Bitcoin Explained - Coinlist.me

What is Bitcoin & History

Bitcoin is a peer-to-peer electronic cash system. Put simply, Bitcoin is the world’s original digital money, however it shares many similarities with gold. The most striking resemblance is that it is a tangible asset that can be used as a short or long-term investment vehicle. Bitcoin can also increasingly be used to pay for goods and services, with a growing number of countries worldwide starting to adopt it as legal tender.

Why did Bitcoin start and who created it?

There are a growing number of questions online about Bitcoin, but the most common is why it started and who founded the concept. There has always been an air of mystery surrounding Bitcoin. This is due largely to its pseudonymous creator, Satoshi Nakamoto, who has never been pictured or seen. In 2008, Mr Nakamoto submitted a whitepaper outlining his vision for Bitcoin titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’.

Nakamoto’s proposal was said to have been discovered by video game developer Hal Finney, who spoke publicly about his excitement about the idea of a decentralised digital currency. Who knows whether it was coincidence or not, but just a few months later, the first Bitcoin block was mined on 3rd January 2009, which kicked-off the concept of Bitcoin mining that we will discuss in more detail later in this guide.

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What does Bitcoin aim to achieve? How does it work?

In its purest form, Bitcoin was designed to be decentralised currency, operating without the oversight of a central bank or overarching administrator. Bitcoin’s consensus network was also designed to create a common, shared public ledger that was immune to human error and manipulation from cyber-criminals.

The first step for any new Bitcoin user is to find a good Bitcoin wallet. Secondly, the wallet needs to be funded; this can be done by buying Bitcoin or by receiving Bitcoin from another Bitcoin wallet.

Bitcoin payments are called transactions. A transaction is a transfer of value between Bitcoin wallets that gets registered on the public ledger in the Bitcoin blockchain. The balances of Bitcoin wallets update automatically after every transaction.

Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing mathematical proof they have derived from the owner of the Bitcoin wallet. The signature also prevents the transaction from being altered by a cyber-criminal once it has been issued.

How did Bitcoin evolve over time?

bitcoin graph
Bitcoin was created in 2007 [Crypto News Daily]
Since 2007, Bitcoin has become an absolute behemoth in the cryptocurrency industry. In 2009, when the first ever USD/BTC exchange rate was launched, $1 could get you over 1,300 Bitcoins. In 2010, the first real-world transaction was made using Bitcoins. A computer developer agreed to buy two takeaway pizzas for 10,000 Bitcoins. If he were to make that transaction now, those pizzas would be worth millions of dollars!

In 2011, Bitcoin eventually reached parity with the US dollar, which was when financial investors started to take it more seriously.

However, as time elapsed, concerns and tensions grew around the ongoing development of Bitcoin. The most controversy has surrounded the size of Bitcoin’s blocks and its ability to scale up. In 2010, Bitcoin’s block sizes were set at 1MB – a figure that was hard-coded into the network by Satoshi Nakamoto. Subsequently, the altcoin Bitcoin Cash was eventually formed as a hard fork of Bitcoin. The Bitcoin Cash protocol agreed to remove Segwit and increase the block size from 1MB to 8MB.

Bitcoin is by no means perfect and that’s why so many other altcoins (short for alternatives to Bitcoin) have cropped up in recent years. The likes of fast-emerging Ethereum, Ripple XRP and China-backed NEO have all been designed and established to try and bring something new to the table and build on the flaws or weaknesses of Bitcoin.

Why invest in Bitcoin long-term or short-term & how to get Bitcoin

Bitcoin is one of the most volatile assets you can trade in 2019. It has been known for Bitcoin’s price to rise or fall by as much as 10% within a single hour. Given its lack of global regulation and the fact that it isn’t yet backed by an influential government, Bitcoin remains something of a ‘bubble’. No-one really knows what the future holds for Bitcoin, but there is still every chance that it will be the mainstream currency of the future.

Pros & Cons of investing in Bitcoin

Pros

Volatility can result in significant returns on investment for savvy investors

Investors have physical ownership of their crypto investments and it can never be confiscated, providing it is stored securely in a cold storage wallet

The relatively low supply of Bitcoin helps to avoid inflation, maintaining Bitcoin as a store of value

It remains the leading base cryptocurrency that all other altcoins trade themselves against

Cons

✓ The volatility of Bitcoin can also go against novice investors that unwittingly buy at strong resistance points in the market

Bitcoin remains unregulated – don’t forget that. Regulators such as the Commodities Futures and Trade Commission are looking after futures exchanges, allowing retail investors to speculate on the future price of Bitcoin

Although Bitcoin has hit the headlines in a big way over the last 18 months, it is still very much in its infancy as an asset. Other leading asset classes have been available to trade for more than a century, so it is wise to tread carefully

Similar cryptocurrencies to Bitcoin

  • Litecoin
    Founded in 2011, Litecoin was one of the first altcoins to follow the success of Bitcoin. It has long been referred to as ‘digital silver’, with Bitcoin known as ‘digital gold’. It was the brainchild of MIT graduate Charlie Lee and also uses a proof-of-work algorithm for processing transactions and mining blocks. However, Litecoin was designed to have a quicker generation rate for new blocks, resulting in swifter, more efficient transaction confirmations.
  • Zcash
    One of the newest open-source cryptocurrencies, Zcash was launched in 2016. The most common analogy Zcash likes to use to compare and contrast it with Bitcoin is that “if Bitcoin is HTTP for money, Zcash should be known as HTTPS”. Zcash founders have focused heavily on providing additional security and privacy for transactions made on the Zcash blockchain, protecting a transaction’s sender, recipient and its amount.
  • Dash
    Dash is another alternative to Bitcoin, promising even greater anonymity. The Dash ecosystem operates on a decentralised mastercode network, ensuring all transactions are virtually untraceable.

Exchanges and brokers that offer Bitcoin

  • eToro
    As noted in our eToro review, you can start trading Bitcoin and the other cryptocurrencies that make up the top 11 digital assets in 2019. If you sign up to eToro, you’ll quickly realise it is a CFD trading broker, which means that traders speculate on the price of Bitcoin rather than physically buying and selling Bitcoin.
  • 24option
    Our 24option review labels it one of the most well-known CFD brokers in the industry. Sign up to 24option and you’ll have access to trading the underlying price of Bitcoin, as well as Bitcoin Cash, Ethereum, Litecoin and several more.
  • Coinbase
    If you prefer to physically buy Bitcoin, there’s no better and simpler Bitcoin exchange than Coinbase. Our Coinbase review reveals that it also doubles up as a Bitcoin wallet, allowing easy access to your Bitcoins on your smartphone or desktop as a Coinbase member.

How volatile is the price of Bitcoin?

bitcoin weighing scales
Bitcoin price [WorldSpectrum]
The price of Bitcoin has been notoriously volatile since its 2009 inception, with more upswings than downswings. But in the last 12 months, Bitcoin has experienced the mother of all downswings. Since 2015, the daily volatility rate of Bitcoin has been around 5%. That’s a huge figure when you consider some Bitcoin traders are making 5% daily returns on their investments. However, there are also investors making 5% daily losses on their investments.

There is no denying that the price of Bitcoin is also sensitive to news releases. News stories or press releases regarding government or bank views on Bitcoin and the cryptocurrency industry as a whole can lead to a downward spike; as can news of security breaches or cyber-attacks on Bitcoin exchanges or wallets.

Bitcoins Vs Satoshis

A satoshi is the smallest unit of bitcoin recorded on the blockchain. One satoshi, named after the founder of Bitcoin, is the equivalent of one hundred millionths of a bitcoin, the same way a penny is one-hundredth of a pound.

One Bitcoin is currently trading at about £2,800. A Satoshi is, therefore, worth $0.000028 at the current rates if you divide the value of one Bitcoin by 100 million.

If I decide to spend £100 to buy Bitcoin, I will get roughly 0.035 BTC. Obviously, these figures are not very comfortable to work with if you are shopping around. Suppose we convert this to satoshis? That will be an equivalent of 3,500,000 satoshis. This is a more relatable figure than working in decimals – ideal if Bitcoins are to hit the mainstream.

What can you use Bitcoin for other than investing?

Although many owners and investors of Bitcoin prefer to hold on to their cryptocurrency as an asset, a growing number of people are enjoying spending it. Let’s take a look at some of the most popular use cases for Bitcoin as a legitimate payment method:

  • Household consumables
  • Fashion accessories and merchandise
  • Computer software (Microsoft accepts Bitcoin payments)
  • E-commerce products (via Shopify)
  • Travel services i.e. flights, hotels and rental cars (via CheapAir.com)
  • Food and takeaways
  • Coffee (via CryptoCoffee)
  • Wine and other alcohol
  • iGaming
  • And much more

Bitcoin mining

Bitcoin mining has become the most lucrative way of obtaining free Bitcoins. To mine new Bitcoins, miners must confirm awaiting transactions on the Bitcoin blockchain. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. Bitcoin miners compete to complete the verification process first by trying to solve a computationally difficult puzzle using SHA-256 cryptographic functions, which is also known as proof-of-work.

Whoever solves the puzzle first gets to place the next block on the Bitcoin blockchain and claim the rewards: transaction fees and newly released Bitcoin. Once a transaction is confirmed on the blockchain it is considered immutable and therefore permanent. The Bitcoin blockchain is wholly transparent, with the public able to view all transactions at any time.

Today, Bitcoin miners use powerful hardware to process the latest Bitcoin transactions and receive payment in the form of transaction fees and new Bitcoins; whilst helping to keep the Bitcoin ecosystem moving.

Bitcoin forks

bitcoin and fork
bitcoin fork [Marco Verch]
A Bitcoin fork is what happens when a blockchain diverges into two potential paths forward. As Bitcoin is based on open-source software, which anyone can contribute to, permanent changes to the rules of the Bitcoin blockchain can only occur on the consensus of a majority within the Bitcoin community; if consensus is not achievable, the blockchain splits, or forks.

For example, the Bitcoin symbol BTC represents the original Bitcoin. However, as Bitcoin miners disagreed on the way forward in terms of increasing the size of blocks on the Bitcoin blockchain from 1MB to 8MB – to increase the number of transactions that can be processed in a single block and scale up the network – the Bitcoin blockchain forked, creating a second Bitcoin cryptocurrency, known as Bitcoin Cash (BCH).

There has since been a further Bitcoin fork, creating another cryptocurrency known as Bitcoin Gold (BTG). It differs to the original BTC in that it offers replay protection and displays unique address formats for users. Its proof-of-work algorithm is also Equihash rather than SHA-256.

Bitcoin faucets

Put simply, Bitcoin faucets are a kind of reward system for Bitcoin owners. They are usually created in the form of a website or app, dispensing ‘rewards’ in the form of satoshis when you complete tasks or captcha forms, as requested by the faucet. Remember, a satoshi is worth one-hundred-millionth of a Bitcoin, so it is hardly megabucks. Nevertheless, it’s free Bitcoin for doing very little, so why wouldn’t you do it?!

Bitcoin news

Don’t forget – if you are keen to keep up-to-date with the latest Bitcoin trends and news updates, visit our Bitcoin news section for articles on analysis and predictions about the future for Bitcoin.

Bitcoin wallets

Think of a Bitcoin wallet like your everyday wallet or purse, only for digital currencies. These digital wallets can be installed on your smartphone, tablet or computer. Alternatively, they can be stored offline in ‘cold storage’, away from the prying eyes of cyber-criminals. Either way, a Bitcoin wallet allows you to trade, transfer and spend your crypto assets. With so many good Bitcoin wallets out there, it can be difficult to decide on the most suitable wallet for your needs. For all you need to know about making the right choice, read our dedicated guide to Bitcoin wallets.

Keen to know more about the basics of Bitcoin and the benefits of getting involved? Sign up to receive CoinList’s exclusive Bitcoin Handbook!

Bitcoin FAQs

Is Bitcoin legal?

At the time of writing, Bitcoin has not been made illegal by legislation in the majority of jurisdictions worldwide. However, some nations such as Russia and Argentina have sought to prohibit or restrict the use of Bitcoin and other cryptocurrencies. 

Is Bitcoin a bubble?

There is an argument for and against this question. Those who would say ‘yes’ would say that Bitcoin’s price has been artificially inflated in recent months and years and will take some time to find its ‘true’ value. Those who would disagree believe that the price of Bitcoin is merely based on supply and demand. 

Is it true Bitcoin is vulnerable to quantum computers?

Unfortunately, most cryptographic infrastructures are vulnerable to these. However, quantum computing is not yet a threat and if it does become so, the Bitcoin community is likely to upgrade the Bitcoin protocol to utilise post-quantum algorithms. 

How many people use bitcoin today?

It’s unknown the exact number of Bitcoin users but Bitcoin.org claims that millions of dollars worth of Bitcoins are exchanged daily. 

What influences Bitcoin's price?

When demand for Bitcoins rises, so too does the price of Bitcoin. When demand diminishes, its price falls. With only a limited number of Bitcoins in circulation, inflation is kept relatively low.

Recommended places to trade Bitcoin



 

Featured image source: Pixabay

Bitcoin (BTC) – The Original Cryptocurrency
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