Ultimate Bitcoin Guide
Whether you are new to Bitcoin and the world of cryptocurrency or you already own some Bitcoin, this guide is for those who want to learn more about how Bitcoin works, who invented it, what it's worth, and how this technology ties in with the current financial market.
So, to get started:
What is Bitcoin?
Bitcoin is a digital currency that is not issued by a single government. It is a medium of exchange so there is no direct bartering between two goods. (read our history of money article here). Much like most of the world's fiat (government-issued) currency is already digital today, Bitcoin is not a physical currency. Instead, there are wallets that contain certain amounts of Bitcoins. It is a software that uses cryptography and accounting to make sure that no one can send the same Bitcoin to two people (double spending), just like modern money is difficult to counterfeit.
In fact, there had been many attempts to create a digital currency, dating back to the 1990s, such as Digicash and Ecash; however, it was Satoshi Nakomoto who solved the double-spending problem when he created Bitcoin and released it to the public in 2009. Satoshi Nakomoto is a pseudonym (false name) that was used by the programmer so that his true identity would not be revealed. This was a strategic move since Bitcoin is an alternative, and therefore, competitive currency to the currencies issued by governments.
The word "Bitcoin" is commonly used to reference the software or concept of the currency, whereas, "bitcoin" is spelled lowercase when referring to the quantity of the currency. For example, "You spent one bitcoin" or "I own 7 bitcoins". Another reference to the currency is "BTC", and it is often used for exchange rates, e.g. USD/BTC refers to the price in US Dollars per bitcoin.
Unlike traditional currency, there is no central party that can control the supply of Bitcoin. This means that the price of Bitcoin, relative to the goods and services it can be exchanged for, is determined by supply and demand. Anyone with access to the internet can have access to Bitcoin. When a person owns a certain amount of Bitcoin, they use a private "key" to spend it. The person uses the private key to prove ownership of a certain amount of Bitcoin, and the private key should be kept secret only to the person or party authorized to spend the Bitcoin within a certain wallet. The address of a wallet can be derived from a private key (but not vice versa), and it is called an address because it is used by other users to send funds to it. Wallets come in several forms, since there are several ways to store a private key. These include paper wallets, hardware wallets, mobile wallet, and hot wallets. (insert wallet article here).
Technically, the amount of Bitcoin stored in each wallet address is public information; however, the identities of the people who own the Bitcoin in these wallets remains unknown. This public accounting ledger that tracks the balances in each wallet is called the blockchain, and a blockchain transaction is simply the transfer of a balance from one wallet to another. This concept is similar to how a bank can update the balances of the bank accounts of its customers, but there is no single authority that has the power to change the balances of Bitcoin wallets. Bitcoins can be spent from anywhere, at anytime, and it is a great way to send international payments which are secure, inexpensive, and private.
How Does Bitcoin Work?
Only 21 million bitcoins can ever be minted, so when all bitcoins have been minted, it will be the transaction fees alone that will incentivize Bitcoin miners to spend their resources. Traditional currencies, such as the United States Dollar, use an inflationary system, which releases new dollars at a certain rate to keep the price of goods and services at a relatively stable price. The rate at which bitcoins are minted is predetermined by an algorithm, and the supply is fixed.
Bitcoin mining is the process of minting new bitcoins into circulation, and it is also how the Bitcoin network achieves the problem of authorizing valid transactions without a central party. As the name blockchain implies, the public accounting ledger is actually a chain of blocks, which contain transactions. Typically, the chain is not altered, but only added onto. Miners are expending electricity in order for their computers (also called mining rigs) to be the first ones that solve the computationally difficult puzzle that will allow them to add the next block to the chain. One block is added to the Bitcoin blockchain approximately every 10 minutes, and the miner is rewarded in bitcoin for being the first to solve the puzzles. The Bitcoin software was designed to increase or decrease the difficulty of the puzzle, dependent on how many miners are expending computational power to add to the blockchain.
When Bitcoin was released in 2009, the mining difficulty was 1.0. This allowed for any ordinary desktop computer to be able to participate in the Bitcoin network. In January 2020, this difficulty was over 13 trillion, and miners are using more specialized forms of computers such as Application-Specific Integrated Circuits (ASICs) and Graphic Processing Units (GPUs),to solve the mining puzzle. This increase in difficulty serves to keep the blockchain safe from a single attacker having enough computational power to change the transactional information on the Bitcoin blockchain. When more miners are expending more computational power to add onto the blockchain, it establishes more trust and validity to the decentralized Bitcoin network.
Although the mining difficulty can increase or decrease, the reward a miner gets for successfully adding a block to the blockchain is halved every 210,000 blocks (or approximately every 4 years). In 2009, the reward was 50 BTC, and in May 2020 the reward will become 6.25 BTC. These dates for decreased rewards are called "halvenings", and they serve as important events for the Bitcoin economy (insert halvening article).
How Much is Bitcoin Worth?
The price of one bitcoin is simply the exchange rate between two goods, e.g. the exchange rate between two currencies. These rates are governed by the laws of supply and demand. Traditional fiat currencies have exchange rates with one another, and these rates fluctuate according to the strength of the economies of the nations which issue them. The worth or utility of one nation's fiat currency is high when there exists a large demand for it. Specifically, a nation's strong economy typically means that many other nations will want to engage in trading with them. So, the value of any currency lies in its liquidity, or ability to be exchanged for other goods or services. Therefore, the more nations, places, people, etc. are willing to accept a specific currency as a form of payment, the more value that currency has, and the higher the price of the currency will be.
Since bitcoins are not issued by a single nation, the price of one bitcoin is primarily dependent on the size of the mining network. Since, when the network of miners is large, the difficulty is high, and it is more costly to produce new bitcoins. Sometimes this is too costly for some miners, so they stop mining. If the mining network shrinks as a result, the difficulty will decrease accordingly, until miners begin joining the network again.
The price of Bitcoin has generally increased since its inception in 2009. Being an openly traded currency, the volatility and liquidity of Bitcoin is subject to the supply and demand of its traders. Miners also act as market influencers, since they can decide when to keep their newly minted bitcoins or put them into circulation by selling them on the market. In 2017 alone, the price of one bitcoin rose from $1,000 to $19,000 due to a lot of speculation from traders; however, the price of one bitcoin has become more stable as the technological currency matures.
There will exist only a total of 21 million bitcoins, which are expected to all be mined by 2140. As of 2020, approximately 18 million bitcoins have been mined. A single bitcoin can actually be divided into 100,000,000 individual units, called satoshis. So, there are 2,100,000,000,000,000 units of the currency that can be exchanged between people. In comparison, the World Bank estimate the global economy to be worth $80,000,000,000,000.
Bitcoin, as a currency, is valuable when it is accepted by many as a form of payment. Bitcoin, as a technology, is valuable because it is decentralized, borderless, and secure.
Who accepts bitcoins?
Bitcoin is often used to pay for many different goods and services. Here is a definitive list of 20 things that can be bought with bitcoins (Insert article here). Online and person-to-person transactions account for a lot of these purchases. For example, some have used Bitcoin to pay for the monthly server fees to host their website. Some bigger companies have begun accepting Bitcoin, like Overstack.com. In fact, there are many companies dedicated to setting up payment systems for existing companies.
Brief Bitcoin History
The domain name "bitcoin.org" was registered on August 18, 2018 under a protected identity, which is quite common for registering domains today. Then, on October 31, 2008, a user under the name of Satoshi Nakomoto makes an announcement to a cryptography mailing list hosted on metzdowd.com, stating "I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party. The paper is available here. This white paper is in the research-publication-like format describing the technical details of Bitcoin.
On January 3,2009, the first (genesis) block of Bitcoin is mined, presumably by Nakomoto himself, and it contains the headlines of The Times newspaper of that day "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." And yes, Bitcoin transactions can contain text as well as transactions. The message was most likely an opinion underscoring the importance for such a novel cryptocurrency as being germane for our modern world.
Prior to Bitcoin, other attempts have been made at creating a digital form of currency. In fact, the Bitcoin whitepaper cites Adam Back's Hashcash from 1997 and Wei Dai's b-money. As with most technological advancements, new improvements are built on top of old ones. Satoshi actively participated on the forums P2P Foundation and BitcoinTalk, helping improve the software after its initial release and answering questions to those interested. Ultimately, he handed over the control of the project to Gavin Andresen before going fully offline in 2011. Some suspect that Satoshi may have been more than one person, but to this day, "his" identity remains a secret.
Who is Satoshi Nakomoto?
His mysterious behavior has led many people to ask questions, and there are quite a few theories shrouded around his anonymity. It is likely that Satoshi Nakomoto valued his privacy, coming from a cryptography background, and preferred not to receive attention from the media and governments as Bitcoin became popular. Additionally, he may not have wanted Bitcoin to have him as a central figurehead, since the underlying core of the project is to be a decentralized network. He probably believed the community was self sufficient when he disappeared from the forums and e-mail.
Furthermore, he must have mined a large amount of bitcoins in the first couple of years. The value of those bitcoins would be a large fortune today and certainly attract a lot of attention, making Satoshi the target of criminals. Since bitcoins are similar to cash, they are more vulnerable as a secure storage of value, so Satoshi's anonymity can act primarily as exposure insurance.
How Can I Receive Bitcoins?
Receiving payments with Bitcoin has become easier, and can quickly be done with a wallet provider. Coinpay is an app allows its users to create usernames to quickly send to one another, while giving the user full and secure control of his or her private keys. For businesses, there are solutions out there that can generate a QR code, requesting the appropriate amount, for the payer to scan from their phone. Stores or businesses selling goods and services for Bitcoin simply need to inform the customers that they accept this form of payment. If you are a brick and mortar store, there are point-of-sale machines that will handle the payment processing on your behalf. For online stores, there are also point-of-sale plugins for the customers' shopping carts.
Buying and Selling Bitcoins
Buying under $250 worth of bitcoins in a single day can be done with apple pay and debit card on Coinpay. For credit cards and daily amounts over $250, users will have to provide some more personal information.
Bitcoin ATMs (BTMs) are machines where people can buy and sell bitcoins for cash. These machines are in many different cities and countries already, and they support the local fiat currencies for conversions. They often use phone numbers to verify your identity and have similar daily amount restrictions without providing further identification such as a driver's license.
Although most BTMs are buy-only, more locations are supporting the cash out option as well. If you do decide to cash out your bitcoins at a Bitcoin ATM, read (this article) before you do, since there are a few extra steps involved.
Can I Earn Bitcoins?
Some employers have already decided to pay their employees in cryptocurrency, such as Bitcoin. Additionally, there are websites dedicated to freelancers who can be paid in Bitcoin for their services. These platforms are matchmakers for those hiring and those seeking work. Some common ones are: Cryptogrind, Coinality, Jobs4Bitcoins, BitGigs, and even Craigslist allows people to specify whether they accept bitcoins.
There are also apps that let you earn smaller amounts by learning about Bitcoin or spending it.
Gambling with Bitcoin
Online lotteries, casinos, jackpots, and spread betting websites exist that allow users to participate with Bitcoin. Bovada is a popular gambling website that has been using bitcoins for quite some time. Users of the service would bet and also be paid out in the cryptocurrency. As with all gambling, these activities the high risk of losing all your money.
Bitcoin Investing, Risks, and Regulations
There are many people that believe digital currencies are a more efficient means to transferring value, since a network without a central authority allows for a more efficient process. Specifically, digital currency processing times and fees are much lower than traditional processing payments, especially for international transactions.
Since there exists a liquid marketplace for the exchange between cryptocurrencies and also fiat currencies, some investors and traders have also used these constantly changing exchange rates to predict future prices for a profit.
The value proposition for cryptocurrencies as an investment lies in the fact that they are another alternative to currencies backed by governments and central banks, as well as, potentially acting as a store of value to a traditional commodity like gold or oil.
In the United States, investors in cryptocurrency are subject to regulation and taxation from the IRS. Cryptocurrencies are considered property for taxation purposes, and their gains or losses would be viewed as capital gains and losses respectively. Any bitcoins, however obtained, would be considered property by the IRS.
Although Bitcoin was not designed as an investment vehicle, many individuals and institutions have invested in the cryptocurrency on a speculative measure. They view the digital currency as an asset instead of a medium of exchange, where the principle of buying low and selling high applies. However, due to its decentralized nature, there is a lack of guaranteed value. There is no regulatory agency that can properly control the risk of Bitcoin as an asset, although many popular agencies have issued their stance and warnings thereof.Although Bitcoin was not designed as an investment vehicle, many individuals and institutions have invested in the cryptocurrency on a speculative measure. They view the digital currency as an asset instead of a medium of exchange, where the principle of buying low and selling high applies. However, due to its decentralized nature, there is a lack of guaranteed value. There is no regulatory agency that can properly control the risk of Bitcoin as an asset, although many popular agencies have issued their stance and warnings thereof.
Even as cryptocurrencies gain more maturity and stability, they are still evolving since they are, in essence, a modern technology. This may be attractive to some, such as investors who are comfortable in high-risk, high-return environments.
Risk is inherent for any technology, however, it is unclear how to traditional regulatory agencies would pose clear restrictions on a decentralized network.
Currently, it is the sole responsibility of the owner of cryptocurrencies to make sound judgements that are in the best interest of his or her financials. Controlling the private key to one's cryptocurrency is similar to handling cash in one's pocket. If the money is lost, there is little chance of recovery for the funds. Extra precaution for the storage of large amounts of cryptocurrency should be taken, such as using an offline wallet. An offline wallet would not be vulnerable to hackers, and it comes in the form of storing the private key in a physical form- such as on a piece of paper, engraved in metal, or even a USB drive that is not accessible online.
Smaller amounts whose purpose is for transacting can be stored in online or mobile wallets, but the owner should make sure that they are using a legitimate business to do so. Unlike bank notes, which are insured by the Federal Deposit Insurance Corporation (FDIC), bitcoins are not insured by all businesses who are in the service of storing cryptocurrency on behalf of these users. Luckily, there are compliant and secure businesses out there, who have capital reserves that hedge against this sort of risk.
Bitcoin transactions are permanent and irreversible, similar to wire transfers. Therefore, only the wallet that has received the funds can reverse them. Since there is no third party or payment processor, no appeal processes or further protection is available. It is important to note, however, that these risks can be easily controlled by the owner of the private keys. Coinpay makes this safer by using usernames instead of public keys, taking the uncertainty out of the equation.
Unlike centralized systems, where one hacker can have access to millions of people's sensitive information, decentralized systems are inherently safer for the whole. With great power, comes great responsibility, and decentralized networks are a technology that empower the individual if they are up to the task.
Altcoins, Bitcoin Forks, and Competition
Many alternative cryptocurrencies ("altcoins") have sprung up in the past, which are all promising to deliver different results. Bitcoin has largely remained ahead of its competitors through name recognition and even venture capital investment; however, there is always the possibility of a new, improved currency taking the place of the most popular cryptocurrency. Bitcoin itself is being constantly improved and developed on by a community that seeks to empower Bitcoin's widespread adoption. There are new layers being developed to act on top of the underlying network, similar to how the internet has multiple layers which helped its mass adoption. These higher level layers show steady results and promising applications.
Sometimes, the competition arises internally, such as when the Bitcoin community becomes divided about a particular issue with the network protocol. These divisions affect miners and developers, and they may have to choose which "chain" they keep adding blocks to and how its done. This is in the form of supporting a new software on their computers. While many improvements are largely agreed on, if the debate becomes polarized enough, a "hard fork" will represent a split in the blockchain. The new branch is considered a new token, and a new token will be issued for each bitcoin. For a hard fork to be successful, an entire community needs to support the development and mining of the new tokens.
Some examples of these include Bitcoin Cash (forked in August 2017) and Bitcoin Gold (forked in October 2017). These branches can and have forked further such as Bitcoin Satoshi's Vision, which forked from Bitcoin Cash in November 2017. These are all technical issues; however, most improvements to the Bitcoin Protocol happen without forking, these are called "soft forks".
Since cryptocurrencies are an alternative to fiat currencies, this implies that they can also be a competitor. Therefore, many governments have begun regulating the use and sale of cryptocurrencies. It is important for legitimate businesses to have proper compliance, and there have been illegitimate businesses and scams in the past due to a lack of regulation.
Since cryptocurrencies can have clear technological advantages, some governments and central banks have looked into issuing their own version. Although the future of these fiat cryptocurrencies, cryptocurrencies, and the digital economy as a whole is hard to predict, it will be interesting to see the improvement of efficiency in the financial market. Governments may need to work together in order to create create uniform regulations, and cryptocurrencies may even bring about a financial human rights movement.