Quick look: Bitcoin (BTC) was launched as the first-ever cryptocurrency and has since been the most popular by market capitalisation. With Bitcoin, people can directly and securely send digital money on the internet to each other.
High-level breakdown
Bitcoin (BTC) was launched as the first-ever cryptocurrency and has since been the most popular by market capitalisation. It was launched in 2008 as “an electronic payment system based on cryptographic proof instead of trust” by the pseudonymous developer(s) Satoshi Nakamoto. Essentially, Bitcoin is digital money that allows for secure peer-to-peer transactions on the internet between two parties.
Users can benefit from lower transaction fees, faster transaction times, increased mobility of financial assets across countries or regions, and more. Although Bitcoin, Ethereum, Dogecoin, and other cryptocurrencies have recently been gaining popularity online, their prices have been highly volatile in the past and are still considered a highly speculative choice of investment by some professionals.
People in most countries are able to easily purchase Bitcoin by signing up with a trusted crypto exchange in their respectable region.
Understanding the basics
The basic functionality of Bitcoin is to be able to transfer value online directly from one party to another, but depending on the user’s goals it can be used as…
- an investment asset
- a store of value (like gold)
- a way to transfer value across regions
- a pathway to emerging technologies
Due to the decentralised nature of cryptocurrencies such as Bitcoin with no intermediary involvement (like a payment processor or bank), users take complete ownership of their funds; whatever the use may be.
In most regions, it’s legally considered a financial asset rather than being adapted as a medium of exchange – extreme caution is always advised when making investment decisions.
Key characteristics
Since Bitcoin’s creation, thousands of new cryptocurrencies and tokens have been launched. However, the mighty Bitcoin (trading as BTC) remains the largest by market capitalization and trading volume to date in 2022.
- Unlike payment platforms like PayPal and Venmo which rely on the traditional financial system (based on trust) for permission to transfer money and on existing debit/credit accounts, Bitcoin is decentralized! Any two people, in any region of the world, at whatever time, can send and receive Bitcoin to each other without the need for of a bank, government, or other institution to verify transactions (based on cryptographic proof).
- Transactions are recorded in code on an open, distributed ledger across participants of Bitcoin’s entire blockchain network. It’s similar to a bank’s ledger, or a log of customers’ funds going in and out of the bank. Essentially, it’s a record of every transaction ever made using bitcoin; they’re “blocks” of data that are then linked together on a “chain” of previous cryptocurrency transactions.
- Bitcoin has its own blockchain, and the blockchain ledger is distributed across the entire network. No government, company, country, or third party is in control of it; anyone can join the network and see transactions.
- The market supply for Bitcoin is ₿21 million, and will only ever be this amount. The value is based on supply and demand, and cannot be influenced by inflation or monetary measures!
- You don’t have to buy a whole Bitcoin – users can buy fractional amounts of a coin at any time if that’s all they need and want.
Bitcoin provides solutions to many shortcomings of the traditional financial system. Extreme economic inequality, identity theft, and most importantly high fees are some of the potential issues it was designed for and has the potential to address.
Solution, concept & origins
To understand how crypto transactions work, it’s useful to know how it originated and the purpose of it’s creation.
The principles behind Bitcoin first appeared in a whitepaper published online (on Reddit) in 2008 by a person or group of developers going by the name Satoshi Nakamoto. After much research and investigation by journalists and members of the crypto community for many years — Satoshi, Bitcoin’s creator, remains anonymous.
- “Bitcoin: A Peer-to-Peer Electronic Cash System” – written by Satoshi Nakamoto.
The title captures two key features of cryptocurrency:
Peer-to-peer
Cryptocurrency allows for direct P2P payments without third-party intermediaries such as banks or payment processors. This is a major reason why Bitcoin is commonly regarded as a highly ‘decentralised’ currency.
Electronic cash
Many attempts have been taken to develop electronic cash, but what makes Bitcoin stand out is its clever use of existing technologies like cryptography and distributed systems (blockchain ledger) to make it highly secure and efficient.
The white paper actually refers to some earlier concepts of computer science and secure communication techniques that were used as ideas for digital money, as it wasn’t the first – people were already talking about creating a digital form of money (non-physical coins) using data and cryptography.
But for a person to send money directly to someone else online using the traditional payment infrastructure, some level of trust is needed between the two parties in confirming that the payment was successful. For example, if the receiver says they didn’t receive the payment that was made by the sender, there would be a dispute between the two parties. And a third party is almost always needed to solve such disputes – your banks and payment platforms.
Creating an electronic cash system that was actually based on cryptographic proof, what it solved in the white paper was in fact the problem of establishing trust between two online entities.
Satoshi created a system where Bitcoin transactions are recorded on a virtual ledger and verified on a peer-to-peer network known as the blockchain. This virtual ledger is distributed amongst participants of Bitcoin’s entire blockchain network, and is what provides proof that a transaction was both sent and received directly from one peer (user) to another – this also means that transactions are irreversible.
By providing proof that a transaction has been verified, there is no need for trust between two online entities when transferring value! If one users’ ledger is different to the others on the blockchain, that users ledger can rectify its records with the correct information.
Solution continued…
But, if everyone on the blockchain can see other’s transactions (as per the distributed ledger), where’s the privacy in that? Satoshi solved for this by combining some well-known data security methods known as public key encryption and private key encryption.
Each holder will be assigned a private key that is revealed to them when they first purchase Bitcoin – a randomised string of letters and numbers (sometimes both) that act as a password to unlock a ‘virtual vault’ in the network that holds their purchases. This vault, or rather the crypto wallet address, will then be linked to a public key using a method known as ‘hashing’.
- Think of private key as your password, and the public key as your username. Anyone can send Bitcoin to the public key (“username”), but only you can access the funds in your account (“virtual vault”) using your password (“private key”).
As the two keys are linked, the chosen cryptocurrency network will always recognise the user with the private key as the owner of the corresponding public key. But, hashing makes it nearly impossible for anyone or a system to predict a private key by knowing the public key.
Knowing the public key doesn’t reveal any personal details about the user either. In fact, there’s no personal details that are needed at all for a Bitcoin transaction. This is why the pseudonymous Satoshi Nakamoti has remained anonymous for over a decade!
How transactions are verified?
As mentioned earlier in the guide, Bitcoin’s payment network is not controlled by a government or a centralised authority. Anyone can view Bitcoin transactions, and no single entity controls it.
It doesn’t depend on third parties like banks or payment platforms to verify transactions., but rather on the blockchain. You can read more about it here.
Here’s some key takeaways:
- When a new transaction is entered into the blockchain, it is broadcasted to the entire network.
- Specialised computing devices known as ‘miners’ or ‘mining rigs’ race to solve mathematical equations to record and verify a new transaction requested on the blockchain.
- The first miner to solve the problem and verify the transaction is awarded a reward in Bitcoin for participating in the constant, essential work of maintaining the blockchain – the rewarding amount changes over time and can typically be from 6-12 BTC per block of verified transactions.
- The computing devices typically require intense computer power and electricity resources, and the “miners” don’t necessarily make large profits mining on a small scale.
- In 2008, a typical desktop PC could become a miner. In 2022, crypto mining is highly concentrated with industrialised size operations owned by businesses or investors.
- Bitcoin can never be separated from the blockchain, as each new Bitcoin is recorded on it, as is each subsequent transaction with all existing supply of coins. Transactions are blocks of data that are then linked together on a chain of previous transactions, that is ongoing and is constantly reverifying itself.
- Since Bitcoin, which uses a consensus mechanism known as ‘proof-of-work’ to verify transactions, most other cryptocurrencies using blockchain technology have advanced with a more sustainable approach known as ‘proof-of-stake’
How to purchase Bitcoin?
The easiest and more secure way to buy Bitcoin (BTC) for a beginner is to purchase it through a centralised online exchange like Crypto.com or Coinbase. With an exchange, it’s easy to buy, sell, send, receive, and store Bitcoin online without needing to take complete ownership of your funds (with a private key).
You can easily learn and compare the fees, new user bonuses, and other important information about popular crypto exchanges with Coinfall. For more information, please read our full guide on “How to Purchase Cryptocurrency” for beginners.
However, should you decide to buy and store bitcoin outside of a centralised online exchange, you’ll need to choose and create a crypto wallet to receive your Bitcoin purchases! When you create a wallet, you’ll be given a public key (virtual vault address) for Bitcoin that can be used to receive your funds.
If you’re looking to transfer funds from your wallet to a bank account after selling your Bitcoin for fiat currency, you can do so with a platform like Coinbase, Crypto.com, or Easy Crypto AI – it’s as easy as transferring funds from one bank to another. Similar to traditional money transfers or withdrawals from an ATM, exchanges set a daily limit on withdrawals and may take a few days for the transaction to be completed.
Using Bitcoin
The first time non-virtual goods were successfully purchased using Bitcoin was back in 2013 when an early adopter paid someone to deliver Papa John’s pizza to their home in Florida, USA. Now, it’s accepted as a payment method in major companies like Microsoft, Virgin Galactic, and even some countries like Venezuela and El Salvador
To make a payment in Bitcoin, you simply have to enter the amount in Bitcoin (BTC) you wish to pay and the vendor’s public key using your crypto wallet.
Here are some common steps!
- Step 1 Open your crypto wallet
- Step 2 Select Bitcoin (BTC)
- Step 3 Select ‘transfer’
- Step 4 Enter the amount you wish to pay
- Step 5 Check the fees and other details and confirm
- Step 6 Enter the wallet address (public key) of the person or business
- Step 7 That’s it! Your payment will be processed in around 30 minutes or less
Unless you’re purchasing physical goods that need shipping, you won’t need to enter any personal details either! The transaction can only be tracked back to your public key, with a date and time.
Should you invest?
Cryptocurrency prices have so far been highly volatile and are regarded as speculative investments by some. You should always do your own research and seek advice from a professional before making any investments.
Understanding the benefits and risks can help you make more informed decisions on investments!
Here are some things to consider:
- You can easily transfer cryptocurrency to anyone else at any given time, unlike stocks or bonds
- Crypto transactions are much faster than fiat transactions
- The number of people who hold Bitcoin and other digital currencies is growing – with millions already investing around the world
- The value is determined by supply and demand, rather than by a centralised government and monetary policies
- Centralised intermediaries like banks and monetary institutions aren’t necessary to enforce trust and solve disputed transactions between the two parties
- The signup process is quick and only takes a few minutes
- Purchasing is easy and secure using a debit card or bank account
- Buy as little (or as much) as you want with reasonably low minimum purchase limits
- You can buy fractional coins. For example, you can buy $50 worth of Bitcoin or Ethereum
- Cryptography eliminates the possibility of a single point of failure – for example, a large monetary institution setting off a cascade of crises around the world
- Investments can generate profits – with crypto markets skyrocketing and reaching $2 trillion at one point
- Cryptocurrency can be used to transfer the store of value across borders/countries at much lower fees. For example, fiat currency can be converted to Bitcoin then moved across borders – then withdrawn using the fiat currency of the destination
- Though transactions are made anonymously, they are also pseudonymous – they leave a digital trail that agencies (usually affiliated with the government) can track down. Technologies could later be developed to identify wallets to a person.
- Cryptocurrency has a reputation for being a popular tool for criminal activities and illicit purchases.
- They are used by hackers for ransomware activities – with an increasing number of incidents each year.
- Although cryptocurrencies are decentralised in theory with an even distribution of wealth between the many participants on a blockchain, it is not the case just yet – ownership can be highly concentrated with some investors regarded as ‘crypto whales’ for owning a large portion of the market supply of a coin.
- Cryptocurrencies that use proof-of-work uses up considerable amounts of energy resources. Mining can too be highly concentrated with industrialised size mining operations for some.
- The blockchains are highly secure; however, the crypto exchanges and wallet provider platforms can be hacked. Millions of hard-earned money have previously been stolen from users – resulting in devastating losses.
- Crypto prices are highly volatile – most have experienced rapid surges and crashes in value.
If you do decide to purchase Bitcoin, Ethereum, or any other cryptocurrency, you can compare crypto exchanges and wallets for free, anytime, with Coinfall. We work with crypto providers and businesses to even offer some signup bonuses for new users! Check them out on our website.
