It’s almost an unbelievable tale about how to create money when you dig into the details of Bitcoin. It’s actually the best-known version of digital currency in use today even if it seems like fiction. I pulled together this complete beginner’s guide to Bitcoins to help you wrap your head around what it is, what it does, and how to earn Bitcoins.
Bitcoin is a cryptocurrency that is a form of electronic money. It is a decentralized digital currency that can be sent from user to user on the peer-to-peer bitcoin blockchain network without the need for intermediaries and is independent of banks.
Just after Occupy Wall Street accused big banks of misusing borrowers’ money, duping clients, rigging the system, and charging boggling fees, small wonder that Bitcoin emerged in 2008. Bitcoin pioneers wanted to put the seller in charge, create organic network value, to hack corruption, cancel interest fees, eliminate the middleman, and make transactions transparent, and cut fees. They established a decentralized system, where you could control your money and notice what was going on without depending on banks.
History & Who created Bitcoin?
The first established cryptocurrency is Bitcoin—a digital asset that can be exchanged like currency and is secured with cryptography. When Bitcoin became available to the public in 2009, other versions of cryptocurrency had been launched but never fully developed.
Behind the development of Bitcoin is the anonymous Satoshi Nakamoto—possibly a group or an individual whose real identity is still unknown—who stated the goal of the technology was to create “a new electronic cash system” that was “completely decentralized with no server or central authority.” In 2010, to purchase two pizzas for 10,000 Bitcoins, someone decided to sell their Bitcoins for the first time. With the Bitcoin community, about shared the source code and domains, and hasn’t been heard from again.
Once, Nakamoto himself claimed to be a 37-year-old male residing in Japan. However, there are reasonable doubts about this because of his perfect English and his software not being labeled in Japanese. Leaving Bitcoin in the hands of a few prominent members of the BTC community, around mid-2010, Nakamoto moved on to other things. Also, Satoshi named Gavin Andresen a lead developer.
It has been calculated that Nakamoto owns around one mln Bitcoins, which is approximately $3.6 bln as of September 2017.
Who controls Bitcoin?
According to Gavin Andresen, further decentralization was the very first thing he focused on after Nakamoto moved on from the project. Even if he would ‘get hit by a bus’, Andersen wanted Bitcoin to continue its existence autonomously.
The major advantage of Bitcoin is its independence from world governments, banks, and corporations, for a lot of people. No authority can take people’s money away, interfere in BTC transactions or impose transaction fees. Moreover, as every single transaction is being stored in a massive distributed public ledger called the Blockchain, the Bit-coin movement is extremely transparent.
Essentially, it gives its users total control over their finances, while Bitcoin is not being controlled as a network.
Where can I find Bitcoins?
From any of these four places, you can get your first bitcoins. A cryptocurrency exchange where you can exchange ‘regular’ coins for Satoshi or for bitcoins, which are like the BTC-type of cents. Resources: Coinsquare and Coinbase in the US & Canada, Bittylicious in the UK and BitBargain UK.
A Bitcoin ATM (or cryptocurrency exchange) where you can change cash or bitcoins for another cryptocurrency. Resources: Your best bets are CoinCorner and BTER. A classified service where you can discover a seller who will assist you trade bitcoins for cash. Resources: LocalBitcoins is the definitive site. For bitcoins, you could sell a product or service.
Resources: Sites like Purse.
Caution! Before using any service look for reviews from previous customers or post your questions on the Bitcoin forum, as bitcoin is notorious for scams.
How does Bitcoin work?
The number of Bitcoins only on his or her wallet and transaction results can be seen by a user. Behind the scenes, a public ledger called the “blockchain” is shared by the Bitcoin network. Every transaction ever processed is contained in the ledger. Digital records of all the transactions are combined into “blocks”.
It will also affect all of the following blocks if someone tries to change just one letter or number in a block of transactions. The mistake or fraud attempt can be easily spotted and corrected by anyone as it is a public ledger.
The validity of each transaction is verified by the user’s wallet. By digital signatures corresponding to the sending addresses, the authenticity of each transaction is protected. It may take a few minutes for a BTC transaction to be completed because of the verification process and depending on the trading platform. The Bitcoin protocol is formulated so that each block takes about 10 minutes to mine.
Characteristics of Bitcoin:
The network’s independence from any governing authorities was one of Satoshi Nakamoto’s main objectives when creating Bitcoin. It is constructed so that every individual, business, as well as every machine involved in mining and transaction verification, comes to be part of a vast network. Moreover, the money will keep moving, even if some part of the network goes down.
Let it be Credit history, addresses, phone numbers, spending habits, and so on, these days banks know virtually everything about their clients. As the wallet doesn’t have to be linked to any personally identifying information, it is all very different from Bitcoin. And while some might argue that drug trade, terrorism, and other illegal and dangerous activities will thrive in this relative anonymity, other people just simply don’t want their finances to be governed and tracked by any kind of authority.
As every single BTC transaction that ever happened is stored in the Blockchain, the anonymity of Bitcoin is only relative. In theory, anyone can tell how much money is in it by carefully studying the blockchain ledger, if your wallet address was publicly used. However, it is still nearly impossible to trace a particular Bitcoin address to a person.
Necessary measures can be taken by those who wish to stay anonymous with their transactions to stay under the radar. The simplest measure would be to use multiple addresses and not transfer massive amounts of money to a single wallet, even if there are certain types of wallets that prioritize opaqueness and security.
While normal bank transfers can take several days, the Bitcoin network processes payments instantaneously. It normally takes just a few minutes for someone on the other side of the world to receive the money.
There is no way of getting them back unless the recipient would want to send them back to you, once you send your Bitcoins to someone. This reception of payment is ensured by this and thus whoever you’re trading with can’t scam you by claiming that they never got the money.
What is Bitcoin Mining?
By chronologically adding new transactions (or blocks) to the chain and keeping them in the queue, Mining, or processing, keeps the Bitcoin process secure. As each transaction is finalized, codes decoded, and bitcoins passed or exchanged, the blocks are chopped off.
To solve cryptographic problems, Miners can also generate new bitcoins by using special software technology. This provides an incentive for people to mine and also provides a smart way to issue the currency.
The reward is agreed-upon by all people in the network but is normally the fees paid by users sending transactions as well as 12.5 bitcoins. There can be no more than a fixed total number of 21 million bitcoins (or BTCs) in circulation by the year 2040, to prevent inflation and to keep the system manageable, so the “puzzle” gets increasingly harder to solve.
So to summarize the Bitcoin mining process:
- In the Bitcoin network that possesses specialized software technology called ASICs, Bitcoin miners are the nodes.
- Cryptographically hard puzzles are constantly solved by Bitcoin miners.
- If successful, in return they get to add a block to the Bitcoin blockchain and earn a reward.
- The bitcoin block reward is around 12.5 BTC currently.
There are some more key things to know about bitcoin mining or proof-of-work and those are listed as follows:
- It’s extremely difficult to do. To successfully mine a Bitcoin, Miners often need to spend a lot of money and computing power. In fact, for a lone miner to do it on their own, mining is now so difficult to do that it is impossible. To create mining pools, this is why miners often join forces.
- ” Difficulty” is the metric that defines the degree of toughness of mining.
- The difficulty is directly proportional to the network hash rate. A value that calculates the rate in which miners are executing operations within the ecosystem is called Hashrate. Higher the speed and security of the network, higher the network hash rate.
- The difficulty increases as well to keep mining under control and maintain a consistent bitcoin block time of 10 mins when bitcoin hash rate increases.
How to protect your Bitcoins?
Here are four pieces of advice that will help your bitcoins go further.
Only store small amounts of bitcoins on your computer, mobile, or server for everyday use, as you’d do with a regular wallet, and keep the remaining part of your funds in a safer environment.
- On a regular basis, backup your wallet. With a strong password to protect it from thieves (although, unfortunately, not against keylogging hardware or software), encrypt your wallet or smartphone
- For added security, store some of your bitcoins in an offline bitcoin wallet disconnected from your network. While you generally, keep only some of your money in your wallet, think of them as your bank accounts.
- Do not store your cryptocurrency in bitcoin exchanges or any third-party storage location for that matter.
- Update your bitcoin software. Use Bitcoins’ multi-signature feature that allows a transaction to require multiple independent approvals to be spent, for added protection.
Spending some time on these steps can save you money.
Advantages & disadvantages of Bitcoin
Bitcoin is decentralized and that is the best thing about it. It means that without messing around with exchange rates and extra charges, you have a payment system that can settle international deals. Plus, to conduct your transactions, you don’t need to go through a third party like a bank. There’s no Federal Reserve System to hike interest rates as Bitcoin is free from manipulation and government interference. You can also know what is happening with your money as it is transparent. Without investing money and energy into details, such as setting up a merchant account or buying credit card processing hardware, you can start accepting bitcoins instantly. Your client cannot demand a refund and Bitcoins cannot be forged.
It’s a small wonder that Bill Gates called Bitcoin “a techno tour de force.” and users call it “Money 2.0”.
In the beginning, since nobody knows the identity of its founder- Satoshi Nakamoto, a lot of people were sceptical about bitcoin. It is still unknown to us if Satoshi Nakamoto is a man, woman, or a group of people in fact.
Hacking and scams are the norms regarding more practical concerns. They are getting more sophisticated and happen at least once a week. While its transactions can be frustratingly slow, Bitcoins software complexity and the volatility of its currency dissuade many people from using its payment system. To approve the transaction, you’ll have to wait at least ten minutes for your network. Recently, for their transactions to be confirmed, some Reddit users reported waiting more than one hour.
Scams to watch out for
Ponzi schemes, mining scams, scam wallets, and fraudulent exchanges are the four most typical Bitcoin scams.
- Ponzi Scams: While redirecting your money to the thief’s wallet, Ponzi scams, or high-yield investment programs, hook you with higher interest than the prevailing market rate (e.g. 1-2% interest per day). In order to protect themselves, they also tend to duck and emerge under different names. For incoming payments rather than the common payment processors such as BitPay or Coinbase, keep away from companies that give you Bitcoin addresses.
- Bitcoin Mining Scams: These firms will offer to mine outrageous amounts of bitcoin for you and in return, you’ll have to pay them. That’s the last you’ll see of your money (with no bitcoins to show for it, either).
- Bitcoin Exchange Scams: Bitcoin Exchange Scams offer features as PayPal/Credit Card processing, or better exchange rates, that the typical bitcoin wallets don’t offer. Needless to say, while they siphon your dollars, these scams leave you in the hang.
- Bitcoin Wallet Scams: To online wallets, Bitcoin scam wallets are similar – with a difference. They’ll ask you for your money. That’s the last you’ll see of your deposit if robbers like the amount. In other words, The address leads to them, rather than to you.
With scammers managing to pinch millions, of all of these, wallet scams are the most popular.
Is Bitcoin safe and legal?
To see how the system works, imagine someone called Alice who’s trying out Bitcoins. She’d sign up for a cryptocurrency wallet to put her bitcoins in.
The Bitcoin Wallets
Alice could use three different applications.
- Full client – This is like a standalone email server that deals with all aspects of the process without depending on third-party servers. From beginning to end, Alice would control her whole transaction by herself. Understandably, this is not for beginners.
- Lightweight client – For access to a mailbox, this is a standalone email client that connects to a mail server. It would store Alice’s bitcoins, but to access the network and make the transaction, it needs a third-party-owned server.
- Web client – This resembles webmail in that it totally relies on a third-party server and is the opposite of “full client”. The third-party operates Alice’s entire transaction replaces her.
You’ll find wallet technology that comes in five main types: Desktop, mobile, web, paper, and hardware. Each of these has its advantages and disadvantages.
What is a Bitcoin Whale?
Whales are the world’s largest mammals, and on the Bitcoin market, the Bitcoin Whales are the largest players. Those are institutions such as Hedge Funds and Bitcoin Investment Funds and typically not individuals. For instance, Bitcoins Reserve, Pantera Capital, Bitcoin Investment Trust and others.
Typically, these institutions move around hundreds of thousands of Bitcoins. It’s a very covert operation: to move such big amounts through exchanges out of sight of regular traders, those funds arrange a special agreement with an exchange.
As per a recent Bloomberg report, only 1,000 people own 40 percent of the market. By selling just a fraction of their assets, those who own so much can send the market into a frenzy.
According to this study, there are currently more than 25 mln people worldwide that own Bitcoins. Interestingly enough, to be in the top 30percent of Bitcoin holders in terms of the amount owned, it only takes around 0.153 BTC. You ‘only’ need to have 15 BTC to your name to be in the top one percent.
Is Bitcoin a bubble?
A checklist that helps determine if something is a bubble was proposed by Robert Shiller, a Nobel Prize-winning economist. Sharp increases in the price of an asset, media frenzy, great public excitement, stories of people getting rich, and growing interest in the asset among the general public are included in the said checklist. Bitcoin checks all of those boxes.
So, in a manner, Bitcoin is a bubble and it has burst before.BTC’s prices were falling for about a year and a half, after the infamous closure of Mt.Gox, a Chinese exchange that was handling more than 70% of all the Bitcoin transactions worldwide. To recover, it took the prices exactly 3 years. Of course, what will happen in the future is hard to predict and there is a possibility of Bitcoin’s prices plummeting again. However, Bitcoin is currently stronger than it ever was and has recovered before.
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