Blockchain And Cryptocurrency Provider

What is Bitcoin? A Layman’s Introduction

bitcoin 3773584 1920

Table of Contents

Introduction

By now everyone, and possibly their grandmother, has heard the of terms Bitcoin and Cryptocurrency. Over the past numbers of years these expressions have gradually seeped into the public consciousness, and yet for many, despite their growing prevalence, they still remain a rather fuzzy unknown.

If you wish to know at a glance just exactly what Bitcoin is, and how you too could benefit from investing in it, then please read on. This introduction will not get too bogged down in the technical details of the underlying technology but will leave you informed on the nuts and bolts of Bitcoin and how you might make your first acquisition of the digital currency.

If you merely wish to see what all the fuss is about, then by reading through the below FAQs, rest assured that through this act alone you will be vastly more informed than the average Joe on the street as to what Bitcoin can offer.

What is bitcoin?

Bitcoin is a digital currency. As with conventional currencies, such as the Dollar, Euro or Yen, Bitcoins may be used to buy goods and services or may be exchanged for other currencies/cash. Despite the prevalence of the below graphic online, there is no physical ‘coin’ to speak of. The currency resides entirely within the digital realm.

bitcoin 3773584 1920
bitcoin 3773584 1920

Who created Bitcoin?

A pseudonymous software developer, or group of developers, going by the name of Satoshi Nakamoto proposed Bitcoin in 2008. To this day, no-one knows who Satoshi Nakamoto really is, which has added to the mystique. What he proposed was an electronic payment system based on mathematical proof. The idea was to produce a means of exchange, independent of any central authority, that could be transferred electronically in a secure, verifiable and immutable way (more on this below).

Nakamoto’s 2008 White Paper, entitled Bitcoin: A Peer-to-Peer Electronic Cash System, served as the blueprint for solving the ‘Double Spending Problem’ and provided the work around that enabled digital currencies to take off. The original paper is short and an interesting read for those curious on the underlying principles behind ‘Blockchain’ technology.

Bitcoin transactional properties

Bitcoin can be used to pay for things electronically, if both parties to the agreement are willing. The same can be said of traditional currencies. So a natural question to ask is in what ways do Bitcoin transactions differ:

Decentralized

No single institution regulates Bitcoin. Instead it is maintained by volunteer coders, and is run by an open network of computers around the world, called nodes. It is no coincidence that Bitcoin emerged as an alternative to the conventional monetary systems in the wake of the 2008 financial crash. The decentralized nature of the platform means that the transactions are maintained by a network of users and not governed by any single entity.

Immutable

Upon completion of a Bitcoin transaction, it cannot be reversed. Owing to the decentralized nature of the currency there is no central body in place to adjudicate in the event that a transaction should wish to be undone after it has been completed. The reason transactions cannot be reversed is a property of the underlying Blockchain technology behind the currency.

Pseudonymous

Bitcoin users do not need to formally identify themselves when either sending or receiving Bitcoin. The transfer of Bitcoin from one user to another is made possible through the use of a  Wallet Address (a string of 34 symbols, also known as your ‘Public Key’). In practice, each user is identified by the address of their wallet.

Transparent

As the network is maintained by its users, each and every transaction is a matter of public record and is visible to all users. However the identities of the users involved in a transaction are the pseudonyms referenced above. Therefore, in general,  it is not possible to tell the identities of the actual people behind the transaction (although there are some companies and law enforcement making efforts to tie real identities to transactions).

Divisibility

In currencies such as the Euro and Dollar the smallest unit of capital is the cent, 0.01 of a unit. In Bitcoin the smallest unit stretches to 8 decimal places, 0.00000001, and is called a satoshi. The superior divisibility of Bitcoin opens the door to enabling micro-transactions to take place that are beyond the capability of traditional currencies.

Limited Supply

Conventional currencies have an unlimited supply – institutions are licenced to issue as many as they deem fit in order to manipulate a currencies value in relation to others. We, the holders of the currency, are entirely at the mercy of this process and its implications.

With Bitcoin there is an upper limit on the number of Bitcoins to enter circulation. This upper limit is capped at 21 million coins. Currently 16.7 million coins are in circulation with the cap expected to be met in 2140.

In theory, if the demand for Bitcoin grows yet the supply has a finite cap, then the value of the coins will increase making Bitcoin an attractive asset. Of course the demand could also drop or vaish which is also conceivable.

How does bitcoin work?

Digital currencies struggled to take off prior to 2008 as they ran into a problem known as the ‘Double Spending Problem’. Digital objects are easily copied. If you sought to purchase 1 Bitcoin from a seller, what guarantee would you have that the seller had not already sold the original coin and was now presenting you with a worthless copy?

In order to circumvent this problem a transparent peer-to-peer framework was introduced. Bitcoin has no central administrator and instead the network is run and verified by its users. Every user has access to, in effect, a ledger of all the transactions that have ever taken place on the network. This ledger is called the blockchain. This makes fraudulent transactions impossible as every user has the same set of records of all the agreed upon transaction.

New transactions between users are then verified by other users of the network and, if verified, are then added to the blockchain and are visible in everyone’s updated ledger.

For the curious, I recommend watching this short Youtube video which details how a basic Bitcoin transaction takes place in practice: How Bitcoin Works in 5 Minutes.

 

What is bitcoin mining?

New Bitcoin transactions are grouped together into ‘blocks’ of transactions to be verified. This verification process is in effect a complicated math problem that must be solved. The first person on the network to solve the problem is given a reward in Bitcoin for doing so. The people who attempt to verify these blocks of transactions are called Bitcoin Miners. In order to solve the math problems they employ incredibly fast supercomputers.

The current reward for each new block of verified transactions is 12.5 Bitcoins. Once a block has been verified by a miner it is added to the blockchain and is now visible in the ledgers of all the users in the network.

How much can I buy a bitcoin for?

The current price for 1 Bitcoin, as of April 2019, is approximately 4,866. The price of Bitcoin, and digital currencies in general, is more volatile than traditional currencies and its value has fluctuated dramatically since its introduction to the world in 2008.

That’s rather a lot to invest? Have no fear, the smallest unit of Bitcoin currency is the satoshi, 0.00000001 of a Bitcoin. For your first investment it is possible to buy fractions of a full Bitcoin owing to the divisibility of the currency.

How do I get a bitcoin?

There are numerous options available in almost every country on how to buy Bitcoin. These range from Bitcoin ATMs, cryptocurrency exchanges or traders. For many people the initial step of making their first purchase of a digital currency can be a daunting one. But as with lots of things, perception isn’t always everything and the process is rather straightforward.

Bitcoins may be purchased from the following places:

Bitcoin ATMs

A Bitcoin ATM allows you to exchange cash for Bitcoins. This method is perhaps the most anonymous means of purchasing Bitcoin. In the Republic of Ireland there are Bitcoin ATMs located in both Dublin and Cork. These ATMs are operated by Boinnex and clear instruction as to their operation can be found on the website.

Cryptocurrency Exchanges

At an exchange traditional currencies are used to buy and sell digital currencies online. Many of these exchanges require an initial ‘Know Your Customer’ stage upon registration. For a review of places to buy online see here.

Traders

It is also possible to find other independent outlets or persons online willing to trade Bitcoin for cash or other products. This is perhaps not an advisable avenue for someone just starting out as it requires a high degree of trust in the trader that is not guaranteed as opposed to using a Bitcoin ATM or exchanges.

How do I store my bitcoins?

Bitcoins are stored in Cryptocurrency Wallets. Bitcoin is not a physical currency and so the wallet is not used to house Bitcoin per se. A Bitcoin Wallet contains 2 important pieces of information: your Wallet Address (a string of 26-35 characters, also known as your ‘Public Key’), which allows other users to ensure that the Bitcoins they send you in a transaction make their way to the right place; and your ‘Private Key’ (a security code encrypted with 16 distinct symbols), this password is your digital signature which you must use to authorise any transactions that you make.

There are numerous types of Wallets available:

Mobile – Often favoured by people using Bitcoin on a daily basis due to its convenience. This form of wallet is an App that runs on your smartphone. The advantage of a mobile wallet is its sheer convenience. The drawback is that your information is more susceptible to being attacked by hackers. Additionally should someone gain access to your smartphone, you may lose control of your wallet unless you have it backed up correctly.

Web – Web wallets store your private keys on the server of a company. Usually this company is a cryptocurrency exchange. Much like with mobile wallets you have access to your funds from anywhere provided you have an internet connection. Many of the companies providing these wallets keep the majority of their users funds in cold storage i.e. on hard drives not connected to the internet. This makes this option potentially more secure than a mobile wallet. However your information is being housed on the severs of a third party, not all of whom are reputable.

Paper – This is a physical document containing your Wallet Address and Private Key, often in the form a QR-code for easy scanning. This approach has the benefit of a paper is wallet is that you are more secure from digital theft by not having your information stored anywhere digitally. The downside is that should you misplace the information, your access to your Bitcoins is lost forever, no one can help you here. Note: paper wallets were made somewhat obsolete by BIP39 mnemonics improvements to bitcoin.

Hardware – Here your private keys are stored in a secure hardware device. This is the most secure from way of minding your coins. Your information is not connected to the internet and is safe from viruses and hackers.

Is bitcoin legal?

Outside of Japan Bitcoin it is not recognised by any Government as legal tender. Despite Bitcoin not being acknowledged as legal tender, that does not mean it cannot be used as a means of payment so long as both parties to a transaction are willing. Everyone is perfectly free to use Bitcoin as a means of payment, it is entirely up to the individuals discretion.

See link here for legality by country. 

Can I buy things with bitcoin?

Aside from buying/selling Bitcoin for Fiat currencies you may also use Bitcoin to purchase a number an ever-growing variety of goods and services online, these options naturally vary depending upon your location. Some examples:

  • Gift cards (eGifter and Gyft)
  • Plane tickets (Surf Air, CheapAir, Expedia)
  • Music (musicians like Imogen and Bjork accept cryptocurrency)
  • Software, apps, movies, and games from Microsoft and their app store

Can you buy bitcoin with cash?

Bitcoin can be purchased with cash. This can be done through the use of a Bitcoin ATM.

Bitcoin ATMs are operated in the Republic of Ireland by Boinnex, with locations to be found in Dublin and Cork. Further information as to the location of the ATMs and a brief tutorial video on their operation can be found on the website.

 

What are the advantages and disadvantages of bitcoin?

The main advantage of Bitcoin over conventional currencies is that it is decentralised. You can trade internationally without having to pay exchange rates and other charges. No centralised administration also means no interest rates. The transparent nature of the platform also adds further to the trust that users are able to have that no institutions are playing unfair with their money.

Hacking and scams are always a concern in the digital realm. These scams are growing ever more sophisticated with time. You should always be careful that you are dealing with a reputable source and be ever vigilant with your wallet information. As transactions need to first go through verification process there is a wait time of 10 minutes for transactions to be verified and added to a block.

Conclusion

Bitcoin is still a relatively young currency. However since its introduction to the world in 2008 it has grown a steady user base and an ever increasing level of awareness. The Bitcoin network grows stronger as more people take the time to learn about the currency and invest in it.

There are a multitude of other cryptocurrencies on the market, yet as first and most prominent cryptocurrency Bitcoin is still seen as the spearhead for the digital currency revolution. The increasing acceptance of digital currencies in the market is very much linked to the success of Bitcoin.

By reading this article alone you may consider yourself far better informed than the average Joe on what Bitcoin essentially is, and of both its pros and its cons. 

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Killian

Killian

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