Bitcoin Guide and How to Buy
Bitcoin was the first mainstream cryptocurrency. Instead of relying on banks or a central authority, it uses peer-to-peer technology to allow for transactions. The project is open-source with a public design, and everyone can be part of Bitcoin. As a peer-to-peer technology, there is no middleman involved in Bitcoin transactions nor a central authority in charge of Bitcoin.
Satoshi Nakamoto created Bitcoin’s original software and the whitepaper, which was released on Oct. 31, 2008. This was done via the MIT license. From there, people could officially buy Bitcoin as of 2009.
Bitcoin is the very first distributed cryptocurrency to be successful. Distributed cryptocurrency is a concept that Wei Dai partly described in 1998. This involves using cryptography as a control for creating and transferring money. Bitcoin improved upon this idea and was created to have all the properties of money, including being difficult to counterfeit, scarce, recognizable, divisible, portable, and durable.
Who Is Behind Bitcoin?
No one knows who Satoshi Nakamoto is, including whether they are an individual or a group of people. The only information we have for sure is that they have worked on Bitcoin since 2007 and are from Japan, information that comes from their P2P foundation profile.
After the first few years, Nakamoto began reducing their involvement in the Bitcoin project and were no longer involved as of late 2010.
The Bitcoin community largely considers the lack of information behind Nakamoto’s identity to be an interesting fact but not essential to overcome. That is because the nature of Bitcoin makes it open to everyone, and it was designed in a way that Nakamoto would not be necessary for its continued functioning. Even so, experts have long agreed that if Nakamoto were to reveal their identity, they could potentially have a profound impact on the internal policies and economies.
Who Is in Charge of Bitcoin Now?
Bitcoin is still an open and community-driven project. There is no single person or entity in charge of Bitcoin, as this goes counter to Nakamoto’s vision. Instead, Bitcoin is based on a consensus of those who participate in it.
Brief History of News to Date
The timeline of Bitcoin begins on Oct. 31, 2008, when Nakamoto published the whitepaper. The first block, the Genesis block, was mined on Jan. 3, 2009, and the first Bitcoin transaction took place on Jan. 12 of that year. This occurred when Nakamoto sent Hal Finney 50 BTC.
Other early milestones were the first Bitcoin sale to fiat and the famous pizza purchase. The first of these was on Oct. 12, 2009, and involved Martti Malmi, a Finnish developer, selling 5,050 BTC for the price of $5.02. The famous pizza purchase was on May 22, 2010, and was the first use of Bitcoin for a real-world purchase. Laszlo Hanyecz bought two pizzas for 10,000 BTC.
The following are some other milestones in Bitcoin’s history:
- The next big step in the cryptocurrency’s history was on Dec. 16, 2009, when version 2 was released.
- The Bitcoin market cap finally passed $1 million in November 2010.
- The first Bitcoin fork resulted in Litecoin in October 2011.
- The Bitcoin Foundation was created in September 2012.
- The famous Mt. Gox hack, and the resulting drop in Bitcoin price, occurred in February 2014.
- Bitcoin forked in August 2017, creating Bitcoin Cash.
- SegWit was activated in August 2017.
- The first Bitcoin futures contract was launched in December 2017, which is also when it reached an all-time high.
- The crypto market crash dropped the Bitcoin price in January 2018.
- Bitcoin halved for the third time in May 2020.
Purpose and Vision
Bitcoin serves as a peer-to-peer alternative to traditional currencies or cash. It is designed to overcome the challenges associated with fiat currencies being controlled by a central authority or organization, something that requires trust. Unfortunately, that trust can lead to costly operations, a lack of transparency, and potential failures that can lead to the system’s collapse.
By contrast, the peer-to-peer, decentralized nature of Bitcoin overcomes the need for trust.
Bitcoin Transactions Are Designed to Solve Problems with Traditional Financial Transactions
The technology behind Bitcoin results in a few important characteristics of all Bitcoin transactions, most of which are improvements over fiat.
They are borderless and permissionless, meaning that anyone can install the software, no matter where in the world they are. This overcomes the international borders associated with most fiat transactions.
You can make a transaction at any time of the day or night, 24/7/365. There are no holidays or weekends off, unlike with traditional banks.
Additionally, Bitcoin transactions do not require identification. This helps expand the reach of Bitcoin since anyone can use it, even if they have privacy concerns or are one of the many unbanked people around the world. People can typically look at and understand the transaction flow, but they cannot connect transactions with people in the real world.
Bitcoin transactions are irreversible once they have settled. Even so, they still allow for a level of consumer protection. This helps prevent fraud and chargebacks.
The transactions also resist censorship. In other words, it is impossible for someone to freeze or block a transaction. This overcomes a potential issue with centralized monetary systems.
The transaction speed also improves on fiat, as transactions can be completed within seconds and become reversible in an hour.
Bitcoin offers security, as the funds get locked in the cryptography system that requires your private key to send funds. The use of big numbers and strong cryptographic technology results in an extremely high level of security and it being extremely unlikely that someone will access your funds unless you provide them with your private key.
The transparency associated with Bitcoin and its transactions is yet another advantage over traditional fiat. This transparency is a direct result of the fact that all transactions are recorded on the blockchain. This helps overcome some of the concerns about hidden transactions or opaque processes associated with traditional currencies.
Additionally, you cannot counterfeit cryptocurrency, thanks to a combination of the blockchain technology and the consensus mechanisms that keep the network running.
Bitcoin Offers an Alternative Store of Value
Another aspect of Bitcoin is its ability to act as a store of value or investment. Using it in this way offers multiple improvements over fiat or other stores of value.
There will only ever be a maximum of 21 million Bitcoins, and no more than this can ever be created. This overcomes the temptation to print more to artificially inflate an economy and cause deflation in the process.
There is no cost associated with storing Bitcoin since the cryptocurrency is fully digital, requiring no space. Even a large amount of Bitcoin can be stored for free. This contrasts with fiat, as storage in a bank requires paying the bank fees and storing it physically requires space.
The storage of Bitcoin also makes it easier to hide and protect the cryptocurrency. You can store it in an encrypted way on a paper backup or a hard disk.
Perhaps most importantly, it is impossible for someone to take your Bitcoin away from you without your private key. As long as you keep this private key secret, no one will be able to take the Bitcoin, regardless of the reason. This can prevent everything from theft to authoritarian governments seizing funds.
The Vision According to the Genesis Block
Although it is impossible to know Nakamoto’s exact thoughts regarding the creation of Bitcoin, other than what they have written about it, there were some clues in the Genesis block, which was Bitcoin’s first block.
Nakamoto included a few relevant insights written into the block, such as:
“Governments are good at cutting off heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.”
Nakamoto also indicated that although there would be no political solution in Bitcoin:
“We can win a major battle in the arms race and gain a new territory of freedom for several years.”
Bitcoin will always have a unique place in the world of cryptocurrency since it was the very first cryptocurrency. It is still the market leader, being the most widely accepted of the various cryptocurrencies, the best-known, and that with the highest market cap.
The original Bitcoin whitepaper is still commonly referenced today and has been translated into 30 languages, in addition to its original language. This remains a great resource for those who want a deeper look at the technology behind Bitcoin.
How It Works: The Basics
You can go into a great deal of detail regarding how the technology behind Bitcoin works, but most people do not need this deep of an understanding.
You store Bitcoin in a wallet, which has at least one Bitcoin address. Sharing this address allows people to send you funds or accept payment from you. Ideally, each Bitcoin address is just used a single time.
The Bitcoin network relies on the blockchain, which serves as a public ledger that is shared. This is where you will find all confirmed transactions. Bitcoin wallets use the blockchain to calculate their balance, and the blockchain remains accurate and in chronological order thanks to the use of cryptography.
Bitcoin transactions appear on the blockchain and involve using your private key, which is a secret data piece that protects your Bitcoin. You use the private key to sign transactions; think of it as your electronic signature or confirmation that you sent the funds.
Transactions get broadcast to the Bitcoin network, and then, confirmation takes place via mining, which typically takes about 10 to 20 minutes to confirm a transaction.
Mining is Bitcoin’s distributed consensus system and serves several roles. It confirms transactions, protects network neutrality, ensures the blockchain remains chronological, and lets various computers agree on the system’s state. The mining process also prevents modifying the blocks that store crypto transactions, as this would make the future blocks invalid, as well.
Mining is also a way for people to earn Bitcoin. It acts as a contest to serve a mathematical problem, and the Bitcoin website refers to it as “the equivalent of a competitive lottery.” Originally, it was possible to mine Bitcoin with a typical computer, but it has become more challenging and competitive, so now, high-end systems are required.
One of the unique aspects of Bitcoin’s network compared to traditional currencies is that you get to choose the transaction fee. Miners receive the fee from the transaction after generating a new block successfully.
In most cases, the sender of the Bitcoin will pay the transaction fee in full. However, they are completely voluntary. Most people choose to pay them because they go to the miners and are an incentive for those miners to continue working to generate the next block. Essentially, paying the transaction fee helps keep the system running.
The fee also helps ensure your transaction is processed in a timely manner. Although you can choose your transaction fee, the priority of your transaction depends on how much you pay. If you pay a higher transaction fee, then your transaction will be processed more quickly. If you have plenty of time to spare, you can essentially skip the transaction fee. This type of system results in the typical transaction fees being determined by supply and demand.
Many factors affect the fee but typically it can be in the $1 to $10 range, so its impact very much depends on the value of the transfer you are making
Bitcoin’s transaction speed goes hand in hand with its scalability. Since the creation of Bitcoin, these have been a concern. In fact, James A. Donald famously made the first public comment on Bitcoin and included the statement:
“The way I understand your proposal, it does not seem to scale to the required size.”
Bitcoin typically processes somewhere between 4.6 and 7 transactions per second. As a comparison, Visa processes about 1,700 transactions each second.
In May 2019, the average Bitcoin transaction confirmation time was more than 12 minutes. In August 2020, it was 9.6 minutes.
The issue with those transaction speeds comes down to scalability. This overall issue, including the inability to speed up transactions, comes from the fact that the Bitcoin blockchain’s blocks take an average of 10 minutes to create and cannot be larger than one megabyte.
The decision to make the maximum block size 1 MB was intentional on the part of Nakamoto. It was a security feature that Nakamoto implemented to prevent DoS attacks that involve unreasonably large blocks that could paralyze the network.
The scalability issue does not typically pose a problem for Bitcoin, although it is always a possibility. With average activity, you do not typically have to wait too long for your transaction to go through. However, when it is at peak loads, people can wait up days for transactions to be confirmed, although waiting hours is more common.
Over the years, there have been numerous proposals to solve the problem. These have included forks to create new cryptocurrencies that overcome the issue, such as Bitcoin Cash, which averages 61 transactions per second.
The most recent change to Bitcoin to improve scalability is the proposal of the Lightning Network. This network adds a blockchain layer, making it possible for users to make direct payment channels between each other. You can keep those direct channels in place forever. Since there is no need to go through the main network, the transactions have minimal to no fees and are nearly instant.
The Lightning Network works by essentially allowing the two users to have unlimited transactions between themselves and when they are done, they sign their updated balances using their private keys. The original blockchain network does not have a change in the balance until this new channel is closed. One great thing about it is that it is not limited to direct transactions between two people who set up a channel. It can also combine channels, connecting people via multiple channels.
Of course, the Lightning Network also comes with downsides, including that it does not have the full security measures of the blockchain. As such, most people will only use it for smaller amounts. Startups have been working on applying the original Lightning Network concept.
Other proposed solutions to the scalability problem include batching payments into a single transaction or using other cryptocurrencies that correct the issue, such as Bitcoin Cash or EOS, which is a high-performance blockchain. Unfortunately, all of those have their downsides, as well.
Bitcoin incorporates multiple features and technologies that were specifically designed to improve its security.
Bitcoin relies on SHA-256 encryption for transaction verification as well as the proof-of-work system to add a layer of security. Additionally, the Bitcoin blockchain itself was designed with security in mind. Part of this comes from the fact that even if the blockchain diverges, the one that has the most work becomes the one used to verify transactions.
One of the important things to consider about Bitcoin security is where you store your coins. Bitcoin wallets may have security risks, depending on the one that you choose. However, you can minimize the risk by opting for a paper wallet or a hardware wallet instead of one connected to the internet.
The biggest security concern regarding Bitcoin comes from the risk of a security breach on a wallet or exchange where you may store your funds. Although there have been numerous small breaches over the years, it is the major ones that have made headlines. Some of them include:
- Inputs.io: In October 2013, this wallet service was hacked two times, with hackers taking the equivalent of $1.2 million in the form of 4,100 Bitcoins. This came via a social engineering attack that involved compromising email accounts.
- Mt. Gox: Perhaps the most famous of the Bitcoin hacks is Mt. Gox in 2014. It experienced Distributed Denial of Service (DoS) attacks and froze withdrawals. The hack was estimated at $350 million.
- Silk Road 2.0: Also in 2014, Silk Road 2.0 had the equivalent of $2.7 billion in Bitcoin stolen from its escrow account. It involved the same methods and exploits, namely the malleability of transactions, as the Mt. Gox hack.
Another common security concern about Bitcoin is a 51 percent attack. Essentially, if a group of individuals or a single person owns more than half of the Bitcoin network’s computing power, they could fork the main blockchain and commit fraud. This has not typically been a problem, although the Ghash.io mining pool got close to 50 percent. That instance also showed that the Bitcoin community is willing to regulate itself, as the problem resolved itself.
Overall, Bitcoin tends to be safe thanks to its encryption, its transparent nature, and the fact that it is decentralized.
Not only was Bitcoin the first cryptocurrency, but it was also one of the first projects to showcase decentralization, along with all of the benefits associated with it. The decentralization of Bitcoin contrasts sharply with fiat currencies, which are controlled by governments or with any system controlled by a central player.
In a centralized system, that central authority can be a point of failure, as if something happens to them, the entire system is compromised. This can happen if that central authority is not reputable and chooses to engage in malicious actions. It may also happen if the central authority does not take security measures.
Bitcoin was specifically designed to overcome these issues via its decentralization. There is no single point of failure nor any need to trust a central authority or its intentions. This allows for resiliency, democracy, and efficiency. Many of the other cryptocurrencies that have been developed since Bitcoin follow this decentralized model thanks to the benefits associated with it.
Adoption and Community
Legality and Regulation
One of the limiting factors for Bitcoin’s adoption is its legality, which varies by country. Obviously, if Bitcoin is illegal in an area, it is hard for it to spread since holders or users would be breaking the law. Regulations on Bitcoin are still being developed in most countries, and there are many more that allow it than those that have made it illegal.
Since it is the first and largest cryptocurrency, most countries create their regulations with Bitcoin in mind or explicitly include it in the list of cryptocurrency-related regulations. Bitcoin’s legality in a certain country typically follows the legality of other cryptocurrencies in that country.
Bitcoin is legal in the United States. As of 2020, Bitcoin is illegal in Afghanistan, Algeria, Bolivia, Bangladesh, Pakistan, the Republic of Macedonia, Qatar, Vanuatu, and Vietnam.
Although it is not completely illegal, the following countries place restrictions on where and how you can use it: American Samoa, China, Ecuador, Egypt, India, Morocco, Nepal, and Zambia.
Because it was the first cryptocurrency and is the one with the largest market cap, most potential use cases for digital currencies in general apply to Bitcoin. Keep in mind that the Bitcoin whitepaper was also the introduction to the blockchain for many. That blockchain alone has numerous use cases, including intellectual property, food safety, voting, fundraising, supply chain management, digital identity, and healthcare. However, we will focus on the uses for Bitcoin itself instead of the network that it runs on.
The most common use of Bitcoin is as a digital alternative to cash or any fiat. You can use Bitcoin to send money to someone else, and now that it has grown in popularity and prevalence, you can even make purchases at numerous retailers using Bitcoin. This use of Bitcoin takes advantage of its benefits over fiat, such as decentralization, anonymity, security, immutability, and transparency.
You can also use Bitcoin for programmable money in the form of smart contracts. While Bitcoin is not the first cryptocurrency most people associate with smart contracts, it is compatible with them. For those unfamiliar with smart contracts, they let you program an if, then scenario that results in money being sent. They are typically agreements between a buyer and a seller and were first proposed in 1994.
Yet another use of Bitcoin is as collateral or as part of a lending service. With the rise in cryptocurrency, there has also been an increase in lending involving Bitcoin. This can involve lending Bitcoin with fiat as collateral or lending fiat with Bitcoin as collateral.
Many people also choose to use Bitcoin as a store of value. These are the people who purchase Bitcoin with the expectation that it will retain or increase its value over time and plan on keeping it for a while, known as HODLing. This use case is similar to owning gold to store your wealth.
Bitcoin can also be used for governance, although Bitcoin’s ability to help with this role is not as great as that of other cryptocurrencies. Governance comes from the ability to engage in on-chain voting with Bitcoin or its blockchain. Bitcoin’s relatively primitive use cases for governance actually inspired several crypto projects that are dedicated to governance.
Projects and Partnerships
Most of the projects and partnerships with Bitcoin involve the use of its blockchain technology or accepting it as payment. If you just look at blockchain use, some of the big names that rely on this Bitcoin technology include Siemens, Pfizer, Scotiabank, Delta, BBVA, Visa, Walmart, Ford, and Unilever.
As of late 2019, there were 15,174 businesses around the world accepting Bitcoin, including about 2,300 in the United States.
These include big names such as Wikipedia, AT&T, Microsoft, KFC, Burger King, Overstock, Subway, Twitch, Virgin Galactic, Norwegian Air, Namecheap, NewEgg, ExpressVPN, some Etsy vendors, and more. Keep in mind that in the case of larger companies, not all locations will necessarily accept Bitcoin. Even so, the rise in acceptance, including from big brands, indicates strong adoption.
Yet another type of partnership is the rise of banks that offer custody services or investment options involving Bitcoin. As of July 2020, banks in the United States were allowed to offer cryptocurrency custody services, including for Bitcoin. Some of the banks that accept Bitcoin in the United States include Chime Bank, Ally, Goldman Sachs, USAA, and Simple Bank.
There are also a growing number of banks around the world that accept Bitcoin, including the National Bank of Canada (in Canada), Revolut (in the UK), Bankera (in the UK), Worldcore (in the Czech Republic), Change (in Estonia), Fidor Bank (in Germany), and Wirex (in the UK).
There is also a rise in the offering of Bitcoin CFDs (contract for difference). This is a derivative product that involves very high risk due to leverage, but it lets people trade Bitcoin without actually owning it. Instead, they trade based on its changes in price.
Bitcoin has a very strong community, with many people using the cryptocurrency. Recent world events have seemed to increase the appeal of Bitcoin even more due to its lack of ties to governments. According to Coin Desk, by August 2020, there were 16.6 million Bitcoin addresses with the equivalent of $10 or more, a record high. The previous peak was in January 2018, when it hit 14.5 million accounts, but the August 2020 figure is 14 percent higher than that.
There are also more addresses that have small balances than those during the peak of the last bull market. Experts believe that this indicates Bitcoin may be in a growth cycle with more adoption. Part of this is also fueled by data, such as an increase in adoption between March and August 2020 of 27 percent, also based on data from Coin Desk.
As of December 2019, people around the world had created more than 42 million Bitcoin wallets. Estimates in early 2020 indicated that Bitcoin had 7.1 million active users, with an estimated 5 percent of Americans owning at least some Bitcoin.
As mentioned, there are more than 42 million Bitcoin wallet accounts that have been created. Keep in mind that many people have multiple Bitcoin wallets, so this does not necessarily indicate the number of users.
There is no accurate count of how many Bitcoin software and hardware wallet solutions exist, but there are easily hundreds of them, if not more. There are so many that Bitcoin.org has a feature to help you choose the right wallet for your needs. Some of the most popular Bitcoin wallets include Exodus, Electrum, Trezor Model T, Ledger Nano X, Ledger Nano S, and Mycelium.
What the Fans Say
Bitcoin is the most known and popular cryptocurrency with a valuation more than all of the other currencies combined
- One of the biggest arguments in favor of Bitcoin is its decentralization. As mentioned earlier, because it is decentralized, Bitcoin does not have a single point of failure, making it more resilient than traditional currencies. This decentralization and independence from a central governing authority were key in Satoshi Nakamoto’s creation of Bitcoin.
- The transparency of Bitcoin is another common argument from fans of the cryptocurrency. You can easily view every single Bitcoin transaction to have ever occurred in the blockchain. This contrasts sharply with the opaque nature of traditional currencies.
- Supporters of Bitcoin also point to the inability to counterfeit it as a strong point. As mentioned earlier, the consensus mechanisms that Bitcoin uses prevents counterfeiting.
- Anonymity is yet another common argument in favor of Bitcoin, as you do not need to provide personal information to own or send it. Additionally, even with the transparency of the blockchain, it is near-impossible to trace Bitcoin transactions back to a real person. This is particularly appealing to those who prefer to remain private.
- A final argument made by those in favor of Bitcoin is that it is highly portable. Since the currency is digital, it does not take up any physical space, making it possible to carry any amount on a flash drive, a piece of paper with an address, or online. This portability also adds to the convenience of Bitcoin, making a transaction as easy as scanning a QR code.
What the Critics Say
Not everyone is a fan of Bitcoin
- Critics tend to see the anonymity of Bitcoin as a negative instead of a positive. They argue that this anonymity makes it highly appealing to criminals and others with less-than-legal intentions. The counterargument is that criminals are unlikely to get far since the public ledger shows all transactions.
- Another major criticism of Bitcoin is its use of energy. As of 2018, Bitcoin’s networked annually used the same amount of energy as Bangladesh. This energy consumption comes from the protocol of Bitcoin, which requires numerous computers to work together to verify transactions. When more computers are involved, the puzzles required to verify those transactions become harder, using more resources and energy.
- Yet another criticism that looks at the other side of a positive is that transactions can be slow. Those in favor of Bitcoin argue that about 10 minutes for a transaction is good, especially for international ones. However, critics argue that this is too long for simple daily transactions. Of course, that is one of the problems that developers are working on with new solutions like the Lightning Network.
The key strengths and weaknesses of Bitcoin are as follows:
- Bitcoin was created to overcome the various challenges associated with fiat currency, offering decentralization, security, anonymity, and quick speeds, among other things.
- Bitcoin is the most widely adopted cryptocurrency.
- Bitcoin transaction fees are optional, but they support miners and increase your transaction speed, and they can be high at peak times.
- Bitcoin transactions are typically fast, but they can take hours or even days during peak times.
- Bitcoin has limited scalability, although solutions like the Lightning Network aim to overcome this.
- The Bitcoin blockchain incorporates numerous security measures, but your BTC may be at risk if you store them in a wallet or on an exchange that gets hacked, which is rare.
- Bitcoin is fully decentralized, offering all the benefits of decentralization.
- No one knows who Satoshi Nakamoto, the creator of Bitcoin, is. However, the open-source and community-based nature of the current Bitcoin project helps make it highly reliable.
- As the first cryptocurrency, Bitcoin has some room for improvement, but it is incredibly useful and popular.
Is Bitcoin Safe?
Bitcoin is reasonably safe, thanks to the consensus mechanisms and encryption built into its blockchain. There is always a risk of a hack when storing Bitcoin, however, so it is important to keep your private key secret and only store your Bitcoin in trusted wallets. The biggest risk to the safety of your funds with Bitcoin is if you accidentally lose or share your private key.
How Can You Store Bitcoin Safely?
Before storing your Bitcoin in a wallet or on an exchange, review the service to confirm it takes security measures. When choosing a wallet, you can also select the type with security in mind, but you should know that the more secure a wallet is, the less practical or convenient it will be. Paper wallets are the most secure, followed by hardware wallets, then desktop or mobile ones, and finally online ones.
Will Bitcoin’s Price Go Up?
There is no way to predict the future, so only speculation can tell whether the Bitcoin price will go up. Experts who predict it will rise in price typically point to such factors as increased adoption as being a positive sign for the long term at least.
Who Controls Bitcoin?
No one controls Bitcoin since it is decentralized. The technology behind Bitcoin is public, and a community of developers works together to improve and maintain Bitcoin. The consensus protocols that Bitcoin uses mean that most Bitcoin users and developers must agree on changes.
Is Bitcoin Legal?
In most countries around the world, Bitcoin is completely legal, but there are some exceptions to this. You should always take a minute or two to confirm that it is legal in your country before buying Bitcoin.
How Much Does It Cost to Use Bitcoin?
You can make a Bitcoin transaction without paying any transaction fee, but the transactions that do pay fees will be prioritized. Instead of waiting for just 10 minutes or so for the transaction to be confirmed, you may have to wait for days or weeks. Transaction fees are based on supply and demand, so they are low during off-peak times and high during peak activity but will typically be over $1 and under $10.