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What is Bitcoin & How Does it Work? - BTC for Beginners

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What is Bitcoin?

Bitcoin (BTC) is a digital or virtual currency based on a peer-to-peer network created in 2009 to become a viable replacement of conventional fiat currencies and payment systems. 

Based on a decentralised mechanism, Bitcoin is denoted by BTC and aims to take control of money away from governments and huge organisations and give it to the people. It isn't a physical entity; it's a code that exists on a ledger that's present on every computer within its network.

Every transaction that occurs on the blockchain is transparent and is visible to everyone. No central bank, state, or central authority has any power over Bitcoin, and its price is strictly defined by demand and supply dynamics in the market. Since 2009, BTC has become the most popular and valuable cryptocurrency, accepted by hundreds of retailers and brands worldwide.

Table of Contents

Why Was Bitcoin Invented?

Launched in January 2009 by an anonymous individual or a team that goes by the pseudonym of Satoshi Nakamoto, Bitcoin blockchain and currency were created to take control of the money back from big financial institutions and governments and hand it over to the people. It was designed to work on an infrastructure that was transparent and decentralised. Moreover, it also enabled a higher level of anonymity and affordability.

When it came out, nations worldwide were struggling to deal with the recession caused by the US housing market crash. The recession gave birth to the sense that these large financial institutions have an unreasonable amount of control over the country's economy. The regulations that were in place have failed to keep them in check. Apart from that, using these institutions for financial matters meant you had to share your personal information with them, deal with the delays, and pay a high transaction fee.

It was the first cryptocurrency that attempted to solve those issues by providing an alternative to people who don't want to rely on banks to manage their finances and transactions.

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How Does Bitcoin Work and What Technology Is Behind It?

Bitcoin relies on a peer-to-peer network, a collection of computers called nodes that are linked with each other and run Bitcoin blockchain. It's called a blockchain because it contains blocks of codes that are chained together in chronological order, with each block having a record of transactions. Since the blockchain is present on every computer or node, nobody can make any changes on their own as other nodes won't verify those changes.

People who own these nodes and process and verify the transactions are called miners. For investing in the Bitcoin ecosystem and facilitating verification, they're rewarded in BTC. These miners ensure that no unauthorised transaction occurs on the blockchain and ensure no single person has more control over the blockchain infrastructure to maintain decentralisation. New coins are being rewarded to miners at a rate that's continuously been in decline since the total supply of BTC is limited - that is, 21 million coins.

Unlike fiat currencies which are printed based on the number of goods and services created by a country to ensure price stability, BTC cryptocurrency is created through an algorithm that takes different factors into account. It works by having two types of keys - public and private. These keys are long strings of letters and digits created by the encryption algorithm of the blockchain. Public keys are visible to everyone for transparency and recordkeeping, while private keys enforce ownership and transferability.

Is Bitcoin Real Money?

Yes and no. Currently, Bitcoin is the most viable alternative to conventional currency. However, it is still so far away from acquiring the ubiquity, convenience, and speed of cash that is backed by traditional financial institutions. That being said, it has been reported by HSB that around 36% of small to medium-sized businesses in the US are accepting BTC as a valid currency. Some of the notable names include Expedia, Microsoft, AT&T, Overstock, Burger King, and Wikipedia.

It's important to note that as compared to altcoins, Bitcoin has been more popular with consumer-centric brands like KFC, Playboy, Twitch, CheapAir, and Subway. The majority of the other digital currencies are generally accepted by brands and companies that have built their businesses with a cryptocurrency-focused approach. Over the years, it has acquired more mindshare in the mainstream than any other virtual currency. However, it still has a long way to go to be considered as good as real money.

Fees & Expenses

At the time of writing, the average transaction fee of Bitcoin is $3.074 per transaction, a 40% increase compared to the last year when the average transaction fee was around $2.196. The average fee of a BTC transaction is determined in USD when a miner processes and verifies a transaction on the blockchain. Keep in mind that the fees can fluctuate depending on Bitcoin network traffic or the high demand for proof of work. In the last month of 2017, when BTC surged to its peak price, the average transaction rate reached its highest point, almost touching the $60.00 mark.

Moreover, the commission and fees charged by a variety of crypto exchanges and crypto apps, including trading services, differ in terms of percentage and pricing structure. Generally, buying and selling through wire transfer will cost you anywhere between 0.5% and 3% while using debit cards can set you back up to 10%. On the same note, bank transfers may come with a fixed fee. The pricing around BTC transactions can be quite complex and differs considerably depending on factors, including payment mode, amount of BTC, and geographical presence.

What Are the Benefits of Bitcoin?

Designed to be a viable payment alternative, Bitcoin offers a wide variety of benefits, including the following:

Fast Transactions - Using a peer-to-peer network that spans across all the populated continents, it can process and verify transactions in a matter of minutes, regardless of the amount.

Global Payments - With conventional money, international payments are always a hassle. Bitcoin reduces the number of challenges associated with making international transactions and ensures swift and affordable transfers.

Affordable - One of the significant draws of BTC transactions is their low processing fees, allowing consumers to send and receive any amount of money anywhere in the world without paying exorbitant charges or service fees.

Extremely Secure - Blockchain is a system that's designed to enforce security through unanimity. A single individual with malignant intentions can't compromise the system, and the safety is also reinforced through cryptographical encryption.

Widely Accepted - It is the only major cryptocurrency with a broad appeal with consumer brands that include Microsoft, Burger King, KFC, Wikipedia, and many more. Other altcoins have failed to gain similar traction. 

Accessible - It can also be bought via multiple payment methods, such as; bank cards, bank accounts, Apple Pay, American Express, Google Pay, PayPal, Venmo, Neteller, Skrill, paysafecard and more.

Constantly Improving - At any given moment, hundreds of developers are working on the Bitcoin Core project to improve further the payment system, including faster processing and verification and even lower transaction charges.

What is your biggest tip for a user getting into crypto?

"Keep an open mind and unlearn some of the habits you may have gained through traditional investing. In crypto, there are no middlemen, no quarterly financial reports or 2-hour long investor calls, but the wealth of free resources and knowledge transfer that takes place in the crypto community will serve as your best financial advisors. If you invest your time in researching and learning about the use cases, potential and tokenomics of digital assets, you will find projects that make sense to you and start to fortify your financial portfolio for the future."
Charmyn Ho
Head of Crypto Insights at Bybit

Can It Be Used Anonymously?

Anything you do on the internet can't be anonymous in absolute terms. That being said, as compared to how conventional financial transactions work, Bitcoin can be considered relatively anonymous. The issue is governments are trying to regulate cryptocurrency trading, which means they require exchanges and trading platforms to comply with KYC (Know Your Customer) and AML (Anti Money Laundering) regulations. When you buy or sell Bitcoin on any major trustworthy crypto exchange, you need to provide at least some personal information for verification.

There is also a flip side to anonymity. The more anonymous you want your transactions to be, the more you get away from the cryptocurrency or Bitcoin exchanges. And even then, it's highly likely that if a government agency or an expert hacker wants to find out about you, they will. However, it is possible to buy Bitcoin fairly anonymously.

How Safe Is It?

Bitcoin is an inherently secure system as the blockchain mechanism is designed for immutability - which in simple language, it can't be reversed once a transaction has occurred. Moreover, the transaction can't happen unless all the nodes verify it and give their nod of approval. Furthermore, it is made secure with cryptographic encryption, making it impossibly difficult for a hacker or any other malicious cyber attacker to break into the blockchain.

For safe and secure storage of BTC, many software and hardware wallets are available that ensure your digital assets don't get compromised. These wallets can be further secured with two-factor authentication as well as a passphrase.

What Teams Are Working On Development

Bitcoin is a vast and dynamic project with multiple teams and hundreds of developers working on different aspects of it worldwide.

One of the best things about it is that it's a free service, and any developer can contribute. All the code is stored in a GitHub repository, while conversations regarding future developments occur on the Bitcoin-dev mailing list and GitHub. Developers can participate in starter projects where they can write tests, fix existing bottlenecks, and work on finding solutions to known issues. Some of the teams that are directly involved in development include the following:

  • Bitcoin StackExchange

  • Bitcoin Core Slack Channel

  • IRC Channel #bitcoin-core-dev (on Freenode)

  • BitcoinTalk Development & Technical Discussion Forum

Major Bitcoin contributors are mentioned on the website sorted by their number of commitments. Top contributors include Wladimir J. van der Laan with 6500+, MarcoFalke with 2500+, and Pieter Wuille with 1500+ commits. You can see the whole list on the official website. Apart from the Bitcoin core and direct development, there are many free software projects that developers can work on, including Bitcoin Wallet, BFGMiner, and Armory.

Which Financial Institutions Are Invested in Bitcoin?

Since it is a direct competitor to financial institutions and banks, they are not looking to invest in the project directly. That being said, they are looking to experiment with Bitcoin blockchain and other decentralised cryptocurrencies to develop a more viable and consumer-friendly payment infrastructure. These banks and financial institutions include Bank of America, JP Morgan, BNP Paribas, SocGen, Citi Bank, UBS, Barclays, Banco Santander, Standard Chartered, and Goldman Sachs.

Bitcoin Wallet

If you want to store your BTC safely and securely, you will need a wallet. It can either be a physical device or software which you can use on your browser or download as an application on your PC or mobile. Some of the top BTC wallets include the following:

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Payment Methods:
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Public is an investing platform that allows you to invest stocks, ETFs, crypto, and alternative assets like fine art and collectibles—all in one place.
Payment Methods:
Bank Wire, Check, Debit Card, Wire Transfer
Full Regulations:
Cryptocurrency execution and custody services are provided by Apex Crypto LLC (NMLS ID 1828849) through a software licensing agreement between Apex Crypto LLC and Public Crypto LLC. Crypto trading on Public platforms is served by Public Crypto LLC and offered through APEX Crypto. Please ensure that you fully understand the risks involved before trading.
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Bitcoin Mining

Mining is the process that helps Bitcoin in processing transactions and keeping blockchain secure. It involves adding new blocks to the blockchain carrying new transactions and maintaining a chronological record. Once the transaction is verified, the blocks get split, keys are created, and the BTCs get transferred. Miners can also create new coins by using computing power to find solutions to cryptographic problems.

The block reward for Bitcoin mining is based on the unanimous decision of the network and is usually around 6.25 Bitcoins. To ensure there's no inflation, the digital currency has a fixed supply of 21 million BTCs.

Is Bitcoin Worth The Investment?

There is no easy answer to whether investing in Bitcoin is a good decision. The thing is, cryptocurrencies have only been famous for a few years, and they don't have a stable infrastructure behind them. This means that the price of Bitcoin is dictated strictly by demand and supply, which can be affected by several political and social factors. This has introduced a lot of volatility in the Bitcoin space. On the one hand, you can lose a lot of money in a matter of minutes while on the other, you can gain big in no time as well.

That's why you need to be extremely cautious when dealing with cryptocurrencies, including BTC. Only invest an amount that, if lost, doesn't have any adverse effect on your financial situation. Bitcoin is here to stay, but nobody can predict how its price will move the next day. You need to exercise due diligence when investing and ensure you're taking all the security measures.

Frequently Asked Questions

How can I mine Bitcoin?

You can use specialized computers called ASICs to mine BTC, but keep in mind that it's become quite challenging to do it if you're running a small system.

How can I store my Bitcoin securely?
For best security, you can use cold storage which involves the use of hardware wallets like Ledger Nano S and Trezor. To achieve a balance of security and convenience, software wallets like Mycelium, Exodus, and Electrum will do the job well.
Where can I buy Bitcoin?

You can buy BTC through a cryptocurrency exchange using conventional payment methods like wire transfers and bank cards, such as credit cards and debit cards. For a more in-depth answer to 'where to buy Bitcoin?', read our best places to buy Bitcoin guide.

Is Bitcoin a good investment?
Due to the high price volatility of cryptocurrencies, there's no way to make an educated guess. Bitcoin is here to stay, but nobody knows at what price it'll achieve stability.
How much would I have to pay for a BTC transaction?
The average transaction fee that's generated by the blockchain is currently around $3 and $4. The exchange may have its commission and charges.
What are the key benefits of Bitcoin?

The significant benefits include decentralisation, low fees, fast processing, and high security. One of the advantages that sets it apart is its acceptance as a viable currency by consumer-centric brands like Burger King and Microsoft.

Is Bitcoin legal in my country?
There are only ten countries where Bitcoin is outright banned. You'll have to check it on your own to ensure your country allows BTC transactions or not.
Is Bitcoin a currency or an asset?
Currently, it is both. Fast processing times and low transaction fee make it a currency alternative, while high volatility and technological potential mean it's also an investment vehicle for traders.
What is the process of investing in Bitcoin in the UK?

Buying Bitcoin in the UK is generally quite a straightforward process. However, for more specifics on the process take a look at our complete guide on how to invest in Bitcoin UK.

Am I allowed to purchase Bitcoin in the UAE?

Yes, however, the process of buying crypto can vary if you are in Dubai or elsewhere in the United Arab Emirates. You should visit our how to buy Bitcoin in the UAE page for the complete step-by-step.

Where is the cheapest place I can buy Bitcoin?

There are a lot of different considerations to make when buying Bitcoin, and the cheapest may be one of them. Take a look at our in-depth page on the cheapest ways to buy Bitcoin. It takes a look at the cheapest exchanges that still offer great security and features.cheapest ways to buy Bitcoin

What do people use Bitcoin for?

Bitcoin is a payments system that can be used in the same way that you would use any other. That is, to send funds directly to an individual or company but with some marked improvements to the outdated legacy systems. 

One of the main benefits of using Bitcoin is the low cost for international payments. Sending money across borders has been historically expensive, but with Bitcoin, the sender only pays a fraction of these costs in network fees. These can vary, and details to how and why they fluctuate will be given a little further into the guide. Importantly, even when network fees rise, they are still extremely low when compared to international bank transfers or use of a third party. 

Another attraction of using Bitcoin to send and receive money is the degree of anonymity provided by the network. While it is true that all transactions are permanently burnt into the blockchain, the record does not contain any personal data. Your wallet address or public key consists of 26-35 alpha-numeric characters and is very difficult to trace to the individual it belongs to. It is for this reason that Bitcoin has been referred to as ‘digital cash’ in the past. 

Throughout more developed nations, particularly in the West, Bitcoin is very popular as a trading instrument or asset of value. The coin has skyrocketed in price, which was worth just fractions of a cent when it began, to reach an incredible $20k at the end of 2017. The market volatility inherent with Bitcoin makes it a favoured choice for CFD trading and Futures, while being a deflationary currency helps to give it great potential for long-term price appreciation as well. 

Today, Bitcoin is one of the most popular trading instruments across reputable exchange and brokerage platforms. 

How many Bitcoins are available, what if they run out?

Bitcoin was formed with a preconceived design of having a finite supply of 21 million coins. Conversely, fiat currency has an unlimited supply, because we can always print more money. Therefore, inflation takes place; the more cash is printed, the lower its intrinsic value. 

Even gold, which BTC is often compared to, cannot really claim the same as its digital counterpart. Although, as a commodity, we are aware that gold must have a finite supply, it is still unknown how much of this precious metal is left in the earth. 

And so, Bitcoin has been created upon a deflationary model. The reward of BTC that goes to miners halves every 210,000 blocks, or approximately every 4 years. At the time of writing the reward is 6.25 BTC. Eventually, the reward will drop to zero, and when that occurs, no new bitcoins will enter circulation.    

It is the very nature of this design that will likely create an ever-increasing demand for Bitcoin, and why many investors see it as an excellent option for a long-term trading strategy. 

There have indeed been bitcoins lost to virtual limbo, where owners have lost the private key necessary to access the contents of their wallet. These coins are potentially lost forever and cannot be added on to the already declared maximum supply. Although it is theoretically possible for every Bitcoin to be lost in this manner, it is almost a statistical impossibility. Instead, the lost coins only create less supply and increase the demand and value for those still in circulation. 

What is the difference between Bitcoin and Satoshis

A satoshi is the smallest unit of bitcoin recorded on the blockchain. One satoshi, named after the founder of Bitcoin, is the equivalent of one hundred millionths of a bitcoin, the same way a penny is one-hundredth of a pound. One Bitcoin is currently trading at about £2,800. A Satoshi is, therefore, worth $0.000028 at the current rates if you divide the value of one Bitcoin by 100 million. If I decide to spend £100 to buy Bitcoin, I will get roughly 0.035 BTC. Obviously, these figures are not very comfortable to work with if you are shopping around. Suppose we convert this to satoshis? That will be an equivalent of 3,500,000 satoshis. This is a more relatable figure than working in decimals - ideal if Bitcoins are to hit the mainstream.

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