The popularity of bitcoin (BTC) in the world continues to grow, encouraging netizens to learn more about the new financial instrument. Unfortunately, not every source provides reliable information about digital assets written in a clear and accessible language.
To solve this problem, the editors of Be In Crypto have created the most complete, simple and clear guide, which contains all the information about bitcoin.
What is bitcoin in simple words
Bitcoin is the first cryptocurrency analogous to traditional currencies. The prefix “crypto” means that it was created with the help of cryptography-a science that, among other things, studies methods of ensuring confidentiality.
Many people, explaining what BTC is in simple language, often mistakenly compare it with electronic money that users store on cards. this comparison is incorrect. btc differs from traditional money on the plastic of a financial organization by its nature.
A scheme that reflects the differences in the approach to conducting transactions in the bitcoin network, and through traditional financial organizations.
To answer the question of what bitcoin is in simple words, you need to dive into the details that it consists of.
How BTC works
Bitcoin, as well as the ruble, dollar, or other Fiat, can serve as a familiar currency. For example, you can use it to pay for an order or service. However, even the simplest operation with BTC will be significantly different from transferring traditional money.
Let’s compare it with rubles. The national currency of Russia has one issuer – the Bank of Russia. it also determines how many rubles will be in circulation. the value of the national currency depends on the decision of the central bank of the russian federation. In the case of bitcoin, there is no such authority, but the cryptocurrency continues to work thanks to the principle of decentralization. About it-further.
What is decentralization?
Bitcoin does not have a single center whose team could manage the cryptocurrency, but the project still continues to develop. in this he is helped by the digital analogue of the code of laws-the code. it cannot be rewritten or reset.
In the technical map of the coin, the fundamental principles of its existence, including the issue program, are laid down in advance. At the same time, users of the digital asset themselves decide which indicators of the cryptocurrency need to be adjusted. This is what a decentralized approach looks like. Let’s compare it with the current financial system of Russia and other countries, which are built on the transfer of power over national currencies to Central Banks.
Parent organizations for traditional money are a necessity. Without them, the ruble, dollar, or other currency will not be able to fully function, at least because someone has to control the issue and other indicators.
Representatives of Central Banks can make decisions that affect the position of traditional money. At the same time, the opinions of direct participants in the financial system and currency users – ordinary citizens – are rarely taken into account. For example, it is difficult to imagine a situation in which the Russian authorities ask the residents of the country for permission to carry out the denomination of the ruble.
It turns out that the future of traditional currencies largely depends on a single control center. In the case of the Russian Federation-from the Bank of Russia. This management principle is called centralized. The dependence of millions of people on the decision of the chosen ones is not found by everyone to be honest. A decentralized approach was the solution to the problem. It was one of the first implemented by the Creator of BTC.
How is bitcoin secured?
When you try to find information on the query “ok google, what is bitcoin”, you can come across data that the cryptocurrency is not secured by anything. Whether this is so – we offer to understand.
In fact, bitcoin is not backed by traditional assets. At the same time, some members of the crypto community believe that the value of BTC is supported by other factors, including the potential for further growth in value and superiority over classic money.
Many national currencies also have no collateral other than guarantees from their Central Banks. Gold in the caches of the Central Bank for most countries is a thing of the past. It turns out that traditional money can also be claimed for lack of security.
Interesting fact! In the crypto space, you can find options for using the traditional coin security scheme. An example is the stablecoin Tether (USDT). The exchange rate of the coin is linked to the movement of the US dollar (the Bretton woods currency system). To provide each USDT, the project representatives purchased traditional assets for the amount of the cryptocurrency issue.
So, if no one controls bitcoin, why should users trust it? To answer this question, you need to get acquainted with the blockchain technology and its application possibilities.
What is blockchain?
In order to understand how bitcoin works, it is important to get acquainted with the principles of the blockchain. The essence of the technology lies in its name. Blockchain can be divided into two words – block (from English block – block) and chain (from English chain – chain). Together, you get a chain of blocks.
Each block is a storage of information. They can be used to store data in portions-this principle simplifies the search for information, including to confirm their authenticity. Blocks contain information about transactions with bitcoin.
Their size varies depending on the needs of the network, but in the case of bitcoin, the block can not exceed 4 megabytes. In practice, the index rarely reaches 1 megabyte.
The block size depends on the volume of transactions in the network and their type. Some types of operations “weigh” more, and in this case the block size may increase.
One block is formed in an average of 10 minutes. If the available volume was used up earlier, it is closed before the deadline.
The block formation time may also change insignificantly, since the indicator adapts to network requests. At the same time, it always tends to the average value – 10 minutes. For example, during the year, the minimum block closing time was 7.3 minutes, and the maximum was 15.6 minutes.
Interesting fact! It is not the first year that the crypto community has been debating what the block size should be in the bitcoin network. On the basis of disagreements on this issue, a new coin appeared on the market – Bitcoin Cash. The developers of the project took the bitcoin code as a basis, while increasing the size of its blocks.
If the blockchain is a chain of data that has been compiled into blocks, then there is another problem – someone must store it. Here, its users came to the aid of decentralized bitcoin. The cryptocurrency blockchain is stored on their computers. This is how the coin Creator solved the problem of possible data falsification.
Interesting fact! By data bitinfocharts.com, as of October 20, 2020, the bitcoin blockchain weighs 355.85 GB.
In the case of the Central Bank of the Russian Federation, a hacker will only need to hack the system of a financial organization to gain access to a number of archives. By replacing one data with another, the fraudster can cause irreparable harm. The situation can be saved if the Bank of Russia has a cache with a copy of the archive. However, if the hacker got access to it too, the Central Bank risks losing the ability to restore the information.
In the case of the bitcoin blockchain, data replacement is virtually impossible. Substitution of information in one block is easy to notice. The fact is that all parts of the blockchain are consistent. Each subsequent block contains information (a small slice of data) about the previous one. So, if you replace at least one item at the beginning, the system will no longer be consistent and will give an error. It can be corrected using data from a huge number of copies of the bitcoin blockchain.
Technically, a fraudster can gain access to the computers of all members of the crypto community and replace the data, creating anew the entire chain. In practice, to implement such a scenario, it will require enormous resources, which cannot be found and applied unnoticed.
After getting acquainted with the bitcoin blockchain, there are still a few questions. This includes where the coins come from and how the system performs operations with them. It’s time to talk about mining digital assets.
What is mining?
There are several ways to get bitcoins. The easiest way is to buy them on the stock exchange. At the same time, it is important to understand that each BTC was born due to the work of a special group of participants in the crypto community – miners.
The term mining comes from the English word mining-mining. It is often used in relation to the work of people who are engaged in the development and use of the Earth’s interior. For example, gold mining is also called mining.
In the crypto industry, the word mining refers to the process of releasing (mining) cryptocurrency. They are engaged in miners. This work is not free. For each block mined, the miner receives a reward. As of the time of writing, it is 6.25 BTC (about $73, at the current exchange rate) + fees for processing transactions in the cryptocurrency network that users pay.
This kind of work requires computing equipment. The simplest option is a system of video cards. Such structures are referred to as mining-farms. A more modern way is to work through special devices for mining cryptocurrencies-ASICs.
For those who saw the reward for a closed block and mentally built a business scheme for earning money in their head, it is worth clarifying that not everything is so simple. There are hundreds of thousands of bitcoin miners in the world. As mentioned above, the BTC network is self-regulating, so it determines the balance of demand for cryptocurrency mining with the distribution of rewards. It looks like this:
- as the number of miners increases, the difficulty of mining cryptocurrency increases;
- when many miners are disconnected from the network, the difficulty of mining decrease.
Technically, the more computing power a user has, the higher the chance of getting the same reward. In practice, buying enough equipment to get ahead of everyone is an extremely expensive and almost impossible task. The solution to the problem was a voluntary Association of users ‘ computing equipment.
To do this, members of the crypto community have organized special platforms – pools. Participation in them increases the chances of getting a reward for joining the block to the blockchain, which is subsequently divided among all owners of computer equipment.
It is worth noting here that the volume of bitcoin issuance is limited. In total, 21 million BTC will be mined, and not a coin more. As of the time of writing, 18,522,176 BTC has already been mined. Accordingly, there are about 2.4 million left. the Graph below shows how quickly miners are mining new BTC. Please note that the rate of bitcoin release decreases over time.
Falling rates are the result of a correction. The bitcoin network regulates the release rate of new coins, taking into account the demand for cryptocurrency and a number of other factors. The system also adjusts the rate of BTC mining using carving. About it-further.
What is halving?
The term halving means reducing the reward for mining bitcoin in half. As of the end of October 2020, miners receive 6.25 BTC per block. After the next halving, the indicator will drop to 3,125 bitcoins, and so on.
Halving in the bitcoin network is carried out every 210 thousand mined blocks. The last one took place in early may 2020, and the next one will take place in about 4 years – in may 2024. The exact date is unknown. The system can adjust it, depending on the network indicators: the number of connected miners, the speed of new BTC mining, and other details.
At the time of writing, the event is about 1294 days away from the participants of the crypto community.
A reasonable question arises – why does bitcoin need halving? The answer is simple – in this way, the cryptocurrency network adjusts the rate of new coins entering the market. Halving also allows you to maintain the price of bitcoins. The scheme can be represented as follows:
- It is known that about 21 million bitcoins will be mined in total. Accordingly, sooner or later, BTC mining will end – all coins will find owners. There will be no new offers.
- Every year more and more people learn about cryptocurrency as an alternative to classic money. Against the background of the spread of the digital asset, especially in difficult periods for the traditional financial system, the number of users interested in buying BTC is growing.
- Approximately once every 4 years, the number of bitcoins released by manners is reduced by 2 times. The demand remains the same. As a result, buyers interested in purchasing BTC are willing to pay more for the cryptocurrency.
This is how halflings help maintain the value of coins. For example, during the period of declining remuneration for cryptocurrency mining in 2016, the exchange rate of bitcoin to the dollar was about $660. The day of the halving in 2020, the BTC/USD trading pair has already met near the level of $10 thousand.
The last halving, according to experts, also opened up an opportunity for bitcoin to continue growing.
Who created bitcoin
The Creator of the first cryptocurrency is a certain Satoshi Nakamoto, but this is where the information about him ends. Presumably, Satoshi Nakamoto is not a real name, but a pseudonym. It can hide a man, a woman, or even a group of people.
Over the years of bitcoin’s existence, members of the crypto community and the media have repeatedly tried to establish the identity of Satoshi Nakamoto. unfortunately, as of december 12, 2020, it is still unknown who, in fact, is the creator of the cryptocurrency.
Interesting fact! Despite the fact that the identity of Satoshi Nakamoto was not established, as a gesture of approval, his name was called by the participants of the crypto community one hundred millionth part of the coin (0.00000001 BTC). The need for the name appeared against the background of the active growth of the value of the cryptocurrency. Now, when transferring small amounts, bitcoin users calculate in satoshi.
The history of Bitcoin
For the first time, information about a new financial instrument – a cryptocurrency called bitcoin – appeared on the web in 2008. Its author was a certain Satoshi Nakamoto. He outlined his vision of the cryptocurrency structure in the document “Bitcoin: a digital peer-to-peer cash system”.
The first readers of the work were friends of the developer on the cryptographers forum. The timeline of events is as follows:
- August 18, 2008. Satoshi Nakamoto registered the domain bitcoin.org.
- August 31, 2008. The developer published the whitepaper of the first cryptocurrency.
- November 09, 2008. Satoshi Nakamoto registered bitcoin on the largest developer site Sourseforge.net.
- 03 January 2009. The first block was generated in the cryptocurrency network, so the system started paying rewards to miners.
- January 09.2009. the developer presented the first version of the client program for working with bitcoin-bitcoin core v. 0. 1.
- January 12, 2009. The first transaction was recorded in the cryptocurrency network. The sender of bitcoins was Satoshi Nakamoto himself. The transfer was received by Hal Finney, a programmer who communicated with the creator of BTC. According to him, he helped Satoshi test the cryptocurrency.
- 05 october 2009. Bitcoin trading has been launched on the New Liberty Standart exchange. The exchange rate of the cryptocurrency in dollar equivalent, at the time of the start of transactions, was about $1.3.
- october 09, 2009. satoshi nakamoto registered a channel for developers who got access to work on the project.
- December 16, 2009. The crypto community was presented with the second version of the client program for working with bitcoin-Bitcoin Core v 0.2.
The chronology of other important events and periods in the history of cryptocurrency can be presented as follows:
|May 2010||The first payment of the purchase for bitcoins. One of the early cryptocurrency miners, Laszlo Hanech, paid for two pizzas with coins. The order of food cost him 10 thousand bitcoins (over $123 million, at the current exchange rate).|
|December 2010||Developers who were contacted by Satoshi Nakamoto lose contact with him. Since then, the Creator of bitcoin has never made himself known.|
|2011||Bitcoin is experiencing its first peak of popularity. Darknet users were among the first to appreciate the advantages of cryptocurrency. They were able to conduct confidential transactions and avoid prosecution by law enforcement agencies. In particular, sellers of the anonymous darknet marketplace Silk Road started accepting bitcoin.|
|2012||The developers have formed an organization the Bitcoin Foundation. It includes specialists who have committed themselves to the development of the project.|
|2013||The first outbreak of active growth of capitalization of the cryptocurrencies. The indicator, for the first time since the creation of BTC, exceeded $1 billion.|
|2014-2016||The first wave of bitcoin distribution, as an alternative to Fiat in the open segment of the Internet. In the summer of 2016, the cryptocurrency network halved.|
|2017||In December 2017, against the background of the launch of bitcoin futures trading on the Chicago Mercantile Exchange( CBOE), the cryptocurrency exchange rate reached a record value near the level of $20 thousand. Many members of the crypto community also believe that the growth of BTC was facilitated by the potential laid down in it by the halving of 2016.|
|2018||In the market of digital assets, the “crypto-winter” has come. during the year, the bitcoin exchange rate declined until, in december, it reached a local level near $3,200.|
|2019||During the year, bitcoin recovered its position. The maximum height to which the cryptocurrency managed to rise during the specified period of time is $13,600.|
As of December 2020 – at the time of writing – bitcoin, according to many members of the crypto community, is still in the initial stages of development.
How does bitcoin differ from traditional money
Earlier, we found out that the issue and control of bitcoins, unlike traditional money, is handled by the participants of the crypto community themselves. Among other features of the cryptocurrency that make it different from rubles and other familiar Fiat, the following points can be highlighted:
- Bitcoin has no physical form. It exists exclusively in digital form.
- Bitcoin cannot be banned. From the point of view of regulators who protect traditional money, decentralization is a problem. As we found out earlier, transactions with BTC are processed by miners. The cryptocurrency blockchain is also stored by members of the crypto community. Accordingly, to ban the coin, the authorities will need to force each of the users to refuse to work with it. It is impossible to carry out such an operation in practice, at least because regulators do not have information about the identities of all BTC owners.
- To work with bitcoin, you do not need to use the services of third parties. cryptocurrency holders do not need banks and other financial organizations – just download or register a wallet. Read more about how to store bitcoin-later in the article.
- Transfers to BTC are cheaper than transactions with traditional Fiat. The difference is especially noticeable when it comes to large amounts. For example, on October 13, 2020, an unknown person transferred 8 thousand bitcoins (over $91 million, at the time of the operation), with a Commission of 0.00024194 BTC (about $3). How much a similar transaction would cost in a Bank is anyone’s guess. It is important to clarify that commissions in the bitcoin network are dynamic. The sender can independently offer a fee for their transactions. The higher it is, the faster the miners will process the operation.
- Freedom of action is another important difference between bitcoin and traditional currencies. For example, the authorities can freeze a user’s account in a traditional Bank. You won’t be able to do the same with BTC, at least because the regulators don’t have the tools to do it.
Many members of the crypto community believe that the high price of bitcoin is due, among other things, to the differences between the cryptocurrency and traditional money.
A few words about the anonymity of BTC
Technically, bitcoin is anonymous, but with a number of caveats. For example, if you get information that a specific wallet that stores coins belongs to a specific person, you can see data about the transactions they made.
Interesting fact! the insufficiently high level of anonymity of bitcoin has led to the development of alternative coins (altcoins) aimed at improving privacy indicators. Examples of such cryptocurrencies are DASH, Monero, and zcash.
Users who do not want to give up bitcoin in favor of more anonymous altcoins can use “mixers” – special platforms that allow you to confuse the traces of transactions. The principle of their operation can be represented by the following diagram:
- User N wants to send 10 bitcoins to address V.
- To do this, N transfers the cryptocurrency to the “mixer”.
- Further, the platform, depending on the settings and wishes of the user, sends the specified amount to the address V.
- To confuse the tracks, “mixer” uses a different sender address. In some cases, to increase anonymity, programs split the transaction into several parts. So, instead of one transfer of 10 bitcoins, the system can send, for example, 2+3+4+1 BTC.
As a result, the trace of user n is lost. The owner of address V, however, receives the funds in full. For such operations, platform users are forced to pay a small percentage of the transaction amount as a Commission. Thus, for many, the answer to the question of what a bitcoin mixer is is the phrase “a tool for increasing the anonymity of cryptocurrency”.
Features of bitcoin and differences between BTC and other cryptocurrencies
Due to the fact that BTC appeared earlier than other projects, the coin managed to focus the attention of the majority of participants in the crypto community around it. Therefore, the market capitalization of bitcoin is several times higher than even the nearest competitor Ethereum.
Bitcoin also differs from other cryptocurrencies technically. Some coins are more confidential than BTC, while other crypto projects offer their users more features. At the same time, there is still a debate in the crypto community about whether altcoins can be more perfect than bitcoin. The anonymity of the Creator of BTC is also considered by many to be one of the distinctive features of the project.
Is bitcoin legal
there is no clear answer to this question. technically, cryptocurrency cannot be completely banned because it is decentralized. But at the same time, the ban of a digital asset by the authorities can cause damage to BTC. For example, due to the introduction of restrictions on holding ICOs and working with a new financial instrument by the Chinese authorities in the fall of 2017, bitcoin has seriously lost in price.
Despite the regular appearance of news about bans on the digital asset market, the bitcoin legality map continues to turn green (green indicates the countries where BTC is legal).
Interesting fact! In history, there are cases when the authorities of countries unexpectedly stimulated the growth of the cryptocurrency market.
Where to buy Bitcoin
When searching for options on how to buy bitcoin, you can find many offers. For example, on digital asset exchanges, or by hand.
Can I get Bitcoin for free
Those who want to learn all about bitcoin should also understand that it is not always necessary to pay for cryptocurrency. You can find ways to earn coins without investing on the Internet.
How to store bitcoins correctly
When studying questions about how to work with bitcoins, it is impossible to lose sight of the options for storing coins. Choosing the appropriate way to simplify the process of user interaction with digital assets. First, the investor will need to know what a bitcoin wallet is in order to choose a suitable option.
Many believe that the main condition for safe storage of cryptocurrency is anonymity. If you do not share personal information with third parties, you can avoid data leaks and questions from regulators about operations with digital assets.
Unfortunately, many exchanges, under pressure from the authorities, began to collect information about their users. only a few platforms have remained true to the principles of anonymity that were originally laid down in bitcoin by its creator.
An example of a platform that allows you to work confidentially with cryptocurrencies is StormGain. The exchange is characterized by high functionality and a good level of security.
StormGain is considered by many to be the best option for storing bitcoins and trading thanks to the bonus system that operates in the project.
Where can I pay with bitcoins
The number of cryptocurrency acceptance points in the world is growing in proportion to the spread of a new financial instrument. At the time of writing, the map of points where you can pay with digital assets looks like this:
How to make money with Bitcoin
Speaking about how to work with bitcoins, you should also not lose sight of the questions about earning money on the coin. Some people prefer trading, and other participation in affiliate programs.
A little bit about derivatives
The logical continuation of the development of the cryptocurrency segment was the emergence of derivatives-derivative financial products. One of the most popular instruments in this category is bitcoin futures.
To understand the interest of market participants in them, it is enough to recall the events of December 2017. It was during this period that the Chicago Mercantile exchange (CME) and the Chicago options exchange (CBOE) started trading bitcoin futures for the first time in the history of the crypto community. Against the background of the launch of trading, the bitcoin exchange rate soared to a maximum, near the level of $20 thousand.
The future of bitcoin-forecasts
In the digital asset market, you can find different opinions about the prospects for the movement of the exchange rate of the most capitalized cryptocurrency. However, not all of them are worthy of attention. Often, even the most famous members of the crypto community give incorrect forecasts.
A popular model in the crypto community for predicting the behavior of the bitcoin exchange rate, the author of which was an analyst at planb. according to his theory, btc will be able to reach the level of $100 thousand. by the end of 2020.
The best option is to analyze the information yourself. You can do this with the help of news on the Internet.
Advantages and disadvantages of bitcoin
Now that all the nuances of the cryptocurrency are revealed, you can draw a line to determine the advantages and disadvantages of BTC.
Advantages of the coin
The advantages of bitcoin include the following points:
- You can perform anonymous operations.
- Independence from national regulators.
- Potential growth in the value of cryptocurrencies.
Disadvantages of the coin
Among the disadvantages of cryptocurrency, the following points can be distinguished:
- In order to achieve maximum anonymity, BTC users have to resort to third-party resources (mixers).
- Despite the fact that bitcoin is decentralized, regulatory decisions of the authorities can put pressure on its rate.
- No one knows who the Creator of the cryptocurrency is, how much BTC he has in his wallet, and how he plans to manage his savings.
However, in the market you can find supporters of the theory that it is thanks to the anonymity of the developer, bitcoin has achieved success. The fact is that working in an impersonal format “tied” the hands of regulators – the authorities, even with a strong desire, can not get in touch with the Creator of the cryptocurrency in order to hinder its activities in any way.
Thus, bitcoin became the first representative of a new class of financial instruments-cryptocurrencies. Its creator was able to prove that in order to conduct operations with money, users do not have to cooperate with banks.