What is a Bitcoin? – A Comprehensive Guide for Beginners
What is a Bitcoin? Is it worth it? Or is it overhyped? If you’re curious about the potential of this cryptocurrency and want to know more then this is the right place to go. We will be exploring everything about this cryptocurrency along with its origins and the technology behind it.
What is Bitcoin?
In January of 2009, a new form of digital currency called Bitcoin was introduced to the world. A mysterious and pseudonymous figure named Satoshi Nakamoto has outlined his ideas in a white paper.
The creator or creators of the invention are still unknown. Unlike government-issued currencies, Bitcoin is not controlled by a central body and hence offers lower transaction costs than standard online payment options.
Because it relied on cryptography to ensure its security, Bitcoin has earned the moniker “cryptocurrency.” Everybody has access to a public ledger in which all transactions are recorded, hence there are no actual Bitcoins (although each record is encrypted). A vast amount of computational power is required to verify every Bitcoin transaction, a process known as “mining.”
A single bitcoin isn’t valued as a commodity because it doesn’t come from a bank or a government. Even though Bitcoin is not legal cash in most countries, it has sparked the creation of hundreds of rival cryptocurrencies, known as altcoins. When Bitcoin is exchanged, it is frequently referred to as BTC.
Each node or miner in the Bitcoin network is responsible for running and storing the blockchain’s code. A blockchain can be viewed as a collection of blocks, figuratively speaking. Transactions are stored in each block. No one can tamper with the system because all of the machines running the blockchain have access to the same list of blocks and transactions.
If you don’t have a Bitcoin “node,” you may witness these transactions taking place right now. An evildoer would need to control 51% of Bitcoin’s computational power to carry out a malevolent operation.
Because Bitcoin miners—the people who use their computers to take part in the Bitcoin network—would most certainly branch off to a separate blockchain if an attack were to occur.
The “keys,” which are long sequences of numbers and letters connected through the mathematical encryption method that creates them, are used to keep track of Bitcoin token balances. Using a public key like a bank account number as a public address, others can pay Bitcoin to it.
Private keys are like ATM PINs in that they are designed to be kept private and used solely for approving Bitcoin transfers. There is a distinct difference between a Bitcoin wallet and a Bitcoin key, which is a digital or physical device that facilitates Bitcoin trade and allows users to trace the ownership of currencies. “wallet” is a bit deceptive, since Bitcoin is never stored “in” a wallet but rather distributed on a blockchain.
What is Blockchain Technology?
Distributed Ledger Technology (DLT) or better known as Blockchain uses decentralization and cryptographic hashing to ensure the history of any digital asset. This makes it unalterable and transparent.
A Google Doc is a good analogy for blockchain technology because it’s easy to see how it works. A document is distributed rather than copied or transferred when it is created and shared with a group of people.
As a result, everyone can access the document at the same time in a decentralized distribution chain. While all changes are being recorded in real-time, no one is locked out awaiting changes from another party, and the document is completely transparent as a result.
Why is it important?
Transactions and assets in a business network can be recorded and tracked more easily with the help of blockchain, a decentralized, immutable ledger. There are two types of assets: tangible and intangible (intellectual property, patents, copyrights, branding). A blockchain network can track and trade virtually anything of value, reducing risk and lowering costs for everyone involved.
Business relies on data, which is why the Blockchain is so critical to it. That information can be delivered quickly, securely, and completely transparently through the use of blockchain technology, which can only be accessed by network members who have been granted permission to do so.
Orders, payments, accounts, and production can all be tracked using a blockchain network. For one thing, you’ll be able to see all the details of a transaction from start to finish because all members have a single view of the truth.
How does it Work?
A blockchain is comprised of 3 important parts: The data, the nonce (a 32-bit whole number), and the hash (a 256-bit number)
A nonce generates the cryptographic hash for the first block of a chain. Once a nonce and hash are mined, the data in a block is considered signed and permanently linked to the nonce and hash.
A process known as mining is used by users to add new blocks to the chain.
Blockchains have unique nonces, but they also reference the previous block in the chain, which makes mining a new block difficult.
To find a nonce that generates a valid hash, miners use specialized software to tackle the incredibly difficult math problem. To find the right nonce-hash combination, there are approximately four billion possible nonce-hash combinations. When this occurs, the “golden nonce” is found by the miners, and their block is added to the chain.
For a chance to be made to an earlier block, you must re-mine all the subsequent blocks as well. This makes blockchain technology very hard to manipulate and alter. It’s like “safety in math” because it takes a lot of time and computing power to find golden nonces.
After successfully mining a block, all nodes on the network accept the change and payout to the miner.
Decentralization is a key concept in blockchain technology. The chain cannot be controlled by a single computer or organization. Instead, the nodes linked to the chain act as nodes in a distributed ledger. A node can be any electronic device that maintains copies of the blockchain and ensures that the network operates.
For the chain to be updated, trusted, and verified, every newly mined block must be algorithmically approved by the network. In the blockchain, every action can be checked and viewed because it is open. An alphanumeric ID number is assigned to each participant to keep track of their transactions.
The integrity of the blockchain can be maintained by integrating public information with a system of checks and balances. Blockchains are essentially a way to increase the scalability of trust by utilizing technology.
Buying and Selling Bitcoin
When Bitcoin just started there were only a few ways of buying and selling this cryptocurrency. However, as it became more and more popular so too did the methods of getting as well. Below is a detailed list of the methods of buying and selling Bitcoin.
Recommended Way to Buy and Sell Bitcoin
The main way to buy and sell Bitcoin is by using a crypto exchange platform. Regulation and cooperation with the traditional banking sector are hallmarks of the exchange services industry. These services can range from a simple website to an entire cryptocurrency exchange that includes order books, market makers, and other components.
Buyers and sellers are linked through Bitcoin trading platforms. Just like on a traditional stock exchange, you can use market and limit orders to buy and sell bitcoins When a trader places a market order, he or she authorizes the exchange to buy or sell coins at the current market price. Traders who use limit orders instruct the exchange to trade coins at a price that is lower than the current ask or higher than the current bid, depending on whether they are buying or selling.
A crypto exchange requires a user to register and verify his or her identity before he or she can trade bitcoins. First, a user needs to transfer money into an account that has been set up for them after their authentication is successful.
Several exchanges accept wire transfers, direct bank deposits, and credit or debit cards as forms of payment. Depending on the exchange, a trader can make money from their account in a variety of different ways. Bank transfers, PayPal withdrawals, checks mailed, cash deliveries, and bank wires are just some of the options available to customers.
In-person bitcoin exchanges and Bitcoin ATMs are very similar in operation. Users can buy bitcoins by depositing cash into a machine, which then sends the coins to their online wallets for safekeeping.
As a result, using an ATM may not be worth it. There are two fees associated with ATM bitcoin purchases: a purchase fee and a fee for converting fiat currency into bitcoin. Both fees are quite expensive when compared to other options. The global average for ATM purchases and sales fees is 8.4% for purchases and 5.4 percent.
To put it simply, you can buy Bitcoin using Bitcoin ATMs, but it will cost you a lot of money and you’ll have to pay a lot of fees to do so. While it may be a good option for purchasing small amounts of Bitcoin, we strongly advise against using this method if you plan to purchase large amounts of Bitcoin.
If you’re used to using a credit card for all of your purchases, Bitcoin and other cryptocurrencies may not be an option for you. Your credit card company or the exchange where you’re trying to purchase the cryptocurrency may place restrictions on your purchase.
Some of the biggest cryptocurrency exchanges, like Coinbase, do not accept credit cards. The only credit cards accepted by Coinmama and CEX.io, according to their websites, are Visa and MasterCard. It doesn’t matter if your credit card company allows it, as long as you don’t use it.
Buying cryptocurrency with a credit card may not be possible if you live in the United States.
Even if you can buy bitcoins with a credit card from a smaller bank and exchange dollars for them, you might not want to.
When using PayPal to buy cryptocurrency, you’ll need a PayPal account. It’s as simple as clicking the “crypto” button and then selecting the coins you want to buy.
Bitcoin, Ethereum, Litecoin, and Bitcoin Cash can all be purchased through the crypto-currency section of the PayPal app. A novice investor should stick with Bitcoin and Ethereum unless they have a lot of money.
You will need either a linked debit card or a linked bank account to make a purchase. There are no hard and fast rules when it comes to weekly spending. If you use PayPal to buy and sell cryptocurrency, you will be charged a fee, which varies depending on the amount of cryptocurrency you buy.
PayPal transactions are distinct from those made on an exchange like Gemini. To fully own cryptocurrency, you can either store it in your wallet or give it away. This is a huge difference when it comes to full ownership.
Exceptions to this rule include PayPal. Selling cryptocurrency on PayPal is required to withdraw funds from your PayPal account, which must be reported to the IRS on your tax return.
If you want complete control over your coins, using a crypto exchange is a wise choice. You’ll have more control over your coins and possibly pay fewer fees as a result, even if using them is more difficult at first. Using these marketplaces, you can trade one cryptocurrency for another.
Only a few mainstream brokerages offer bitcoin buying and trading options due to the lack of clarity surrounding the regulatory status of cryptocurrencies. Retail investors who want to trade digital currency often turn to Robinhood Markets, Inc. (HOOD), an app developed by the company.
With no commission on cryptocurrency trades or purchases, it makes money by giving its trading volume to other platforms or brokers, like Coinbase, in exchange for the payment of order flow
beginners might find the lack of a commission fee appealing, but there are a few caveats to this. However, Robinhood’s selection of coins and features is significantly smaller than that of well-known crypto exchanges like Coinbase. Bitcoin, Bitcoin Cash, Ethereum, Bitcoin SV, Dogecoin, and Ethereum Classic were among the seven cryptocurrencies that could be traded on the Robinhood platform.com exchange.
On the other hand, you can trade over a hundred cryptocurrencies on platforms like Coinbase. As a result, the exchange offers a wide range of order types to help mitigate trading-related risks and losses.
Peer to Peer
Exchange services that connect buyers and sellers anonymously and handle every aspect of the transaction are becoming increasingly popular, unlike decentralized exchanges. Once a user has registered for an account, they can post requests to buy or sell bitcoin, as well as information about payment methods and prices.
Finally, users can select the parties they want to do business with from a list of available buy and sell offers.
Even though P2P exchanges do not offer the same level of anonymity as decentralized exchanges, they allow users to select the best price. Many of these exchanges allow users to rate potential trading partners before completing a transaction.
Is Bitcoin Reliable? Can it be Tampered With?
The short answer here is yes, Bitcoin is reliable and it cannot be tampered with. In theory, all blockchain ledgers are tamper-proof because blockchain technology heavily relies on security.
Many ledgers make up the global monetary system we are currently using. Ledgers are at the very core of banks and credit card companies, which keep track of transactions and the flow of money between parties. A high risk of fraud and information tampering has put the traditional banking system under pressure.
This is where tamper-proof ledgers, such as blockchain, come in. With the release of the Bitcoin whitepaper, the first truly tamper-proof ledger was born. When it comes to keeping the Bitcoin ledger tamper-proof, Satoshi Nakamoto has come up with a radical new idea.
Nakamoto realized that incentivizing users to avoid tampering with the ledger was all that was needed to make decentralized financial systems workable. In other words, tampering with Bitcoin or the Bitcoin blockchain is extremely difficult because doing so would result in immediate exclusion from the network.
This means that node operators who validate transactions and thus add new blocks to the chain are actively discouraged from tampering with the records. Because Bitcoin is a decentralized network, all of its nodes use the same copy of the ledger to verify transactions.
This means that if someone tries to alter the records, the other node operators will not be able to achieve consensus. If no consensus is reached and all nodes’ copies of the record do not match, the node becomes inactive. Since nodes are discouraged from altering records, Bitcoin is the first natively tamper-proof ledger.
Inactive nodes are no longer eligible for mining rewards if they are no longer in agreement with the rest of the network. To put it another way, Bitcoin node operators have no reason to tamper with the ledger, or they will lose their Bitcoin rewards.
What makes it Tamper-proof?
Both a cryptographic fingerprint and a “consensus protocol” make this system theoretically tamperproof, as the nodes agree on a shared history through consensus.
The initial generation of the fingerprint, known as a hash, requires a lot of computing power and time. As a result, it serves as evidence that the miner who added the block to the blockchain performed the computational work required to earn a bitcoin reward.
To alter a block, you’d have to generate a new hash, which serves as some kind of seal. As long as the hash is consistent with the block, the nodes can simply update their copies of the blockchain with the new block once they have verified it. Consensus is achieved through this method.
Last but not least, the hashes act as links in the blockchain, with each block containing the unique hash of the previous block. Consequently, you must calculate a new hash for each subsequent block to make a retroactive change to an entry in the ledger. Adding new blocks to the chain faster than the other nodes is essential.
You can’t add new blocks because they will conflict with existing ones, and other nodes will reject your alterations unless you have computers that are more powerful than all the other nodes combined (and even then, success isn’t guaranteed). “Immutable” refers to the fact that the blockchain cannot be altered or changed.
Does this mean that it’s 100% secure?
No, it does not. The blockchain system might be tamper-proof but the other systems surrounding it aren’t. The recent headlines about cryptocurrency hacks tend to focus on failures in software clients and third-party applications that connect blockchain systems to the real world.
Cryptocurrency owners’ private keys are stored in “hot wallets,” internet-connected applications that can be hacked to access the funds. Online cryptocurrency exchanges’ wallets have become a popular target for hackers.
A large number of exchanges claim to store most of their customers’ funds in “cold” hardware wallets, which are disconnected from the internet. However, as the theft of more than $500 million in cryptocurrency from the Japan-based exchange Coincheck in January demonstrated, this isn’t always the case.
Smart contracts, which are computer programs stored in certain types of blockchain and can automate transactions, are perhaps the most complicated points of contact between blockchains and the real world.
The Decentralized Autonomous Organization (DAO), a new type of blockchain-based investment fund, was hacked in 2016 by hackers who exploited an unforeseen quirk in a smart contract written on Ethereum’s blockchain.
Ethereum’s community had to push a contentious software upgrade known as a “hard fork” to get the money back, effectively creating a new version of history in which the money was never stolen. Researchers are still working on ways to prevent smart contracts from malfunctioning.
Who Invented Bitcoin?
Bitcoin’s origins remain a mystery, and no one knows for sure who invented it. When the original Bitcoin white paper was posted in 2008 and the first Bitcoin software was launched in 2009, the moniker “Satoshi Nakamoto” became synonymous with the person or group responsible.
Even though a slew of people have claimed or been rumored to be Satoshi Nakamoto in the years since the genuine person (or people) behind the pseudonym remains a mystery.
Despite the media’s claim that Satoshi Nakamoto, the inventor of Bitcoin, was a lone genius who developed the currency out of nothing, such innovations rarely occur in isolation. Scientific breakthroughs, no matter how groundbreaking, are always the result of prior research.
When Adam Back first came up with the Hashcash algorithm in 1997, it was followed by the b-money, bit gold, and reusable proof of work systems of Wei Dai and Nick Szabo. Several works in several disciplines of research are mentioned in the Bitcoin white paper, including Hashcash and B-money.
Many of the people involved in the initiatives listed above have been rumored to have had any involvement in the creation of Bitcoin.
Bitcoin’s creator may wish to remain anonymous for a variety of reasons. One of the most important aspects of privacy is: The media and governments are likely to pay close attention to Satoshi Nakamoto as Bitcoin grows in popularity and becomes a global phenomenon.
Bitcoin’s potential to cause massive disruption in the current banking and monetary institutions is another possible explanation. If Bitcoin were widely accepted, it would have the potential to overtake national currencies. Governments may take legal action against Bitcoin’s developers because of this danger to existing currencies.
It’s also a matter of public safety. At a rate of 50 Bitcoins every block, the total amount of Bitcoins mined in 2009 was 1,624,500 Bitcoin. 9 It’s reasonable to assume that Satoshi Nakamoto and a few others were the only ones mining Bitcoin in 2009 and that they now control the vast bulk of the currency.
Since the private keys needed to enable spending can be printed out and put under the mattress for safekeeping, anyone with a large amount of Bitcoin could become a target of thieves.
Speculations on who it might be
Although the moniker Satoshi Nakamoto has been credited with creating Bitcoin, no one is sure who is behind it. Bitcoin’s first blockchain was mined by Nakamoto, who also authored the digital currency’s whitepaper. Originally, Nakamoto envisioned that Bitcoin would become a global currency that would be used to protect against inflation.
But while Bitcoin’s price and popularity have skyrocketed over the past two years, the identity of Nakamoto remains a mystery. The richest man on the planet thinks he has the answer.
Nick Szabo is the guy behind the Nakamoto pseudonym, according to Elon Musk, CEO of Tesla, SpaceX, Neuralink, and many more firms.
Cryptocurrencies and comparable digital assets were pioneered by Szabo. When Szabo founded the Bit Gold virtual money project in 1998, he was the driving force behind the first attempt to build a decentralized currency.
Several of Szabo’s Bit Gold ideas and approaches, such as the proof-of-work (PoW) model and the use of mining blocks on the blockchain, would go on to influence Bitcoin development. Ethereum, the second-largest cryptocurrency in the world, is built on Szabo’s smart contracts, which he designed. Szabo, on the other hand, has stated that he is not responsible for Nakamoto’s identity.
An investigation by Aston University’s Center for Forensic Linguistics, which examined Szabo’s published work and 10 others, found in 2014 that Szabo was unquestionably responsible for the production of the Bitcoin whitepaper.
To them, the similarities between Szabo and the Bitcoin whitepaper were so striking that no other author could come close to matching those similarities.
Because of this uncertainty, it’s feasible that no one will know for sure who created cryptocurrencies without Nakamoto disclosing his or her own identity.
How is its value determined?
In the end, the price people are willing to pay for a Bitcoin determines its value. In this way, it is comparable to the price of stocks. Since Satoshi Nakamoto’s protocol stipulates that only 21 million bitcoins can ever be mined (almost 19 million have already been), there is a limited supply, but no real intrinsic value, like with gold and other precious metals.
Nakamoto’s choice of 21 million is the subject of numerous mathematical and economic hypotheses.) This makes bitcoin distinct from stocks, which are typically linked to a company’s actual or potential profits.
This means that “value” is completely open to interpretation without a government or central authority in charge of the supply chain. Volatility in Bitcoin is primarily caused by this “price discovery” process, which invites speculation (don’t borrow money to buy bitcoin) and manipulation (hence the well-documented talk of tulips and bubbles).
Bitcoin has made its creator, Satoshi Nakamoto, a multibillionaire. Early bitcoin miners, investors, and tech pioneers are all richer because of it. According to Fortune, the Winklevoss twins, who turned a $65 million Facebook payout into a bitcoin venture capital fund, are now well-known billionaires.
Advanced math and meticulous record-keeping are used in the mining of bitcoin. Here’s how it all works. Every time a bitcoin transaction is made, the network creates a “block” to store all the information related to that particular transaction.
Specially programmed computers, referred to as “miners,” record these transactions in an enormous digital ledger. Every single transaction is recorded in this openly available “blockchain,” which is a permanent record of every single transaction that has ever taken place.
It’s done with specialized software and ever-more-powerful (and energy-intensive) hardware, and the result is a “hash.” Even more dramatic than it sounds, hashing requires a significant amount of computational power, and the competition among miners to do so is fierce. It’s like a horde of chefs frantically racing to prepare a new, extremely difficult dish, and only the first one to serve up a perfect version of it gets paid.
When a new hash is created, it is added to the end of the blockchain, which is then publicly updated and propagated. The miner currently receives 12.5 bitcoins for their efforts, which were worth approximately $100,000 in February 2018. As time passes, fewer and fewer bitcoins are being awarded.
To conclude, Bitcoin is made possible through blockchain technology. It is essentially tamper-proof and many online transactions can benefit from it. Thank you for reading this article. We hope you got everything you needed and that you are interested in trying out Bitcoin and blockchain technology.
* We hope this information will help you in your investment process, but this is not investment advice. Every investment carries risk, especially in this industry, so DYOR before making a decision.