Bitcoin Explained: Everything A Beginner Needs to Know
There isn't a week that goes by without Bitcoin making headlines. However, unless you're a trader or have an interest in cryptocurrencies, it's likely gone right over your head.
So, why is Bitcoin so popular, and why should you care? Well for one, many experts see it as the future of finance and it could be detrimental to traditional currency. With a shaky present and a bright future, it’s a great time to learn about the King of Crypto: Bitcoin.
A BIT of backstory
If you’re a complete newbie it’s important for you to know why Bitcoin exists.
Satoshi Nakamoto invented Bitcoin in 2009 with the goal to create a completely decentralized electronic currency with no server or central authority. While it may seem strange to suggest that a decentralized digital currency like Bitcoin is based on an ideology, the fact of the matter is that, in its early days, its supporters were primarily techies, libertarians, and crypto-anarchists.
On May 22, 2010, Florida programmer Laszlo Hanyecz offered to pay 10,000 BTC, which were only worth $40 back then, for pizza. This was the first recorded use of Bitcoin.
Bitcoin's first exchange rate was only set a few months before. At the time of purchase, the two large Papa John's pizzas cost around $25. Today the combined value of those two pizzas is $372 million. This makes it the most expensive pizza ever purchased.
While many people now laugh about Hanyecz's transaction, it's important to remember how new the Bitcoin network was at the time. Hanyecz's famous purchase is frequently brought up in discussions about Bitcoin, as an example of how the drastic rise in Bitcoin's price history appears to contradict its use as a currency.
Instead of using it as tender, people may prefer to utilize Bitcoin as a long-term investment rather than cash — especially given the limited supply of 21 million total coins.
Following the development of the concept and technology, Nakamoto handed over the source code and domains to others in the bitcoin community in 2011. After that, he simply disappeared.
What is Bitcoin
Bitcoin is a currency that only exists virtually. There are no bills to be printed or coins to be minted.
It's decentralized, which means it's not under the control of any government, institution (such as a bank), or any other jurisdiction.
Bitcoin links sellers and buyers through encryption keys rather than using names, tax IDs, or social security numbers. And unlike traditional currency, Bitcoin is "mined" by powerful computers rather than being issued from the top down.
How Bitcoin works
If you’re confused about how a computer can generate something that is worth tens of thousands of dollars out of thin air, that’s fair. This stuff isn’t exactly intuitive — at least not on the surface. Here’s how Bitcoin works.
Mining Bitcoin
A new Bitcoin is generated by making a computer solve predetermined mathematical problems. These mathematical problems refer to a hash which is a 64-digit number that is equal to or close to the target hash.
Okay, let’s make it as understandable as possible. A Bitcoin is a predetermined combination of unique numbers that a computer can reach by using an algorithm to solve mathematical problems. Better? Maybe? We get it, this isn’t your grandmother’s paper-printing mint. Let’s keep going and see if things get clearer.
Bitcoin and the blockchain
Bitcoin is entirely dependent on a distributed digital ledger known as the blockchain. The Blockchain is a linked database made up of blocks that carry information about each transaction, such as:
The buyer and seller.
The time and date.
The total value.
A unique identification protocol for each transaction.
The entries are priced together in chronological order to form a digital blockchain.
When a block is added to the blockchain, it becomes accessible to everyone, acting as a public record for cryptocurrency transactions.
The blockchain is decentralized, which means it is not controlled by a single entity. The digital blockchain resembles a Google Doc that can be edited by anybody.
While the potential for anyone to alter the blockchain may appear risky, it is precisely this ability that makes Bitcoin trustworthy and secure.
A transaction block must be endorsed by the majority of Bitcoin miners in order to be included in the Bitcoin blockchain. The encryption pattern for the unique codes used to identify users' wallets and transactions must be followed.
Counterfeiting these unique codes is extremely difficult because they are long random numbers. The randomness of the blockchain verification codes required for each transaction greatly reduces the chances of anyone committing fraud.
Okay, so Bitcoin can be mined using mathematical algorithms. It also resides on the digital and decentralized blockchain, where it is safe from fraud thanks to its complex verification codes.
But still there’s the lingering question …why is Bitcoin worth anything?
How Does Bitcoin Get its Value
The value of a bitcoin is ultimately determined by how much people are willing to pay for it. If we look at it there is a similarity between how stocks are priced and how Bitcoins are priced.
In the absence of a government or central authority controlling supply, its value is completely open to interpretation. This nature of the coin makes its price incredibly volatile and invites a lot of speculation.
According to Satoshi Nakamoto's protocol, only 21 million bitcoins can ever be mined. Since almost 19 million have already been mined, there is a limited supply, both in existence and waiting to be mined. This is very similar to gold and other precious metals.
To understand the concept better, let's assume two forms of currency, a dollar bill and a Bitcoin.
If someone pulls out a $1 bill from their wallet, the money has a face value of $1. It can even be used to purchase goods or services.
Now let's suppose that everyone agrees that the bill worth $100. If that’s agreed upon, a person could use it with 100 times more purchasing power.
The only difference between a Bitcoin and a dollar bill, in this case, is that the $1 bill has a physical form and a preset monetary value. Bitcoin, on the other hand, is just a number with no inherent value. The number may have a value that people agree on, but it essentially has no intrinsic value.
It’s an important point and one which explains why the price of Bitcoin can swing so wildly.
Bitcoin’s Uses
While there are some places where bitcoin can be spent, many people prefer to keep their bitcoins as long-term investments. Bitcoin's price volatility makes it difficult to make day-to-day purchases, but a few crypto-powered debit and credit cards are beginning to change that.
Perhaps the fastest emerging landscape for employing Bitcoin as an official currency is the Metaverse. In this digital reality everything from virtual real estate to avatars can be created and purchased by using Bitcoin.
Bitcoin will be critical in the shift of information from the physical to the virtual age.
Is Bitcoin a Good Investment
Bitcoin is a highly volatile currency. If you're willing to take the risk, make sure you know what you're getting into and that you have a crypto investment strategy in place.
The value of Bitcoin has risen dramatically over the years, but buyers' fortunes have varied greatly depending on when they invested.
Those who purchased Bitcoin in 2017 when the price was approaching $20,000, for example, had to wait until December 2020 to recoup their losses. Even though Bitcoin had a strong year in 2021, it has since fallen significantly from its all-time highs.
Bitcoin is still one of the most valuable cryptocurrencies. But it has seen its value plummet in 2022. Even so, there is a lot of hope that Bitcoin will begin an uptrend and reach $100,000 by the end of the year.
How To Buy Bitcoin
If you're willing to take on the risk of buying bitcoin, there are a growing number of digital currency exchanges where you can purchase, sell, and store bitcoins, such as Coinbase and FTX.
Getting started is as simple as signing up for a Paypal account. With Coinbase, for example, you can deposit funds into a virtual wallet of your choice using your bank account or digital wallet. You can then exchange traditional currency for bitcoin once your account has been funded, which usually takes a few days.
Several well-known money services now offer in-app bitcoin purchases. This makes it simple for newcomers to dip their toes in the vast ocean that is Bitcoin.
It's also important to note that certain platforms charge significantly higher transaction fees, which can quickly deplete your investment if you trade frequently. So you should read the terms of the agreement carefully before purchasing to ensure that you are aware of each service's drawbacks.
What are the Risks
Apart from the legal and regulatory concerns, bitcoin is a very risky investment and currency. You know exactly how much a dollar can buy when you wake up in the morning — breakneck inflation concerns aside.
The value of a bitcoin, on the other hand, is highly volatile. It fluctuates widely from day to day and even hour to hour.
Bitcoin transactions are very difficult to link to specific individuals. This is because of Bitcoin’s incredibly safe transaction structure.
While this is an upside to the coin, it also has its drawbacks. They're not only safe but they're also hidden behind public and private encryption keys. This anonymity can be appealing, but you can never be sure who is selling or buying bitcoins from you.
Theft is also a possibility, and there are few options for getting refunds, contesting transactions, or recovering losses. There is no going back once a transaction reaches the blockchain.
The Future of Bitcoin
Bitcoin's development over the next ten years could be critical. Apart from financial revolutions, there are a few aspects of Bitcoin's environment that investors should be aware of.
Cryptocurrency is currently torn between serving as a store of value and a transactional medium. Despite the fact that governments around the world, including Japan, have recognized it as a viable method of payment for goods, institutional investors are eager to get in on the action and profit from the price volatility.
At the end of the day, though, one thing is for sure. The future is coming and Bitcoin will most certainly play a big part in it. And for those still hesitating about diving into the crypto frenzy? Well, it still might not be too late to catch up!