What Is Bitcoin ? Basics for Bitcoin Beginners

At one time, cryptocurrency newbies ask themselves, “What is Bitcoin?”. They are always looking for answers to this question, and most of the material they get online tends to be a little too shallow, with scattered and unverified details. We took up this challenge and compiled a verified, detailed, and simplified guide with all the facts to help you kickstart your crypto journey.

What Is Bitcoin?

Bitcoin is a form of decentralized digital currency. It was the first cryptocurrency and was invented by Satoshi Nakamoto, as stated in his nine-page whitepaper, Bitcoin: A Peer-To-Peer Electronic Cash System, which laid out Bitcoin basics. The history of Bitcoin dates back to 2008 when Nakamoto implemented cryptocurrency ideas that had been floated from as early as 1983 by an American cryptographer, David Chaum. Nakamoto’s invention relied on the Bitcoin blockchain as a peer-to-peer cryptocurrency where all Bitcoin transactions would occur (literally where Bitcoin ‘lives’).

Imagine you and I are walking down a busy street. I have a banana and hand it over to you. You now have full control of the banana while I remain with nothing. At that point, we did a physical peer-to-peer exchange of the banana without involving a third party. You now fully own the banana, and you’re free to give it to anyone you wish. It left my possession entirely, and I can’t control it anymore. That’s how in-person exchanges operate.

graphical simplification of what is bitcoin

Since Bitcoins are digital tokens, let’s assume I hand you a digital banana. How can you be convinced that the digital banana I once owned now belongs to only you? Maybe a million people downloaded the digital banana when I shared it with you through the internet. This brings about the double-spending problem. Sending digital bananas looks more complicated than physically exchanging them. But don’t worry. There’s a solution – public ledgers!

For accountability, the bananas will have to be tracked via a public ledger (an accounting book for monitoring all transactions). In this case, the ledger has to live in its own world and be managed by someone. All subsequent exchanges of the digital banana will create a block, the primary container of transaction data on the Bitcoin blockchain.

Let’s take a game like World of Warcraft. The inventors, Blizzard, monitor the rare flaming fire swords via a digital ledger. Our digital bananas can be monitored the same way too.

But here’s another problem! What if one of the guys at Blizzard created a duplicate of the game World of Warcraft? He could add more of these digital bananas to his balance at will. It’s not like when we walked down the street and I handed you my physical banana. Going through Blizzard is like involving a third party in all our physical transactions.

We can solve this problem by giving everybody access to the digital ledger instead of going through Blizzard. The ledger will live on everybody’s computers, and all transactions related to the digital bananas will be recorded there. Nobody can manipulate it since it’s open to the public. It’d be tough to beat the system, especially if it got big. Besides, no one can give themselves more digital bananas since the system is decentralized.

The rules in the digital ledger are open-source since they’re defined at the beginning. Only the smart contribute, maintain, and secure this digital ledger. They could be rewarded with like 6.25 digital bananas as compensation for their hard work. And that’s the only way to create more digital bananas. That’s the most straightforward answer to what is Bitcoin and how it works.

Here are the definitions of the basic concepts of Bitcoin you’ll encounter as you read on:

  1. Blockchain is a decentralized, distributed, public ledger where transactions are recorded across several computers, and the recorded transactions cannot be modified without altering all subsequent blocks.
  2. Bitcoin Mining is the validating of information in a block within the blockchain by solving complex mathematical problems.
  3. Miners are individuals that process transactions on the blockchain in exchange for Bitcoins as a reward.
  4. Bitcoin Fees are small amounts of money users pay to have their transactions validated by miners.
  5. Proof-of-Work (PoW) refers to a Bitcoin algorithm that ensures blocks are only valid if they meet a specific computational power requirement.
  6. A private key is an alphanumeric code generated by your crypto wallet and is used to authorize transactions on the blockchain.
  7. A public key (also called an address) is an alphanumeric code generated by your crypto wallet and is used to receive funds.
  8. Peer-to-peer transactions refer to the direct selling and buying of cryptocurrencies without intermediaries.

How Bitcoin Transactions Work

After discovering what is Bitcoin, most users want to know more about how Bitcoin works. Well, Bitcoin transactions rely on private and public key concepts, ensuring the integrity of transactions on the Bitcoin network. To conduct a transaction, each user must have a pair of private and public keys as security measures for the Bitcoins they own. For transactions to be registered as complete, they have to go through a series of validations and confirmations on the crypto blockchain by miners.

Initially, after the genesis block Bitcoin in 2009, miners could be rewarded 50 Bitcoins for every successful block mined. The rewards have, however, been gradually reduced by 50% through Bitcoin halving, a process that takes place at intervals of four years for every 210,000 blocks mined successfully. The process helps lower the Bitcoin supply since it ‘demotivates’ miners and eventually reduces the rate at which new Bitcoins are mined.

how bitcoin transactions work

Security tip: Private keys must always be kept secret since anyone with access to them has your Bitcoins, ‘literally’.

What Makes Bitcoin a Favorite in the Crypto World

Bitcoin’s growing acceptance has made it a favorite in the crypto world. Over the years, many businesses have adopted it as a form of payment, including major corporations like Microsoft, PayPal, Starbucks, and Tesla. This acceptance expands Bitcoin’s usability, credibility, and accessibility, attracting more users into the ecosystem. But what makes Bitcoin ‘tick’?

Crypto Exchanges

One of the things making Bitcoins a favorite is that they can be exchanged for cash on various licensed exchanges like Binance, Bitstamp, Kraken, and Coinbase, among others. With their low transaction fees and robust security features, crypto exchanges make buying and selling cryptocurrencies easy without subjecting users to long and tedious processes as is with fiat transactions.

Limited Supply & Scarcity

With a hard cap of 21,000,000 Bitcoins, there is a limited supply, and users are working toward ensuring they own a piece of Bitcoin. This has contributed to a surge in global demand and led to Bitcoin’s value appreciation, positioning it as a hedge against inflation.

“I see Bitcoin as ultimately becoming a reserve currency for banks, playing much the same role as gold did in the early days of banking. Banks could issue digital cash with greater anonymity and lighter weight, more efficient transactions.” – Hal Finney.

Anonymity

Users never have to worry about Bitcoin anonymity whenever they are transacting. The Bitcoin blockchain grants privacy to users since they are never asked for their personal details while transacting. It’s, however, advised that users should not use one address for repeat transactions as their anonymity can be easily compromised using blockchain explorers.

Global Accessibility

Since it has no geographical boundaries, Bitcoin is easily accessible by anyone with a crypto wallet and an internet connection worldwide. This has opened up underserved regions in the financial world, creating financial inclusion and economic empowerment opportunities.

Bitcoin ATMs

Sometimes called Bitcoin Kiosks, Bitcoin ATMs are special automated teller machines that let users buy Bitcoins and other cryptocurrencies using cash and debit cards. So long as users understand the Bitcoin basics, these ATMs allow them to wire their purchased Bitcoins directly to the crypto wallets of their choice. This saves users from making purchases on unauthorized platforms that might lead to losing their funds.

bitcoin atm image

Pioneering Status

As the first cryptocurrency, Bitcoin has had a massive following since most consumers tend to be loyal to the first products or services they consume so long as they meet their expectations. Bitcoin has also offered a platform for inventors to use its blockchain in their initial invention stages of altcoins and the sale of those respective altcoins. Besides, inventors of various Bitcoin hard forks have had to rely on the Bitcoin network to create forks.

Decentralization & Security

Bitcoin’s distributed public ledger is operated on a blockchain, and users have direct control over their funds. They don’t have to go through a central authority like banks to utilize the funds. Robust security measures like cryptographic algorithms and the consensus mechanism ensure the safety of Bitcoin against fraud and hacking attempts.

Safety and Transparency of Bitcoin

Safety and transparency are critical pillars of the Bitcoin network. Robust cryptographic protocols on the network ensure transactions are secure and protected against fraud. As a peer-to-peer cryptocurrency, Bitcoin transactions are verified and recorded on the blockchain and are accessible to all users. Besides, the decentralized nature of Bitcoin prevents a single point of failure. This makes the blockchain resilient against hacking attempts. Users can also enhance their security by using strong passwords, hardware wallets, and enabling two-factor authentication.

Bitcoin’s public blockchain is highly transparent and allows anyone to inspect transaction details.

Transparency enhances the trustworthiness of the network as users can verify the integrity of transactions. Transparency in the blockchain also makes independent audits possible, improving accountability and preventing fraudulent activities. Users can check the real-time Bitcoin value on reputable exchanges like Coinbase to find Bitcoin’s monetary value at any time.

Risks & Concerns Surrounding Bitcoin

While Bitcoin has been highly accepted, it has also faced a backlash from users along the way. Here are some of the most common risks and concerns surrounding Bitcoin.

As much as businesses are adopting Bitcoin for transactions, it’s not easy to insure the risks involved. Factors like lack of data and familiarity, regulatory uncertainty, price volatility, concentration risk, and misperceptions regarding costs still pose a significant challenge to Bitcoin insurance. It’s not easy for crypto-accepting businesses to convince insurance companies to cover their businesses since crypto is highly volatile and unpredictable.

A fair amount of fraud exists in the crypto market. Users always want to trade Bitcoins, but some exchanges could be fake. Regulatory bodies like the Securities and Exchange Commission and the Consumer Finance Protection Bureau have warned against such platforms. As much as there are systems to deal with the issue, fraud remains a great concern to Bitcoin users.

Bitcoin prices can shift quickly at any time due to various reasons. This makes it a highly volatile digital currency to transact with. However, with a deep knowledge of crypto trends, it’s possible to avoid falling victim to crypto volatility and know the best times to transact.

The Bitcoin market currently operates without any major regulations. Governments don’t have clear stances on cryptocurrency, except in a few countries like the US, Canada, the UK, Central African Republic, and El Salvador. The lack of taxation on Bitcoin transactions makes it appealing as an investment opportunity. This could, however, lead to problems making Bitcoin pose as a direct competition to a country’s official currency. There’s minimal acceptance of cryptocurrency as an acceptable currency, and we can’t predict the state of the crypto market regulation in the coming years.

Bitcoin is primarily secure due to the highly sophisticated blockchain technology it employs. However, the Bitcoin network faces security risks like:

  • Cybersecurity risks whereby fraudulent or incorrect information on the blockchain cannot be overridden.
  • Wallet security risks where unsecure wallets can be exploited by hackers and funds be stolen.
  • Selfish mining, where powerful mining pools can hide a block instead of broadcasting it to the network after successful mining. This can invalidate transactions on the network and give selfish miners an advantage over others.

Unlike in fiat transactions, you can only reverse your money for Bitcoin transactions if the recipient sends it back to you. It’s, therefore, essential to ensure you have all the correct details of the recipient before engaging them in a crypto transaction. The moment you click ‘Send’, it’s a done deal – no amount of effort can reverse the transaction.

Key Differences Between Bitcoin and Fiat Currency

Bitcoin and fiat are two different forms of currency. Here are the main differences:

  • Bitcoin is decentralized and has no legal entity controlling its distribution, while fiat is a government-issued legal tender managed by a central bank.
  • Bitcoins are hard-capped at 21,000,000 coins at maximum, while fiat money is unlimited since more money can be printed according to demand.
  • Bitcoins can only be stored as digital currency, while fiat can be stored as digital and physical currency.

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FAQs

Bitcoin is the world’s first decentralized cryptocurrency, launched in 2008. It relies on peer-to-peer transactions to record all transactions on a public ledger.

Miners on the Bitcoin blockchain make money by being rewarded for validating blocks successfully.

Satoshi Nakamoto created Bitcoin according to the 2008 ‘Bitcoin: A Peer-To-Peer Electronic Cash System’ whitepaper that he published in a cryptography mailing list.

Bitcoin’s scarcity makes it so valuable. With a maximum quantity of 21,000,000 Bitcoins, users always want to own a piece of this most valuable cryptocurrency.

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