What is Bitcoin?
13 mins read
3 mths ago
The past few years have recorded technological advancement across the globe. One of such significant changes in the financial market is the introduction of digital currencies, which eliminates the challenges that occur when completing transactions with fiat currencies such as dollars, yen, pounds, naira and many more. One of such preeminent digital currencies is Bitcoin.
Introduction to Bitcoin
Because bitcoin is digital, decentralised and encrypted, it has fast become a preferred medium of exchange around the world. And as its adoption increases, more people keep finding new ways to use bitcoin and simplify their everyday transactions.
Before we get into why bitcoin is so special, let’s take a quick look at the history of the world’s foremost cryptocurrency.
History Of Bitcoin
Since bitcoin gained popularity and its benefits have become apparent to both financial experts and regular individuals, many have wondered why it took so long for someone to come up with the brilliant idea that birthed bitcoin. However, while bitcoin was indeed the first implemented cryptocurrency, the likes of Bit Gold and B-money were proposed years before bitcoin but never implemented. Some of these ideas, though, were useful in the creation of Bitcoin.
And since its launch, Bitcoin set a precedence for other currencies because of its revolutionary nature and its ability to cover loopholes that other proposed digital currencies had missed.
Bitcoin was introduced by Satoshi Nakamoto, an alias of a person or group of persons. To date, no one knows the real identity of Nakamoto. And if you were wondering who the mysterious person could be and what led to the creation of Bitcoin, we discussed that in Who created Bitcoin?
For the purpose of this lesson, here’s a brief history of Bitcoin:
Aug. 8, 2008
The domain name bitcoin.org is registered. Today, this domain is "WhoisGuard Protected," meaning the identity of the person who registered it is not public information.
Oct. 31, 2008
An unknown person or group of people with the pseudonym Satoshi Nakamoto publishes the Bitcoin whitepaper on the cryptography mailing list at metzdowd.com. The paper was titled, “Bitcoin: A Peer-to-Peer Electronic Cash System” and is now available at https://bitcoin.org/bitcoin.pdf. It serves as a guide for how Bitcoin operates today.
Jan. 3, 2009
The first Bitcoin block, Block 0, is mined. This is also known as the Genesis Block and it contains the text: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". It is assumed that this was added as proof that the block was mined on or after that day and perhaps also as a relevant political commentary.
Jan. 8, 2009
The first version of the Bitcoin software is announced on The Cryptography Mailing List.
Jan 9, 2009
Block 1 is mined.
Features of Bitcoin
There are certain features that set Bitcoin apart from fiat currencies; they include:
The implication is that no one person has the power to make changes on the Bitcoin network, and all transactions do not need to go through one central point before they can be completed.
Bitcoin offers a reliable platform to complete transactions with low transaction fees. One of the notable features of Bitcoin is that it is non-refundable. This eliminates the possibility of you getting defrauded with a fake transaction because once a transaction is completed on the Bitcoin network and is confirmed on the blockchain, it is locked in. For a confirmed transaction to be altered, it would take altering every transaction that is confirmed after it - which is virtually impossible for any person to do.
We are well familiar with delays with transactions while completing payment with physical currencies, even when operating cashless. Transactions on the Bitcoin network are almost instant. It takes merely a few minutes to complete a transaction, and you do not have to worry about delayed transactions.
How Does Bitcoin Work?
Bitcoin transactions aren't the same as with fiat currencies like dollars or pounds. Bitcoin transactions take place on an open ledger known as the blockchain. The Blockchain contains the details of all transactions made on the network.
For example, if you want to transfer $1,000 worth of Bitcoin to a friend, it follows this process:
- you send the current BTC equivalent of $1,000 to the Bitcoin Address of your friend and the transaction is broadcasted on Bitcoin’s peer-to-peer network.
- A Bitcoin miner adds the transaction details to the Blockchain by solving a computational problem.
- The amount of BTC sent is added to your friend’s BTC balance.
- All nodes connected to the Blockchain are updated with the transaction and balances of the transacting addresses.
Bitcoin miners are very important to the working of the Bitcoin Network. Without miners to confirm and add transactions, the whole network doesn’t work because then, we would experience issues like double spending where one person can spend the same bitcoin twice - it is like duplicating a digital file and sending it to two different devices. Issues like this compromise the Bitcoin Network and is why miners are necessary.
Even though bitcoin is said to be mined, the mining process is very much different. While gold miners need to dig deep into the ground, Bitcoin miners can find Bitcoin in the protocol’s design.
The Bitcoin protocol is designed in such a way that only twenty-one (21) million BTC can exist. And the only way new bitcoins are obtained is when new blocks are added to the blockchain.
For the Bitcoin network to work, there has to be a way to ensure that the integrity of the network is maintained. This would make sure that there are no issues of double-spend or the addition of fake blocks of transactions to the blockchain, amongst other things. This is why miners exist -- to keep the network operating as it should. But for them to want to do this, they have to be incentivised. The creation of new bitcoins (mining) is how these miners are incentivised.
Scalability centres on the ability of a system to expand and accommodates its increasing demand. For instance, to improve a website's efficiency to accommodate its growing users, it needs to be scaled by including more servers. Bitcoin scalability centres on improving the Bitcoin network such that it can accommodate and process an increased number of transactions.
It is important for Bitcoin to scale because of its increasing number of users and the need to meet their daily demands. However, because of the Bitcoin protocol design, there is a limit to the number of transactions that miners can process per block.
Presently, the Bitcoin network can only manage to process about five transactions per second, which is relatively lower than most centralised exchange solutions.
A Bitcoin upgrade that could allow about ten thousand (10,000) transactions per second may be included in the system, but that might essentially threaten its decentralised nature. In this regard, Bitcoin experts recommend that effective scaling needs to be attained for the network's efficiency. This contributed to the fork in Bitcoin’s network that resulted in the creation of Bitcoin Cash.
Pros and Cons of Bitcoin
Every system has its pros and cons and so does Bitcoin. Lets’ briefly consider these.
Trading with digital currencies offer a safer means to complete transactions. You are able to control your transactions, and no one is able to withdraw money from your account without your approval. It is very difficult to steal your payment information. The Bitcoin protocol is secured with encryption, which makes it difficult for an organisation or individual to manipulate or control it.
You could also secure your funds with encryptions and create backup copies. And more importantly, your identity and personal details are safe and do not need to be disclosed to complete a transaction.
- High portability
Bitcoin is a digital currency which makes it the most portable currency ever to exist. You can easily carry millions without it having to cost you any extra weight or space. You can store your coins in any form of Bitcoin Wallet and take it with you anywhere, regardless of how much you have.
You can also complete transactions in minutes with just a click, saving you from outrageous fees without any stress to you.
- Legal status
In some countries, crypto trading is encouraged while it is considered illegal in other countries. There has been a lot of criticism surrounding the attractiveness of bitcoin to criminals. As such, you should confirm your state's take on Bitcoin before you start trading with crypto.
- Possible loss of access
Bitcoin can be accessed through a Bitcoin Wallet that stores the private and public keys to a Bitcoin Address. Without the private keys to an address, you cannot access the Bitcoin in it. And when proper care is not taken, it is easy to lose your private key which means you also lose access to your Bitcoin. In order to prevent this, however, there are certain wallets that are structured with backup mechanisms to safeguard the key.
In the past few years, the price of Bitcoin has varied, experiencing spikes as well as skyrocketing within short intervals. This often makes the value of Bitcoin unpredictable and unreliable as a form of payment for goods and services. However, Bitcoin is undergoing certain developments and acceptance across the globe that has set it to a steady rise in value. And as adoption rises, it is likely to reduce the volatility over time.
What makes bitcoin valuable?
However, this isn't the only reason why bitcoin is so valuable. Investors have found a nest in bitcoin as a form of digital gold. This is why many, rather than use it for only transactions, prefer hodling it. Bitcoin is seen as a scarce commodity with a limited supply that can be profitable when stored up.
How to access bitcoin
Bitcoin can neither be printed nor handled physically. It can only be accessed through mining or buying from someone who already owns it. However, only 21 million bitcoins can exist and once all 21 million bitcoins have been mined, one would only be able to get bitcoin from those who already own it.
The easiest way to access bitcoin is to buy from other people or from exchange platforms. You can buy bitcoin with cash, bank transfers, debit or credit cards, or other cryptocurrencies. But you need a Bitcoin wallet to hold bitcoin.
The Bitcoin wallet is a digital software program that enables you to buy, sell, or hold Bitcoin. This wallet contains a unique set of keys that are needed to complete transactions on the BTC network. The key provided in the wallet corresponds to your Bitcoin address. There are four types of Bitcoin wallet that is the desktop, hardware, mobile, and web.
Yellow Card wallet allows you to trade Bitcoin and offers an offline wallet where you can hold your Bitcoins. You will need a cryptocurrency wallet if you want to trade Crypto because the wallet holds the unique key combination to enable transactions on the network.
How to buy Bitcoin
You can buy bitcoin using cash, credit, or debit card or exchange other Cryptocurrencies for some BTC. The steps to purchasing Bitcoins include:
- Get a wallet: Regardless of your preferred method of purchase, you need a Bitcoin wallet.
- Select an exchange platform: Bitcoin exchanges are the easiest places to buy bitcoin safely. Many exchanges offer the creation and maintenance of wallets so that when you purchase bitcoin, you can hold it directly in your wallet on the exchange. There are hundreds of these exchange platforms in operation with varying policies on security, payment options, transaction fees, exchange rates, and many more. You should conduct proper research before selecting an exchange platform.
- Fund your account: based on the accepted payment method on the chosen exchange, you would need to add funds to your account. On exchanges like Yellow Card that allows you to buy bitcoin with cash, all you need is to pay cash for the amount you want to fund your wallet with and get a voucher that you can redeem on the platform.
- Buy Bitcoin: Once your account is funded, you can then purchase bitcoin. After the transaction is complete, you would receive the corresponding amount of bitcoin purchased in your wallet.
How to sell Bitcoin
You can use the same avenue implemented in purchasing your bitcoin also to sell them. However, while you can buy bitcoin through Bitcoin ATMs in some places, not all Bitcoin ATMs allow you to exchange bitcoin for cash. You can sell bitcoin on:
- Cryptocurrency exchange platforms: The platforms you use to sell your Bitcoin may be dependent on the amount of Bitcoin you wish to trade. Some platforms may be programmed only to receive large orders, while others allow you to sell any amount on their platforms.
Each crypto exchange has its specific policies and exchange rate, so it is best that you are well informed about these policies before selling your Bitcoin. You also have the option to exchange your Bitcoin for other Cryptocurrencies depending on your exchange platform.
- Peer-to-peer sales: With peer-to-peer, you can send bitcoin directly to the wallet of someone else while they pay you via your preferred method. That means you can sell bitcoin to family, friends, or colleagues and have them send cash to you. Some exchanges facilitate peer-to-peer trading amongst their customers such that you can sell to someone who you don’t know and have them send money to you. Escrow systems are usually put in place to ensure that both parties fulfil their end of the deal.
You can easily access, buy and sell Bitcoins using these platforms with no hitch. However, it is best to be well informed about your options before buying or selling on the selected platform to prevent any glitches.
Factors Affecting the Price of Bitcoin
- The demand and supply of bitcoin - like in every other market, the price of Bitcoin is largely influenced by the current rate of demand and supply. When there is an increase in institutional investment and media coverage, for instance, an increase in demand tends to occur, which will drive up the price of Bitcoin.
- The reward of mining bitcoin - as Bitcoin halving occurs, it reduces the amount of bitcoin that goes into circulation. The reduction in supply will affect the price of Bitcoin.
- Bitcoin adoption across the globe - Paypal recently announced that it would be allowing customers to pay vendors with Bitcoin. With over 26 million merchants across the world now able to accept bitcoin as a form of payment for goods and services, this widens the reach of Bitcoin. It will also influence the price as more people now seek to own the cryptocurrency and use it for payments across borders where their local currencies may not serve them.
Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.
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