Bitcoin 101: Back to the Basics
Bitcoin is a digital currency that has been growing in popularity over the last few years, especially among younger generations who are looking to technology for solutions to pressing global issues.
1. What is Bitcoin?
Bitcoin is a digital currency and payment system that was created by an anonymous group of programmers. Bitcoin is the first decentralized payment network of its kind and uses peer-to-peer technology to operate without any central authority or banks. The managing of transactions and the issuing of Bitcoins is carried out collectively by the network and its users.
2. Who created Bitcoin?
The origins of Bitcoin can be found with Satoshi Nakamoto, who published an article on October 31, 2008 about having developed “a new open source P2P e-cash system” which he called Bitcoin. He also released the first bitcoins into circulation by way of mining. Bitcoin was created anonymously under the name Satoshi Nakamoto, but nobody knows who this person really is or where they come from, though many serious efforts have been made throughout the years to uncover his or her identity.
3. How does Bitcoin work?
When someone joins the Bitcoin network by downloading the software, they receive a copy of all past transactions (blocks). Each new transaction is a bit of data that gets linked into a larger packet of data (block) that must be approved by everyone else in the network before it becomes part of the blockchain. In this way Bitcoin is decentralized and everyone has a say on what the blockchain looks like at all times.
Bitcoins are created by “mining” them on computers which solve complicated math problems (about 1 million times more difficult than solving a Rubik’s Cube). The Bitcoin system counts up all the math problems that have been solved and creates new Bitcoins into circulation based on those successful computations. The mathematical problems that have to be solved are designed to get more and more difficult over time, so eventually it takes a lot of processing power to mine for bitcoins. By “mining” users are encrypting the transaction data of that “block” and validating it with other users across the network.
Anyone with a computer and access to the internet can start mining Bitcoins after they download the Bitcoin software for free. However, the processing power of your average computer is probably not enough to earn any significant amount of Bitcoin. The open distribution of Bitcoin is possible these days largely thanks to “mining pools”, where users team up and share their processing power over a network to split the reward proportionally, according to the amount of work their computers contributed. Some mining pools combine the power of hundreds or thousands of computers to solve these problems and earn a bigger share of the mining revenue created within the network.
4. How do I buy Bitcoin?
Basically, you need to have an account with a Bitcoin wallet. The way it works is that you create your own personal Bitcoin address (similar to how people can create their own usernames on social networks like Twitter or Instagram), which is then tied to the specific amount of Bitcoins that you’re holding in your wallet. These addresses are used to transfer Bitcoins, which are then stored in a Bitcoin wallet address that you either download yourself or accept when someone sends you Bitcoins. When you sign up for an online cryptocurrency exchange, wallets are automatically created for your user account, or you can download software wallets to your computer or phone.
In 2021, there are now numerous exchanges online where you can purchase Bitcoin simply by verifying your identity and linking your credit/debit card or bank account for payment. Using reputable exchanges to trade Bitcoin is important for mitigating risk. Exchanges like Coinbase and Binance.us work with government agencies to ensure compliance and prevent disruption of trading or forfeiture of user assets, which can be a risk with investing in emerging financial technologies.
For more privacy, you can also receive Bitcoin to your wallet address through peer to peer exchanges online or in person. Additionally, numerous Bitcoin ATMs have started to pop up in major cities or at businesses with otherwise limited financial processing abilities like cannabis dispensaries. The entire country of El Salvador recently legalized Bitcoin as legal tender and now boasts hundreds of new Bitcoin ATMs as part of their financial infrastructure.
5. Pros and cons of investing in Bitcoin
The biggest pro of investing in Bitcoin is the prospect of mass adoption. The more people who start using cryptocurrencies, the more useful they become. This is because having a widely accepted currency means that merchants no longer have to worry about price volatility or exchanging currencies when doing business across borders.
By 2030, many experts predict that most major retailers will accept Bitcoin as a form of payment. In 2016, Overstock became the first major retailer to accept Bitcoin for purchases online. Since then, other big names have announced that they are jumping on board, including Tesla, Amazon, Microsoft, and more.
The other advantage of having a widely accepted cryptocurrency is the strength of the network. The more people use it, the stronger and more secure it becomes. There have been many cases where one country bans Bitcoin but another adopts it, resulting in a massive loss before an eventual rebound for users invested in the cryptocurrency network. This trend looks positive as more governments and institutions continue to announce their support for blockchain adoption.
The most compelling pro of investing in Bitcoin is the prospect of massive returns on investment. Investors who purchased Bitcoins when they first came out are now millionaires and billionaires. A single Bitcoin was worth around $13 in 2013, but by 2021 it peaked at over $63,000 per coin. Don’t worry about buying a whole Bitcoin, though! Bitcoins are split up into smaller segments (known as Satoshi), much like dollars and cents, so that people can own just a fraction of a Bitcoin.
Of course, there are also quite a few cons that come with investing in Bitcoin. The biggest of which is the fact that its price is highly volatile. You may purchase some Bitcoin one day and see your investment drop by 50% the next day only to slowly recover in price over the coming weeks, months, or even years. People who have made the most significant gains from Bitcoin typically held onto their assets for a number of years (known as “hodl”-ing within the crypto community), despite the depressed price or high risk of the asset.
Another con is that it’s hard to know who is really on the other end of any transaction. Because all transactions are conducted anonymously, governments have a hard time enforcing financial regulation on Bitcoin exchanges or users. This also makes it incredibly challenging for law enforcement officials to track down cybercriminals who use Bitcoins for criminal activities like ransomware or laundering.
Another major con of Bitcoin is the fact that it’s actually not very secure at all. In 2019, a massive hack attacked countless computers mining for Bitcoin, resulting in a loss of around $5 billion worth of coins at the time. The only way to truly secure your Bitcoins is to keep them in an offline wallet disconnected from the internet. The Proof of Work consensus algorithm of Bitcoin now seems a bit outdated and vulnerable to attack when compared to other modern blockchain networks that have evolved from it.
6. Is it too late to invest in Bitcoin?
It’s never too late to invest in Bitcoin. Even if the massive gains of 2017 and even 2021 are gone, it is still possible to make money with Bitcoin as more and more people adopt it through legitimate means like major retailers and institutions. Remember, Bitcoin is the first blockchain network and therefore still moves the entire crypto market. However, it is also worthwhile to look at other blockchain networks that provide better or different use cases, such as ETH, ADA, XRP, LINK, IOTA, VET, and thousands more!
Bitcoin will continue to grow as long as there are new cryptocurrency developers interested in the project as well as investors entering the market all over the world. If the pros of investing in Bitcoin outweigh the cons for you, then it may be time to find an exchange and get started!
