What is Bitcoin (THE ULTIMATE GUIDE)

The Ultimate Guide to Bitcoin

Bitcoin is a term that has become popular somewhat recently. It is pretty common to hear Bitcoin mentioned on the news, on the internet, in commercials, and even in conversations. Despite the increasing popularity around this term, there are still quite a few people that do not understand what bitcoin is. It is quite common to hear the question “What is bitcoin?” surrounding any conversation regarding this virtual currency. Instead of explaining it to them, you can simply share them this article.

 

The History Of Bitcoin

Bitcoin was released as an open-source software in the year 2009. One of the most interesting bits of history surrounding bitcoin is that the name of the actual creator is still unknown. The software was released anonymously under the alias Satoshi Nakamoto.

The first supporter of bitcoin was a programmer named Hal Finney. After downloading the software on the release day, Finney was the recipient of the first bitcoin transaction, where Satoshi Nakamoto sent 10 bitcoins.

The first block of Bitcoins was mined soon after the release of the software by Satoshi Nakamoto. The reward for doing so was 50 bitcoins. It is estimated that Nakamoto mined over 1 million bitcoins before exiting the community.

After Nakamoto left, Gavin Andresen became the face of bitcoin by being named the lead developer of the Bitcoin Foundation and remained in this role until 2014 before leaving to focus on his work with the foundation.

In the early days of bitcoin, the value was unknown. With no central authority to determine the price, the value was decided by users. In one noteworthy trade, an early user of bitcoin indirectly purchased a pizza from Papa John’s for 10,000 bitcoin.

Although the history of bitcoin is rather fun to read about, there is one dark span that negatively changed the view of bitcoin. On August 6, 2010, a weakness was identified in the transaction process. Due to transactions showing up in the transaction log before being verified, users gained the ability to create bitcoins that surpassed the restricted amount. 9 days later on August 15, 184 billion bitcoins were created through this vulnerability in a single transaction. An update was released within hours that eliminated this transaction and fixed the software bug. This still remains as the only security flaw exploited in the history of bitcoin.

 

What is Bitcoin?

Now that we covered the history, let’s discuss what Bitcoin actually is.

Bitcoin is a cryptocurrency. A cryptocurrency is a digital form of currency that uses encryption to regulate the creation and transferring of funds. Like most cryptocurrencies, Bitcoin is also a peer-to-peer currency. This means that there is no central authority involved in the transaction log or in the creation of new Bitcoins. All of this is managed by the network.

The benefits is that its totally de-centralized and no Government nor private entity can control the digital currency. All parties who trade and exchange Bitcoins can do it in absolute anonymously if they choose to.

The con is that if you lose your Bitcoins or if they are stolen from you, there is not much recourse on how to obtain them back. In addition, there are no safeguards if the whole cryptocurrency market collapses overnight.

 

What is the purpose of Bitcoin?

Bitcoin was originally created with the intention of designing a currency that relies on cryptography instead of a central authority. And to be a true digital-first currency. Bitcoin far exceeded these goals.

Bitcoin is now similar to the same currency that you carry in your wallet as long as the other party has a bitcoin wallet. It can be used for the same things, including:

  • The purchasing of goods and services
  • Any form of transaction with any user that has a bitcoin wallet
  • Donations
  • As an investment option

The original genesis behind the creation of Bitcoin was the creator wanted a way to buy pizza online and without the current banking systems in place.

 

Who accepts Bitcoin?

Bitcoin, just like your normal, everyday currency, is accepted by anyone willing to take it. The programmers of bitcoin set the currency up with the intention on having no restrictions on who uses it.

 

Is Bitcoin legal?

Bitcoin is only illegal in four countries – Bangladesh, Bolivia, Ecuador, and Kyrgyzstan have banned the use of the currency.

The legality of bitcoin and what it can be used for vary greatly from country to country. Every government has their own regulations for bitcoin that users must follow. It is important that you learn about the laws and regulations surrounding in your country before getting started.

 

How do you get started with Bitcoin?

Before getting started with bitcoin, it is important to read the above section to make sure that it is legal in your country. After you are aware of the laws and regulations in your country, you can begin getting started.

There are two things you need to get involved with bitcoin: a wallet and some bitcoin.

 

What is a wallet?

Wallets are the place where your bitcoin is stored. Without your wallet, your bitcoin would be stuck with no home. There are three types of bitcoin wallets.

The first type of wallet is the online wallet. Online wallets are often browser-based and are the easiest wallets to use. They work by having you create an account and giving you a wallet address. You can use this address to receive and store money. It is important to note that online wallets are often run by third parties, which means that you need to trust that the operator has a secure server and will not steal your bitcoins.

Pros

  • Quick set up
  • Often have better security than a paper wallet
  • Easy to transfer money internally

Cons

  • Involvement of a third party
  • Vulnerable to security breaches and theft

 

Paper Wallet

A paper wallet is a term used to describe any method of storing your bitcoins offline.

Through the creation of key pairs, bitcoin users can store their virtual Bitcoin in physical objects. Secure keys are generated and printed on objects, which can then be scanned and redeemed.

Paper wallets have a huge security concern. If the PC from which the key is generated is affected with malware, the bitcoins may be stolen. Paper wallets can be stolen easily as they are a physical object.

If you are completing a transaction with a paper wallet, there is also a concern that the key pair you are receiving does not have any value. You will not be able to find this out until you attempt to redeem the key pair.

Pros

  • If created properly, they are safer than virtual bitcoins

Cons

  • Security can be an issue if you are not experienced
  • Easier to steal and destroy
  • Easier to lose
  • Must trust that the key you are given has to value

 

Hybrid Wallet

Hybrid wallets are bitcoin wallets that manage payments and keys through JavaScript in the user’s browser.

Hybrid wallets came into existence after a few online bitcoin wallets were hacked. The difference between a hybrid wallet and a normal online wallet is that the user owns the private keys located inside of the wallet.

Owning the private keys has a few benefits, such as the ability to easily export private keys and the ability to look up your balance in the blockchain, ensuring accuracy.

Even with these benefits, Hybrid wallets still have some negatives. For instance, the same security concerns that exist with regular online wallets still exist here. Protection for your private keys may be even weaker in a hybrid wallet due to a larger attack surface.

Pros

  • Same benefits as online wallet
  • Easier to export private keys
  • Easier to verify balance

 

Cons

  • Same security concerns as online wallet
  • Less secure if you are being individually targeted

 

How do I buy bitcoin?

Now that you have picked your wallet and set it up, it’s time to go buy some bitcoin.

Just as it can be used for any transactions, Bitcoin can be purchased from anyone. The most common method for buying Bitcoin is through a currency exchange, such as Coinbase. A bitcoin exchange is both a marketplace and an online wallet where people are allowed to buy bitcoins in exchange for different currencies. These currencies can include anything from USD to other cryptocurrencies.

Bitcoin can also be purchased from regular people. It may be hard to find someone selling Bitcoin in person, which is why marketplaces such as Localbitcoins exist. Marketplaces like this match buyers up with sellers based on location and price. Most of these transactions take place with regular currency, but it ultimately depends on what the seller agrees to.

Bitcoin can also be obtained through mining. Mining is the method used to that gives away bitcoin. Bitcoin mining is safe and secure; however, you will need a computer with outstanding hardware to be able to do it effectively. It is possible to buy hardware specifically designed for mining bitcoin, but keep an eye on your electric bill! This kind of technology requires a lot of power! Your best option for obtaining bitcoin is through purchasing it.

 

How is the price of Bitcoin determined?

You may be asking yourself, “If there is no central authority, how does Bitcoin have value?”

The price of bitcoin is determined by supply and demand. The programmers that designed bitcoin set a cap on the amount of bitcoin that can be created at 21 million. Because of this cap, there is a limited supply. Since bitcoin is useful and has a purpose, there is naturally a demand. These factors combined give an item value.

It is important to remember that price and value are not the same things. Every individual can assign their own value to something, but only the market as a whole can assign a price. Buyers and sellers ultimately determine the price of bitcoin.

If more people are buying than selling, the price will increase. If more people are selling than buying, the price will fall.

 

How has the price of bitcoin changed?

Although the price is volatile, meaning that it changes quickly and often, the increase of price in bitcoin throughout its history is why some people think it is a worthy investment.

When the price of bitcoin started being tracked by Coindesk in July of 2010, 1 Bitcoin was priced at $.06. In July of 2011, that price reached nearly $18 per bitcoin. The price dropped to $10 in July of 2012 but reached over $96 in July of 2013. In July of 2014, it reached as high as $630. It decreases a little bit in July of 2015, falling down to $280, but that was the lowest it has been since. Bitcoin price has been steadily increasing in value since its creation.

Someone who purchased 100 bitcoins back in 2010 for $6 would have roughly $250,000. That is quite the return on investment, isn’t it?

 

What is the current price of Bitcoin?

Currently, 1 bitcoin is equal to nearly $2500 (as of June, 2017) . The bitcoin price changes every minute, similar to a stock offered on the stock exchange.

This is the estimated price that you will be paying on a coin exchange if you choose to go that way in purchasing bitcoin. If you buy from an individual, they can set their own price.

 

What are some common terms associated with Bitcoin?

BTC

BTC is the abbreviation used to describe a single bitcoin.

Bitcoin Address

Your bitcoin address is your public key. This is what is used to send you money.

Block

A block is what confirms Bitcoin transactions. Miners are responsible for finding blocks and when a block is found all transactions completed since the last block was found.

Blockchain

The blockchain is the ledger for every bitcoin transaction that has ever happened. The transactions are listed based on the date they occurred.

Private Key

The private key is stored in your wallet and is the part of the wallet that allows you to spend your bitcoin. Anyone who has access to your private key can spend all of the money in your wallet.

 

Other Sources:

http://www.coindesk.com/price/

https://en.bitcoin.it/wiki/Paper_wallet

https://en.bitcoin.it/wiki/Browser-based_wallet

en.wikipedia.org/wiki/Bitcoin

http://www.coindesk.com/information/how-can-i-buy-bitcoins/

https://www.bitcoinmining.com

http://bitcoindaily.org/bitcoin-vocabulary/

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