Bitcoin has officially made its way into the mainstream and is almost a household name in developed parts of the world.
Everyone from the general public to financial experts, to governments, to world banking systems are keenly watching bitcoin’s evolution and generating tons of buzz and curiosity around the cryptocurrency.
It’s amazing to think Bitcoin is almost a decade old and has created multitudes of new millionaires along the way. However, a lot of confusion still surrounds the digital currency and the other related cryptocurrencies in the market. By learning the basics of Bitcoin in the following guide, you will have a good foundation to join the promising world of cryptocurrencies.
What is Bitcoin?
Bitcoin is best described as a virtual currency. There are no physical cash forms, coins, or tokens, they exist electronically based on an open-source software released by an unknown developer under the pseudonym Satoshi Nakamoto.
The Bitcoin network is decentralized in that no central authority controls the amount of bitcoin in circulation. Bitcoin doesn’t need a banking system or government for bitcoin tokens to be created, exchanged, or stored, and is not involved in traditional exchange rates. Instead, Bitcoin leverages a peer-to-peer network commonly referred to as the ‘blockchain.’ The blockchain technology used in Nakamoto’s software is the key to Bitcoin’s defining characteristics.
Bitcoin’s blockchain is basically a giant ledger for securely recording, storing, and verifying bitcoin transactions.
Every time Bitcoin is transacted between parties, the blockchain permanently records the transaction and updates the ledger, adding a new ‘block’ of the most recent transactions.
This peer-to-peer technology means anyone can download the ledger, and updates are distributed to each participant in the network. Blockchain technology is fundamental to Bitcoin because it creates a reliable, distributed digital record of transactions without the need for a central point of control.
Bitcoin’s software was created to cap the total supply at 21 million bitcoins. Currently, there are around 17 million bitcoins in circulation, with the remaining yet to be created. Bitcoins are generated through a ‘mining’ process by miners who oversee bitcoin transactions on behalf of the network. This is where the peer-to-peer approach is so valuable. Miners are computers that participate in the process of verifying transactions on the blockchain ledger.
This concept is best understood through a simple example. Imagine Bob want to send Alice one bitcoin. Under a traditional banking system, Bob’s bank would verify that he has the requested funds in his account, and relay that information to Alice’s bank so their accounts can be rebalanced. If you remove the banking system, who is there to verify the transaction between Bob and Alice? In the Bitcoin network, verifying transactions becomes the task of the miners.
The miners have access to the distributed blockchain ledger and run through a multitude of complex computations to verify the bitcoin transaction. As a reward for their efforts in maintaining the accuracy of the ledger, miners receive an amount of bitcoin as compensation. Those are the bitcoin generated and introduced to the market.
Bitcoin is divisible down to 8 decimal places, essentially allowing transactions of 0.00000001 bitcoin, also known as a satoshi. This leads many to believe in bitcoin as a naturally deflationary currency that increases in value over time as the supply dries up and smaller transactions are made.
Where Do I Keep It?
Since bitcoin isn’t a physical currency, it can’t be kept in your wallet with dollars or credit cards. However, there are both online and offline wallets that are strongly encrypted to ensure top security.
Wallets are usually denoted by an address that is essentially a long string of random alphanumeric characters. This is the ‘Bitcoin address’ of the wallet, and there are several different types of wallets to store bitcoin.
Exchange platforms that allow you to buy and sell bitcoin have a unique Bitcoin address for each user.
You can have bitcoin stored here to make for easy trading, but it comes with security risks. Whenever you hear of Bitcoin being hacked, it’s often referring to an exchange that was hacked and users’ bitcoin were stolen. Keeping bitcoin stored on an exchange means you are trusting their security practices.
The other approach is to create or buy a ‘hard wallet.’ In order to create a hard wallet, you need two cryptographic keys, one public (this is the address where people can send you bitcoin) and one private (basically a super strong password) to unlock and access the account.
The only way to hack into a hard wallet and steal bitcoin is to know the private key.
Bitcoin can be stored in hard wallets online and offline. Online wallets host the public and private keys for you through a software service.
Users should keep their private key in a safe place to maintain access to the account.
Offline wallets are USB-like devices that store the two cryptographic keys for you. If you plug in the device, the wallet information is made available. Users should keep their offline wallets hidden in a very safe place. I think Trezor.io is the best place to keep your Bitcoin currently.
How Safe is Bitcoin?
We’ve discussed bitcoin on the blockchain ledger and bitcoin stored in a wallet. So overall, how safe is bitcoin from theft?
As far as the ledger, bitcoin has robust security. Each transactional record that’s added to the ledger uses part of the previous record block in its metadata, and then its bundled with other transactions to create the next block in the chain… thus the term ‘blockchain.’
This makes it impractical to try to change a record, as it would require an overhaul of the entire blockchain ledger.
And because the ledger is distributed across the network, and millions of users have a copy, there is no central version for hackers to corrupt.
With regard to bitcoin stored in a wallet, the security is up to you. That’s part of the beauty of Bitcoin’s concept as a digital currency, the security is in the hands of the user. Like mentioned above, keeping bitcoin stored on an exchange exposes it to any security lapses or cyber attacks on the exchange.
Keeping bitcoin stored in a hard wallet can be ultra secure. The cryptographic keys are long, randomized strings of characters that are impenetrable to current hacking tools. The only notable ways to lose your bitcoin are to physically lose your hard wallet or give out your private key.
How Do You Buy Bitcoin?
In the early days, buying bitcoin from a trustworthy party was a difficult task. To solve that issue, various exchanges have emerged that allow you to purchase bitcoin using fiat currency like the US dollar.
As the cryptocurrency industry developed, more regulations were placed on exchanges trading bitcoin. Two of the more popular exchanges in the United States are Coinbase and Gemini.
When buying bitcoin, you can buy whatever amount you choose. As mentioned before, Bitcoin is divisible by 8 decimal places, so you can purchase 0.0000001 bitcoin. With the price of 1 bitcoin so high, it’s very common for people to purchase fractions of a bitcoin.
Once you purchase bitcoin on the exchange, it shows up in your wallet address that’s stored on the exchange. Going back to the discussions about security, if you don’t plan to actively trade that bitcoin, it’s recommended to transfer it to a hard wallet you have set up. All you have to do is submit a withdrawal from the exchange and plug in your Bitcoin address for the hard wallet. Make sure the address you enter matches your address. There are plenty of horror stories where people enter the wrong address and bitcoins are sent irretrievably somewhere else.
This is Just the Beginning
As we said at the start, there is a lot of confusion around Bitcoin and related cryptocurrencies.
But the crypto-market is much bigger than just Bitcoin. Now that you have a fundamental understanding of Bitcoin, you can start to explore other cryptocurrencies and how they function with the blockchain technology.
Bitcoin fostered the growth of a new market and is paving the way for new opportunities using blockchain technology.
It’s unlikely that the world will stop hearing about new developments in the cryptocurrency space. There are many different cryptocurrencies, bitcoin is just one of about 1,400.
Stay connected with MintDice to be on the cutting edge of new developments with the project and the crypto markets.