What is bitcoin? The Ultimate Guide

The identity of people who created bitcoin is still a question mark, but at least we know when it was made. Bitcoin was born in 2009 January, after the housing market crash. Bitcoin is a famously decentralized technology that accounts for lower fees on transactions than conventional online payment methods. Moreover, unlike other currencies, this one is not tied with government authorities.

Bitcoin is an intangible currency that is only balanced on a decentralized ledger (blockchain) which everyone has a transparent entrance to. Bitcoin is not backed up by any agency or government authority and does not hold any physical value, but it is still trendy. It has led to the launch of hundreds of other cryptocurrencies that are widely circulated in the market.

Understanding the concept of bitcoin

Bitcoin functions on the concept of blockchain. Blockchain can be referred to as a collection of blocks, and each block stores a troupe of transactions. No one can escape or cheat the blockchain system because all the nodes of computers running on the blockchain have duplicate transactions and blocks and can be seen by everyone, whether they are on the chain or not. These transactions take place to live, and bitcoin accounted for at least 47,000 nodes till May 2020, and this number is ever-growing.

If a wicked act or an attack happens on the blockchain, the people with their nodes or computers who were a part of the chain will swim out towards a brand new blockchain, and all the efforts of the attacker would be in vain.

The bitcoin balances are kept into account by using a set of public and private "keys".

These keys are strings of letters and numbers which are mathematically encrypted. The public access is just like an account number, visible to everyone, on which others can send you bitcoins. On the other hand, the private key is like an ATM pin that is to be protected and is used for bitcoin transmissions.

Bitcoin keys are not the same as bitcoin wallets. Bitcoin wallets can be physical or virtual gadgets used as a trading agent and facilitate the ownership of bitcoins.

A little fact sheet here is that when talking about bitcoin as a concept or entity, the word "Bitcoin" is capitalized. On the other hand, when we talk about the quantity of bitcoin, like "I traded 30 bitcoin today", the word is not referred to in capitalization. Instead, it is called either bitcoin or bitcoins in the plural. In contrast, bitcoin is referred to as BTC.

Birth of Bitcoin: a timeline

On August 18, 2008, the domain name bitcoin.org was registered. The identity of the person who wrote this domain name remains protected and anonymous.

On October 31, 2008, a person named Satoshi Nakamoto announced Bitcoin on a cryptography mailing list, talking about how bitcoin will operate and how it is an electronic cash system that functions on a peer-to-peer basis, not on the governmental authorities.

On January 3, 2009, the first bitcoin blockchain came into existence.

On January 8, 2009, the first version of bitcoin was notified on the cryptography mailing list.

On January 9, 2009, the mining of bitcoin as a currency began.

No one knows who invented bitcoin. Satoshi Nakamoto was the name tied to the person or group of people behind the whole idea of the currency in 2008 and worked on the concept that became fruitful in 2009. Many people have claimed to be or have suggested knowing the real people behind bitcoin, but it remains vague and dubious.

Bitcoins as a means of payment

Bitcoin, just like other currencies, can be effortlessly accepted as a means of payment for products and services. If you have a physical outlet or store, you can just put up a board or sign stating "we accept bitcoins", and you are good to go. The transactions can be facilitated through bitcoin wallets, QR codes and touch screen applications. An online business can easily accept Bitcoins as a mode of payment through credit cards, PayPal, and more.

Risks associated with Bitcoin

Investing risk

Although Bitcoin was not designed as an investment entity, it attracted a huge chunk of investors after it got on a hike in May 2011 and in November 2013. Therefore, many people take up bitcoins as a means of investment rather than a medium of exchange. However, this currency lacks the guaranteed value, and its digital nature makes it vague. Moreover, unlike other currencies, Bitcoin does not have a long history of being credible and authentic. Even after ten years of its initiation, the money remains at a developmental stage and continuously evolves.

Regulatory risk

Bitcoins are a competition to the government currencies and can be easily used for black money-making, laundering, tax dodging, and other illegal acts. The government may even regulate or restrict the use of Bitcoins. Many countries have started putting up rules regarding this free-flowing currency. However, the lack of standardized rules and regulation regarding bitcoin poses a lot of questions.

Security risk

Transactions in Bitcoins are digitized and therefore are prone to dangers from malware softwares, hackers. If the private key of any bitcoin dealer gets stolen, he or she could lose a lot of money, having nowhere to go to file a complaint. Hackers can also gain access to bitcoin wallets. There is no source of protection if one encounters any difficulties during transactions. There is no third party or payment processor.

Insurance risk

Bitcoin transactions are not secured and insured by any federal or government program. However, in 2019, SFOX declared that it would provide FDIC insurance to Bitcoin investors, but only for transactions that include cash.

Market risk

Like any other investment product, the value of bitcoin fluctuates. In its short existence, bitcoin has seen some extreme swings in its value. If fewer and fewer people start to accept Bitcoin, it may lose its weight, and there is massive competition with other currencies, even though Bitcoin has always been the most popular one.

Tax risk

Bitcoin is not qualified for any tax-advantaged accounts; there are no legal options to protect investments from taxation.

Conclusion:

No matter the risks involved in Bitcoin, Bitcoin advocates believe that this virtual currency is the future. Many believe that bitcoin leads to faster transactions and trade and has a low-fee system for payments across the planet.

One of the core reasons for the growth of bitcoin is that it acts as a substitute for national currencies and commodities like gold or metal.

Like any other trading asset, the rule of buying low and selling high applies to bitcoin as well.