Best Bitcoin Exchanges
What is Bitcoin?
Based on its whitepaper, Bitcoin is defined as a peer-to-peer electronic cash system. It is a new kind of money, one which is digital and decentralized. There is no one entity that backs it unlike fiat currencies which are backed by their respective governments. Instead, it is supported by a network of computers globally called miners. They are the ones generating, propagating and verifying transactions. They are financially rewarded for their service so it is in their best interest to keep the network safe and secure. Before Bitcoin, any form of payment has to go through a company or a financial institution or company such as Paypal or Bank of America. This is done since we put our trust in these institutions. With Bitcoin, users send it directly to one another. We can do so in a trustless manner since it is based on cryptographic proof and it solves the double spending problem. Since it is not backed by any one or group of entities, there is no single point of failure which can be prone to hacks or central authority blacklisting.
Bitcoin’s underlying technology is called blockchain. The blockchain acts as a public record of all transactions which is visible for all to see. It tracks the inflows and outflows of all Bitcoins in all of its history. Transactions that are valid are formed into a block and added to a chain of previous blocks, hence the term blockchain. As blocks enter the system, it is broadcast to the peer-to-peer computer network of miners for validation. In this way, all users are aware of each transaction, which prevents stealing and double-spending.
Bitcoin was created by the anonymous Satoshi Nakamoto. To date, no one knows who Satoshi Nakamoto is although many speculate that it may not be just one single individual. Right now, Bitcoin is being developed by a global network of developers. Once a proposal has been made, miners will vote whether to implement it or not. For one person to control the Bitcoin network, he has to control 51% of the entire network. The bigger Bitcoin becomes, the harder it is to attack or manipulate the Bitcoin network.
The Bitcoin whitepaper was released in October of 2008 at the height of the real estate bubble and global recession. The Bitcoin network was launched later in 2009. What started out as digital money experiment for hobbyists has grown to become a challenger to the world’s monetary system. It currently has a valuation of over $200 Billion which may seem big but is dwarfed compared to the money supply of the world’s fiat currencies which are in the trillions.
Key Features of Bitcoin
The key feature of Bitcoin is that it is not controlled by a single entity but by a global network of computers incentivized financially to keep the system secure. This means that it is not under any jurisdiction. There is no one a court can subpoena or rule to shut down. They would have to shutdown the thousands of nodes that are operating globally which is almost impossible. It is truly the first global decentralized money system.
Trustless and Irreversible
Once a transaction has been sent, it can not be reversed. It would have to take a 51% network attack to do this which is financially more costly. This prevents common frauds that happen especially in online commerce. On the other hand, this also means that users have to be more careful since there is no customer service they can call in the event that they accidentally sent their Bitcoin to the wrong address.
Since anyone can create a bitcoin wallet without identity verification, transactions and accounts are not connected to real-world identities. The unique address you create is a string of 30 alphanumeric characters where people can send Bitcoin to. This gives people more privacy with their transactions. While it is possible to the transaction flow of Bitcoin since its a public ledger, it cannot be linked to real-world identities unless the user reveals it.
Since the Bitcoin network is supported by a global network of miners, there is no single point of failure. Unlike in banks where hackers can attack a specific address or database, this is not possible for Bitcoin which makes it more secure. And the more miners that come onboard, the more secure the network becomes.
Anyone can create their own Bitcoin wallet. Anyone is also free to mine Bitcoin if they choose to. Unlike in banks or Paypal or other financial institutions (even money changers), you won’t need to show any IDs or do KYC. This is the reason why its a global borderless new kind of money.
How does Bitcoin Work?
Bitcoin uses the Proof of Work consensus mechanism. Basically, this is the process where miners contribute hashpower to solve a cryptographic puzzle. The only way to solve this puzzle is through brute force trial and error. This means that the only way to get an edge is to put in more hashpower. The more total hashpower there is in the network, the stronger the network becomes and is harder to attack. When miners solve it, they are financially incentivized in the form of the transaction fees and block rewards from the network. The current Bitcoin network block reward is at 6.25 BTC per block. This reward is halved approximately every 4 years until the 21 million total BTC supply is available on the market. Each block is produced every 10 minutes which also means that transactions are verified around the same amount of time too.
Aside from validating transactions, Miners are also given the power to vote on proposals. Instead of using a one IP address or one person one vote, having a one CPU one vote ensures that those who are most invested will have more control since they also have more at stake. They will then be incentivized to act in what’s best for the network.
|All Time High
|Market Cap Dominance
|Avg. Block time
|Reward Per Block
|Number of addresses >1 USD
August 2008 – Bitcoin.org domain was registered
October 2008 – Bitcoin whitepaper was published
January 2009 – Genesis Block is mined, along with the first transaction and first version release
July 2010 – MtGox was established
November 2010 – Bitcoin marketcap exceeds $1M
November 2012 – First Bitcoin Halving took place
July 2016 – Second Bitcoin Halving took place
December 2017 – Bitcoin reached its peak of almost $20,000 per BTC
May 2020 – Third Bitcoin Halving took place
Where can I buy Bitcoin?
How to properly store Bitcoin?
You can create your own Bitcoin address through different Bitcoin wallet interfaces. The wallet address will be used to store and send your Bitcoins. When generating your wallet, you will be given a private key and a public address. The private key acts like a key to your house (wallet) while the public address is the address you can give to others so they can send BTC to you.
Hardware Wallets – auto generated
Online Wallets – auto generated
Real world use cases (Who’s using it?)
In its early days, Bitcoin was notorious for being used for online illegal transactions. But that is no longer the case today. Everyday more and more merchants are starting to accept Bitcoin as a form of payment. Now you can buy almost anything with it from travel tickets to daily groceries.
Bitpay, which is a popular cryptocurrency payment processor which allows users to spend BTC on their merchants has consistently been growing in terms of transaction volume. They have processed over $1 Billion worth of transactions in 2018. Dozens of other major retailers have already began experimenting and accepting Bitcoin as an alternative form of payment such as Starbucks and Whole Foods.
Pros and Cons
- Decentralized form of money with a global network of miners
- Supply limit is hard coded meaning it is not inflationary
- It is almost impossible to take down single handedly
- Transparency of all transactions
- Transaction time of 10minutes can be slow especially in a day to day context
- Too volatile to be considered as a medium of payment
- Still not widely accepted compared to fiat currencies
Blocks are produced every 10 minutes
The average fee when sending BTC is around $1 worth of Bitcoin. This can change depending on the number of transactions
The Bitcoin network rewards miners a fixed amount of BTC per block. This block reward is halved approximately every 4 years. It started out at 50 BTC per block, it got halved to 25 in 2012, it got halved again to 12.5 in 2016 and the latest halving happened in 2020 which brought the block rewards down to 6.25 BTC.