Bitcoin: What is it? It’s a most relevant question these days. The short answer is: Bitcoin is how everything started. Yes, we know that’s not very informative so let’s try a little harder.
Bitcoin is a cryptocurrency. The first cryptocurrency that came into existence, courtesy of Satoshi. It’s based on an open source encryption protocol for its creation and transfers that is entirely independent of any central authority. One can use it from any smartphone or computer without recourse to any third party or financial institution.
Bitcoin got announced in a white paper published in 2008 by Satoshi Nakamoto, a mysterious digital superhero whose identity remains unknown. He (maybe them, it could have been a group of developers) defined it as a P2P digital payment system. The Bitcoin network went live on January 3rd, 2009, after Satoshi himself turned it on.
Bitcoin can be used as money (as recognized by the SEC). It’s a means of payment every bit as much as the USD is. Because of the carefully mathematical design it features and multi-divisible properties, it can even be used for micropayments at fees so low that are practically free. When Bitcoin came alive, it opened the doors to unimagined things before it.
When it comes to donations or tips, Bitcoin is very efficient. It enables better transparency to the general public (which is especially relevant for non-profit organizations) by making contributions visible. When disaster strikes, like in natural disasters, Bitcoin can reach those who need resources faster than fiat currency transfers thus reducing waiting time for people in need. Transfers are reliable, faster, devoid of the usual friction in the traditional system. New Bitcoin-based crowdfunding initiatives are popping up on the internet all the time.
All you need to transfer Bitcoins to anybody is for you and them to have a Bitcoin address. In this way, you can store your tokens in your computer (using a special piece of software), transact them anonymously or pseudonymously, or to any other Bitcoin wallet of a third party as long as you have the correct address.
One of the main features in Bitcoin (in every genuine blockchain, for that matter) is the fact that no central authority has any say on the network. There is no centralized control of the way Bitcoins are issued or distributed; it’s all about consensus.
Here is how Bitcoins are created
A P2P network takes the care for this. It’s an open-source protocol that brings peers together for this specific purpose. It’s not a fiat currency so there is no central bank (or authority) that can issue the coins. The whole network creates new coins using a cryptographic algorithm. In this new paradigm, a database, which is spread among all the active nodes (this is what we now know as a blockchain) uses P2P interactions to record transactions and enforce security and avoid double operations.
Every single node in the network keeps the record of the whole Bitcoin ledger. All transactions of any kind are recorded in this public ledger while still maintaining privacy. The active machines in the network keep the ledger working by calculating what’s known as collisions in the SHA-256 algorithm, and every time a node gets the collision right it gets rewarded by the network. That’s what “mining” means.
The mining process
When it all started, back in 2009, any computer could mine new bitcoin tokens. It was like that because few miners were around and the protocol allowed for that. It’s a P2P operation which means that everybody in the network contributes in some way. That’s the difference from fiat currencies in which the central bank chooses when to dump new note banks into the financial system, according to an agreement from the federal government to acquire new debt. Not so with Bitcoin.
New Bitcoins come into existence when the right mathematical problem (SHA-256 collision) is solved, and not when some bureaucrat thinks it’s the right time. This gives the community a reason to join in the process, the more, the better.
Because of decentralization, the more miners you have, the safest the process becomes and the network increases the difficulty in solving that math problem in function of the number of active participants thus avoiding inflationary pressure.
That is why, in the early days, mining was possible using a laptop or any home computer. That’s not the case anymore, these days you need specialized hardware as the math problems in hand to create new tokens become so much harder.
“Bitcoin is completely decentralized it doesn’t have any central government.” Bitcoin jargon calls computing power “hash rate” and miners are rewarded with a new batch of coins six times every hour, more or less. Every miner has a chance to win some of those new coins if they get the right solution to each new math problem.
Coming up with new Bitcoins through math calculations is called “mining” because it’s reminiscent of gold mining. It’s very hard, and the chances for a single user to “strike gold” depend on how much work his machinery is putting in.
But the whole network is working on that as well. Every Bitcoin batch can be only as high as 50 coins per batch, and this number will just get lower in time. That’s how it’s designed. When the total number of coins gets to 21 million, no new coins will be produced, which is why Bitcoins will, in the long run, be a scarce product.
Mining is a competition to solve a mathematical problem. The problem is to find the collision for an SHA-256 (a cryptographic hash function) that has no analytical solution, so it must be found by trial and error.
When a node finds such a solution, it spreads the word around to other nodes, and thus a new Bitcoin comes to live (or a new blockchain element that enables a transaction).
Most mining gets done in “pools” which are groups of miners working together because it’s rather hopeless for a single miner to solve this kind of problem alone. When a pool resolves a collision and gets a new coin, the members in the pool get a bit of the new currency.
Is there a place to keep my Bitcoins?
Yes, you can save them in a Wallet. A Wallet is a computer program you can use in your computer or smartphone. You can keep your Bitcoins there and even transact with them if that’s your thing. As long as you have your own address and the target address as well, exchanging Bitcoins is not very different than sending emails.
Some online websites and exchanges can keep your Bitcoins for you, but you can just install a Wallet on your own computer which is much safer if you know how to pick a secure password. If you know how to keep your computer safe from viruses or malware (which is why mining is rarely done using the Windows or Mac OS… think BSD or Linux). It’s also wise to always have updated backups.
Some of the best Wallet programs are:
- Bitcoin Core
These programs can be installed quickly and simply; you’ll be ready to use them in a heartbeat. If your preference is a smartphone Wallet, there’s always Mycelium Wallet. But you don’t need to install dedicated software to have a Bitcoin wallet. Several online sites allow you to keep your bitcoins in their on-site wallets (Blockchain, Coinbase, Coinkite, for instance) but security is a factor to take into account before choosing this option.
It’s not without irony that how you can earn Bitcoin (and most other digital currencies as well) are basically the same ways in which you could earn gold in the old days in which gold coins were still used as currency. You can receive them as payment for goods and services, win them, have them given to you, buy them or mine them. Easiest of all ways are the Giveaways but not the most effective.
Mining Bitcoin requires a significant initial investment if you want actually to profit from that activity and, as the mining difficulty level increases over time, you’ll also need to keep re-investing for as long as you want to keep your mining operation running.
If mining appeals to you, you really need to do your homework first and figure out how profitable it will be for you (if at all) depending on the costs you’ll face regarding, specialized hardware, internet services, and electricity. Coinwarz can help with that.
Then there are Bitcoin Faucets. These are sites that give small quantities of Bitcoin now and then. But Faucets limit the amount they give away based on bitcoin addresses so while this can be free, is never going to make you particularly rich.
Giveaways also happen. Not just for Bitcoin but many other digital assets as well, and it’s good practice be alert to participate in all of them because you can always trade any token for bitcoin in exchanges and trading sites.
There are several ways to acquire Bitcoins. You can buy them personally at a local exchange (some physical trade even exist in some cities in the world), or you can just join a Bitcoin Exchange website and buy them online.
Localbitcoins are shopping services that enable you to find people physically near you who have Bitcoin tokens for sale so you can meet them, negotiate a transaction and make a deal. Localbitcoins usually provide an escrow service so that operations can be safely completed.
If doing business face to face is not your cup of tea, you can always join an internet Bitcoin Exchange. Bitfinex, Bitstamp, BTC-e, and Kraken are examples, but there are many more.
The mechanics are quite simple: you open an account, you fund it in one of several possible ways, then you use your funds to buy Bitcoins. An additional advantage in exchanges is that most of them keep record and data about trading trends and other information that you will find useful as a brand new Bitcoin owner.
Finally, you can buy Bitcoins from some companies that sell them through credit card payments. While this is available for sure, new users should always mind the security in the process, and the company’s prestige as their correct behavior cannot always be ensured beforehand.
Bitcoin is one of the safest cryptocurrencies ever designed. You can be sure about that. But there are security cracks that have nothing to do with the coin itself but with the trading mechanism so if you’re planning to join the Bitcoin world, take care to do the necessary research about reliability, reputation, and security in the method you choose to acquire your assets. It’s not just about the buying process but about keeping them safe afterward as well.
[Image courtesy of Pixabay.com]
Disclaimer: All information provided through this article should not be regarded as investment advice, nor should be taken for granted for crypto trading purposes. Before making any investment or trading plans, make sure to inquire about the information diligently by carrying out your very own research. Thank you.