What is Bitcoin?

Bitcoin (an amalgam of “bit” – the smallest unit of data – and “coin”) is a decentralized payment system based on the peer-to-peer technology. The namesake accounting unit, Bitcoin, is the first and most popular cryptocurrency. Bitcoin’s central feature is full decentralization.

Bitcoin is not controlled by any single point of authority like central bank. Issuance and transaction processing is done by the network’s users. No one can block an account or reverse a transaction. Anyone can be a part of the network.

WebMoney or PayPal are payment services processing traditional currencies like US dollars and euros. Essentially those are digital money equivalent to their paper counterparts.

Bitcoin is generated by its users in a process fueled by raw computing power. Its price is formed by the market and influenced mostly by laws of supply and demand. Users of Bitcoin network do not have to go through a cumbersome authentication. And of course fees in Bitcoin are significantly lower.

Bitcoin is still relatively young and quite volatile yet there are various ways one can spend Bitcoin to purchase commodities and services.

Bitcoin is of great utility as a means of cheap transfer of value across any border. Bitcoins are accepted at some pubs and hotels, some services allow you to buy flight tickets, pay taxi fees, web hosting, legal advice, various digital content and more. In most countries Bitcoins can be used to replenish phone contracts. And of course there is an increasing number of online casinos that accept crypto.

Digital currency was also used for purchasing expensive houses, cars and yachts on multiple occasions.

Finally, many users value Bitcoin as a venue of long-term investment and a lucrative trading asset.

The concept of Bitcoin was first introduced in a whitepaper published on October 31, 2008. The document’s author signed as Satoshi Nakamoto, but to this day it is unknown who hides behind that pseudonym, be it a single person or a group of people. Further maintenance and development of the project was later picked up by an independent community of coders yet they are not the sole deсiders of the network’s fate. Every major change to the code can be implemented only if the majority of mining pools (communities of computing power providers, who are in charge of processing transactions and new coins issuance) agree to accept it.

Issuance of new Bitcoins can be likened to the issuance of traditional currencies but instead of centralized financial institutions which print new banknotes, new cryptocurrency units are generated by the network’s users themselves. This process is called “mining” and entails miners’ computers solving tough mathematical problems. The first computer that solves the problem gets to sign the new block in Bitcoin’s blockchain and Bitcoins that are minted as a result of new block creation are awarded to the block creator. Computing powers are dispersed all over the globe but miners can gather in pools to increase the probability of being the first to solve the problem and winning the reward.

Not true. Ponzi schemes promise a huge fortune but actually operate by distributing money brought in by new members among the old members. Once the inflow of new members slows down, the entire scheme topples.

Bitcoin does not promise riches to new investors. It’s only promise is the full control over one’s own money. And even though the influx of new investors may increase the price, old users do not receive any dividends. Finally, the decentralized nature of Bitcoin itself ensures there is no single entity that can reap all the benefits.

Some would say that Bitcoin’s price is not backed by anything. James Rickads, the author of Currency Wars, states that every currency in history is backed by trust. The same is true for cryptocurrencies. In Bitcoin community this trust is conceptualized by the specific term “consensus”.

Bitcoin’s value also stems from its network effect: the more people use it, the higher the demand, and the higher the price. While still being an experimental technology Bitcoin is very volatile which is often exploited by traders and crypto investors.

Limited issuance also adds to Bitcoin’s value. Last but not least, Bitcoin introduced the world to blockchain technology, one of the most progressive and revolutionary technologies of today.

New coins are generated every time a new block is created. In Bitcoin’s blockchain a new block is created every 10 minutes. Reward size halves every four years so there is a very strict schedule of issuance and we know exactly how many Bitcoins there will be when the issuance stops in 2140. It’s twenty-one million.

That is another prevalent misconception. Bitcoin is in fact pseudonymous. In other words, everyone can see any Bitcoin’s address’ balance and transaction history although it is indeed very difficult to find out who owns that address.

That said, it is possible to find ways to track down address’ owner. For example some digital wallet providers can track sender’s IP address. Currently there are many fairly efficient tools for transaction analysis. Their features allow cryptocurrency companies to track reliability of their counterparties and find out if they own any Bitcoins that were previously used in illegal financial operations.

There are several swift and safe ways to purchase Bitcoins. Firstly, this can be done via online cryptocurrency exchanges, which accept fiat currencies as payment. First one needs to deposit some fiat currency on his account, then one can buy crypto.

Secondly, there are various exchange services which will sell cryptocurrency for fiat money using such payment systems as Perfect Money, Advanced Cash, Skrill, Payeer, etc. Some services (mostly in North America and Western Europe) allow for purchasing Bitcoins with credit cards.

Bitcoins can also be bought in person from someone who wants to sell it. This option is the least safe though because personal deals often entail a risk of fraud.