What is Bitcoin?

The last few years have seen the exponential rise of a new kind of currency called Bitcoin. It has been the buzz that has spawned a whole new global FinTech industry. It is finding new applications in a broad array of fields and new revolutionary technologies are being developed around the original Bitcoin concept. But what exactly is Bitcoin?

Bitcoin is a decentralized digital currency and payment network that allows users to pay each other directly or exchange value without the involvement of a trusted third party. It is based on a decentralized public ledger called blockchain which provides the crypto proof for the transactions. It was created in 2009 by a person or groups of people using the pseudonym Satoshi Nakamoto.

Traditionally, payment systems have always relied on trusted third parties or intermediaries. They are systems that rely on trust to make them work and this trust is always provided through centralized control. A good example is the central bank or commercial banks. If you are holding a fiat currency such as the US dollar, you must rely on the Federal Reserve not to debase the currency. Likewise, you must trust commercial banks with your private information and trust them to provide excellent security systems that will protect your identity and your money. It is often the case that the trust is misplaced.

The centralized control is the same mechanism through which card processing companies such as VISA and MasterCard process payments across the globe. The magic with Bitcoin is that it is not centralized and it does not require an Issuing Bank or government fiat to guarantee value. It is a currency in itself that allows users to exchange value with one another without any intermediary. Unlike credit or fiat currencies such as the Euro or the US Dollar, Bitcoin is not backed with anything. It is neither backed by a gold standard or a government fiat. Instead, it derives its value almost out of nowhere through a complex computing algorithm that makes the underlying technology virtually impossible to counterfeit. In place of centralized control, it relies on a public ledger called blockchain and a network of nodes or computers to validate transactions.

What is Blockchain?

Bitcoin is built on a technology called blockchain which was invented in 2009 by Satoshi Nakamoto. Unlike traditional financial institutions that maintain private ledgers of transactions, the Bitcoin blockchain system maintains a transparent public ledger of all transaction records. This ledger is distributed across all the nodes in the network.

Currently, there are more than 9500 Bitcoin nodes or computers in the network so the Bitcoin public ledger or blockchain is uniformly available in all of these computers. It is therefore virtually indestructible. This makes it a trustless system.

The peer-to-peer design of the blockchain is what makes the system completely autonomous. It is outside the control or jurisdiction of any government.

All the transactions, activities as well as the balances in the Bitcoin network are stored in the shared public ledger and these transactions are verified by thousands of computers (or nodes) that are connected to the network. These nodes eliminate the need for a middleman in Bitcoin transactions. As long as you have the internet and
Bitcoin in your wallet, you can send money to anyone anywhere in the world.

In popular online literature, Bitcoin “coins” are represented as small golden coins with a B-sign engraving. In reality, a Bitcoin is simply an entry or a record on the blockchain ledger. The blockchain ledger tracks all the transactions and tracks who owns what. It contains the transaction history of all the 16.4 million bitcoins in circulation.

When you transfer your Bitcoin to another party, those Bitcoins will make up a new block of transactions. The new blocks are stacked onto the blockchain after every 10 minutes or so. There is no central regulator validating or approving blocks. Instead, what you have is a network of tens of thousands of users on the blockchain network who authenticate the transactions and keep the system running. These users are called Bitcoin miners.

There is a predetermined number of Bitcoins of 21 million. Out of these, 16.4 million have already been mined or unlocked and are in circulation. The difficulty level of mining Bitcoins is increasing by the day so users will have to expend a lot more energy to unlock the remaining Bitcoins. The last block of Bitcoins will be mined in 2140.

What is Bitcoin Mining?

Bitcoin mining is the process through new Bitcoins are created in the blockchain. Every time there is a Bitcoin transaction, this transaction will be recorded and then verified in the decentralized Bitcoin public ledger called the blockchain.

Currently, there are more than 9500 people using their computers to maintain similar records of these transactions. These people or nodes are the backbone of the Bitcoin blockchain system. Because the Bitcoin records are stored in so many computers, it is virtually impossible for someone to hack into the Bitcoin blockchain and manipulate or falsify the record of transactions in all the nodes. This bestows the Bitcoin blockchain with immutability. The public records on blockchain are unalterable and permanent.

During Bitcoin mining, the computers that make part of the Bitcoin blockchain record and verify the information on transactions that are queued on the blockchain. These miners run software that validates blocks of bitcoin transactions. The miners must reach a consensus on what the latest updates to the blockchain should look like. The nodes know the origin of the transactions and the “fakes” are rejected.

In the Bitcoin blockchain, this process of verification entails the solving of complex cryptographic puzzles and requires significant computing power. The complex cryptographic puzzles are aimed at verifying whether the person spending the Bitcoins actually owns them and that the person cannot spend the coins twice (the double spending problem).

The people who dedicate their computing power to solving these cryptographic puzzles earn a reward in the form of transaction fees or virgin coins. The transaction fees are paid by Bitcoin users when they send coins. The virgin coins are earned by Bitcoin miners who are the first to solve the math problem in the Bitcoin blockchain. They amount to 12.5 Bitcoins. At the current exchange rate, that is equivalent to $102, 610!

How do you pay using Bitcoin?

To start using Bitcoins, you need what is called a Bitcoin wallet. This is just an application on your computer or your phone that you use to keep track of all the bitcoins that you currently hold. The Bitcoin wallet allows you to spend your bitcoins either through a QR code or by keying in the recipient’s bitcoin wallet address. It’s a direct peer-to-peer transfer without any intermediaries.

What is a Bitcoin Wallet?

A wallet is a secure storage service for your bitcoins and you are fully responsible for its security. You have to create and remember a strong password that you will use to gain access to your bitcoins. It is also prudent that you create a backup for the records or transactions that are stored in your bitcoin wallets. Bitcoin is a fully decentralized system so if your coins are stolen, there is really no way of reversing the transactions. It is like losing cash on the highway.

Some of the most popular Bitcoin wallets include the following:-

Bitcoin Core: You can find it at www.bitcoin.org. It is a desktop wallet and was the original Bitcoin wallet and gives users control of both their public and private keys.
BitcoinArmory.com: Armory is an open source desktop wallet that offers users a Multi Signature Support and Cold Storage support.
Blockchain.info: Unlike the above two, blockchain.info is an online web-based Bitcoin wallet. It is currently the most popular Bitcoin wallet with more than 8 million wallets.
BitGo.com: This is another top online Bitcoin wallet with excellent security features.
KeepKey.com: KeepKey is a hardware wallet. It gives you complete control over your BTC and is an ideal option if you have a large amount of Bitcoin and need an unhackable storage solution.
BitcoinTrezor.com: This is another popular Bitcoin hardware wallet that has been recommended by some of the top Bitcoin users.

Bitcoin transactions are said to be pseudonymous. You can make transactions without revealing your identity. However, even though you might be anonymous, the chain of transactions is still traceable on the blockchain.

Where Should You Buy Bitcoin?

You don’t need a lot of money to buy Bitcoin. You can simply purchase a fraction of the coins for as a little as $10. The coins can be purchased using all kinds of payment options depending in the platform. These can range from wire transfer to credit cards, PayPal and even mobile money.

Coinbase: This is one of the most popular platforms where you can buy Bitcoin.
Coinmania: The platform enables you to buy bitcoins using your credit card.
BitPanda: The Bitcoin platform is popular in Europe.
LocalBitcoins.com: This offers a platform where you can buy Bitcoin from other users. Watch out on each user’s pricing Bitcoin.

Pro Tip

When buying Bitcoin from the various marketplaces, make sure you buy as close to the market price as possible. Most users will try to sell at a margin but buying at a marginally higher price is not a good investment strategy, even though the BTC growth prospects look good. The best way to invest in Bitcoin is by buying and holding it long term. Make sure you also watch out on the trading fee. Some exchanges charge as high as 20%! The lower the fee, the better for you.