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What is Bitcoin (BTC)?

Introduction

Bitcoin is a decentralized digital currency with a fixed total supply of 21.000.000 Tokens. The Ticker or abbreviation of Bitcoin is BTC. Bitcoin is based on advanced Cryptography to keep it secure. 

All transactions happen without intermediaries or central authority, which means there are no banks in the world of Bitcoin. Bitcoin is global and can be sent through the globe quickly every day of the year, around the clock. The Blockchain is not closed for the weekends, like banks.

Bitcoin is also open and transparent to everyone, which means every Bitcoin transaction is stored in a public ledger, and there is no room for manipulation.

Today Bitcoin is the largest Virtual Currency by market capitalization—Bitcoin's Marketcap at 13. Dec 2021 is $912.512.691.978. Bitcoin motivated 1000s of other founders to start projects in the Cryptocurrency Space. 

I had my first contact with Cryptocurrencies in 2013 when I got the first voucher for my first Bitcoin in October 2013 for my birthday. I never redeemed the whole Bitcoin, a "funny" story for maybe a different article. Back then, I was all in with my Startup and did not have time to learn more about the world of Cryptocurrencies. Since then, I have had it on the radar at least, and since 2017 I'm deeply involved and have also experienced a couple of market circles. 

In this article, I will talk about

  • How does everything start, and who is behind Bitcoin?
  • How Bitcoin works, and how can you store or use your Bitcoin?
  • Why is Bitcoin valuable if it is a scam, and what are the risks and potentials?
  • How can you buy Bitcoin?

That is an impressive story, but how and when did everything start?

How the Bitcoin Story started - An early timeline

18. Aug 2008 

The domain Bitcoin.org is registered by an unknown person or group of people. 

31. Oct 2008

A mysterious person or group of people with the pseudonym Satoshi Nakamoto announces the Cryptography Mailing List metzdowd"

"I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party."

Besides that, the famous Whitepaper "Bitcoin: A Peer-to-Peer Electronic Cash System" was released. 

3. Jan 2009

The first Bitcoin is mined. Block 0 is also known as the genesis block. It contains the message.

"The Times 03/Jan/2009 Chancellor on brink of second bailout for banks."

8. Jan 2009

The first version of Bitcoin Software is announced 

9. Jan 2009

The first block on the Bitcoin Blockchain is minted

💡Crypto minting means to create a new crypto coin using a proof-of-work (PoW) consensus algorithm

The identity of the person or the group of people is still unknown. Of course, there are a lot of rumors about who it is. Some people even claim that they are Satoshi Nakamoto; we will talk about that later on. 

Who Is Satoshi Nakamoto?

Other projects went into the direction of Bitcoin; for example, Adam Back's invented Hashcash in 1997 and later on Wei Dai's b-money. Nick Szabo proposed Bitgold in 1998; it was never implemented but is widely seen as a forerunner of Bitcoin. Hal Finney's invented the Reusable Proof of Work (RPOW).

The Bitcoin white paper itself references Hashcash and b-money and various other works spanning several research fields. 

In the first seven months after the launch of Bitcoin, Satoshi Nakamoto minted around 1.1 million Bitcoin. As of today (14. Dec 2021), the value is about $50 billion. The mined Bitcoins were not touched to this day. This would give him (them) a top 30 position in the Forbes list of the wealthiest persons on earth. 

Several individuals claim to be Satoshi, but his identity stays a secret. 

How does Bitcoin work? 

Before we go into details, we need to define some essential terms that you need to understand, at least in an introductory way. 

Blockchain

The Blockchain is a transparent, public ledger storing transactions peer-to-peer. Transactions are organized in blocks that are chained together. The chained blocks make up the Blockchain. Once a record is added to the Blockchain, it is irreversible and can not be changed anymore (or only with incredible effort). The whole software is open source and can be inspected by everyone. Nobody can cheat the system. 

Bitcoin Mining

Miners are members of the peer-to-peer Bitcoin network. Miners are like a decentralized authority taking care of the credibility of the bitcoin network. The total Bitcoin supply is 21.000.000 BTC. Today there are 18.895.256 mined, which leaves a bit over a 2Mill Bitcoin left to be minted. Miners build up an independent network of computers and confirm the transaction using high-performance processors to solve computational puzzles. Typically this process takes ten to twenty minutes.

Private and Public Keys

A Bitcoin wallet consists of a private and public key. The private key has to be kept as a secret (like your ATM Pin just more secure), and the public key or public address can be compared with a public available bank account number or an email address. You can receive Bitcoin on your public number. 

The private and public keys work together and make it possible to initiate and digitally sign transactions by providing proof of authorization. Balances of Bitcoin tokens are kept using public and private keys.

The average person could mine Bitcoin in the early days with his personal computer, but that's no longer the case. Nowadays, there is very specialized processing power in the form of ASICs (application-specific integrated circuits) and common GPUs (graphic processing units). ASICs are more advanced and efficient than GPUs graphic processing units for mining Cryptocurrencies like Bitcoin. 

The transactions are verified by miners, who provide their computational power in Exchange for mining fees. 

Currently, a winner is rewarded with 6.25 bitcoins roughly every 10 minutes. In a so-called Bitcoin halving event, the block rewards are cut in half approximately every four years. The next halving is supposed to happen in May 2024, where the block reward will drop to 3.125. 

Bitcoin Halving Chart - Source: Bitcoinhaving

How Many Bitcoin are there?

In a centralized system, money is created by central banks at a rate matching growth of the economy. In theory, this should give stability. In a decentralized system like Bitcoin, there is no third party that can influence the "production" process of Bitcoin; the whole release schedule is planned ahead according to the source code. 

The supply of Bitcoin is limited to a total of 21.000.000 Bitcoin. Currently, there are 18.900.825 Bitcoins, which is around 90 % of the total supply, minted. Around 900 Bitcoin are mined every day, and the last Bitcoin should be mined in about 120 years. The Bitcoin inflation rate is at approximately 1.75% till the next halving event.

Bitcoin Inflation. Source:Bitcoinhalving

One Bitcoin can be fractionalized into eight decimal places. The smallest unit, 100.000.000 part of a Bitcoin, is called a satoshi. This could be changed in the future via Bitcoin Improvement Proposal (BIP) governance vote. Miners can vote. 

How can I use my Bitcoin?

You can buy Pizza, right? In 2013 an early Bitcoin Adopter in Florida offered 10.000 Bitcoin if somebody is bringing him two pizzas to his come. Back then, the value of 10.000 Bitcoins was $25; now, the 10.000BTC is worth around $600.000.000. At least the guy has a nice story to tell, but jokes aside, here are some use cases for your Bitcoin. 

There are different ways you can do with your Bitcoin.

  • You can buy and hold
    Bitcoin and other Cryptocurrencies can be part of your investment strategy. You can just buy and hold. Since the start of Bitcoin in 2009, the price has increased insanely. Even if you are a good trader, it is not easy to make more profits than somebody who was buying bitcoin and HODLing it. 
  • You can exchange it into Traditional Currency (FIAT) at the Bitcoin Cash machine.
    In many cities worldwide, there are already Bitcoin Cash Machines available. The Transaction Fee can be hefty, but you get cash for your Bitcoin vice versa. 
  • You can use it to pay with your Bitcoin Debit card / Credit Card.
    Usually, from these providers, you get a Visa or Mastercard, and you can pay your purchase as you are used to it. This works for any shop accepting debit cards. Crypto.com and Binance.com are two of the most popular Crypto debit cards. 
  • You can donate your Bitcoin.
    There are already many nonprofits and charities accepting cryptocurrencies as donations. There is a whole Ecosystem around the donation space. The Giving Block, for example, is a service to help you to get started to receive Crypto donations. 
  • You can use your Bitcoin as collateral to get a loan.
    There are many solutions like BlockFi out there where you can put your Cryptos as collateral and get a loan. 
  • Buy at Crypto-Friendly Services and Stores
    Bitcoin Payments and payments with other Cryptocurrencies are accepted more and more online and offline. The payment sometimes is made via hardware terminals or through QR codes.
The Chainalysis 2002 to 2021 Global Crypto Adoption Index

How to store Bitcoin?

Not your keys, not your coins.

To store our digital currency, you need a wallet, which is a virtual bank account, or better, you are the bank. With the help of this wallet, you can track your ownership of your coins and send and receive digital assets; p2p network to cut out the middleman. 

A big misconception of people who are new to cryptocurrencies is that they think their Bitcoin is stored IN the wallet. This is not the case. The wallet only helps you track your coins, and through the private and public key mechanism, access your coins and send and receive them. The coins themselves are stored on the Blockchain. This is one reason you have to protect your private key from anybody. This can be confusing for Beginners. 

There are different kinds of wallets. 

Hot Wallet (Software Wallet)

Hot wallets are connected to the internet and help you keep track of assets. You also can send and receive tokens. Hot wallets hold your private and public keys. Since hot wallets are connected to the internet, they are more vulnerable to hacks than cold storage methods. A hot wallet can be a browser plugin, a desktop, or a mobile application.

Some examples are:

  • Metamask
  • Exodus
  • Electrum
  • Myetherwallet

Cold Wallet (Hardware Wallet, Cold Storage)

A cold wallet is a physical device that is not connected to the internet and keeps your private key completely offline. In general cold wallets are safer than hot wallets. If you do not store your private key on, for example, a paper wallet or a second hardware wallet with the same private key in a safe place and your cold wallet gets stolen, your assets are gone. Be aware of that and develop a strategy how to protect your assets. 

Some examples of digital wallets are:

  • Trezor
  • Ledger
  • KeepKey
  • Safepal etc

Why is Bitcoin valuable?

Bitcoins' value is based on the law of supply and demand. Bitcoin is seen as very volatile compared to other asset classes. 

Especially when money is printed by central banks like there is no tomorrow, Bitcoin offers an opportunity for people to hedge their risks, store value, and not only rely on a fiat currency backed by a government. People are hedging for the worst-case scenario like hyperinflation. In countries like Venezuela, Argentina, Zimbabwe, Bitcoin got a lot of attention. 

More institutional investors are also diversifying their portfolios by adding (mainly) Bitcoin to their portfolios. They start treating Bitcoin as a kind of digital gold and try to hedge their risks against market volatility and inflation. 

More and more companies accept payments via Bitcoin. Some well-known companies accepting Bitcoin. are Tesla (stopped again), Microsoft, Paypal, Whole Foods. 

With El Salvador, we also have the first country that made Bitcoin a legal tender in June 2021. The government is releasing a digital wallet for the people in El Salvador and giving away around $30 in Bitcoin to every citizen. Nayib Bukele, the president of El Salvador, released plans to build a Bitcoin City backed by BTC bonds. 

Nayib Bukele President of El Salvador

There are rumors that other countries will follow this trend—positive news for the whole Crypto world. 

Risks and Benefits of Bitcoin?

NOT YOUR KEYS, NOT YOUR COINS

In this section, I will introduce some risks and benefits of Bitcoin. Of course, not everything is sunshine and roses; there are risks and downsides, even if with every day up and running, Bitcoin is getting less and less experimental. In over ten years of existence, Bitcoin was never hacked. 

Let's start with the Benefits, most of which we mentioned earlier. 

Bitcoin - The Benefits

  • Decentralized digital currency that you can buy and sell without a central authority like a bank. It is permissionless. 
  • After a transaction makes it to the Blockchain, it is tough to reverse or fake. 51 % of the miners would need to play together and perform a 51 % attack. 
  • Lower transaction fees and faster transactions. Bitcoin is by far not the quickest currency. 
  • Bitcoin is fully transparent and open. The software is open-source, and many computer scientists and cryptographers were checking the system from a security aspect.
  • Bitcoin is private. There is no need to give any personal information other than the Bitcoin addresses and the amount. 

Bitcoin - The Risks

  • The price volatility can be quite big. This is not for everybody's nerves. 2013 the Bitcoin price dropped by 61 % in a single day. If Elon musk has some ideas, sometimes the Crypto markets are shaking, as it happened a couple of times in spring 2021. With Bitcoin now, this is very unlikely; with other Coins with a smaller market cap, it is not. Can you deal with that?
  • Regulatory Risks. Cryptocurrencies are a rival to the currencies of the governments, and they will and already do try to regulate, restrict and ban Bitcoin and other cryptocurrencies. Some countries already did so.
  • Security risk, hackers, malware operational glitches on centralized exchanges and on your computer. If you are holding your coins in a private wallet, you are the bank, and you need to protect them. Suppose you are keeping all your digital assets on a centralized cryptocurrency exchange. In that case, there are also risks that they get hacked or just run away with your money, depending on the Exchange. You maybe remember Mt. Gox in Japan, a bitcoin exchange that got hacked in 2014. 
  • Insurance Risk. Crypto Exchanges are usually not insured like classical banks. 
  • Fraud Risks. People will try to get your money; greed is big in the crypto space, other people might use that against you. Be careful. 
  • 51% attack to the Blockchain.  51 % of the miners processing powers would need to play together and perform this attack. The costs for hardware and electricity go in billions of US dollars. 

 

Is Bitcoin comparable with money?

Pictures say more than 1000 words, they say. The following graphic shows some of the main differences between Bitcoin (other Cryptocurrencies) and traditional money issued by central banks like US Dollars or the Euro. 

Fiat Money USD, Euro vs. Bitcoin

Is Bitcoin a Scam?

Bitcoin was proven to be robust over more than a decade. It is open source, and the code has been inspected by 1000 and 1000s computer scientists, cryptography experts, and more. Every day online, it is getting more robust and harder to destroy. 

You have to know where the money is; there are also scammers and people who rip you off and get your hard-earned money. You need to do your own research, try not to get too greedy, and be careful with your investments. Those people are there is also a negative result of Bitcoins success, but it's certainly not Bitcoins fault. 

How did the interest of Bitcoin Change over time?

Worldwide Bitcoin Interest over time. Source: Coinbase.com

How to buy Bitcoin?

There are many different ways you can buy Bitcoin, depending on where you are located. 

You can make an account on the major cryptocurrency exchanges. For the central exchanges, you need to verify your identity. 

The process is similar if you signup for a centralized Cryptocurrency Exchange, Online Broker, or Fintech Bank. 

Step 1: Signup/Register

You have to choose your current location of residence with most of the services. If you are using my Affiliate Link, you get a little Bonus for a start depending on the Exchange you choose. 

Some of the most known Crypto Exchanges are:

  • Binance.com or Binance.US (for the USA)
  • Crypto.com
  • Kraken.com
  • FTX.com or FTX.US (for the USA)
  • Gemini
  • Coinbase

You can also signup with online Brokers, Payment Providers, or Fintech Banks like:

  • Robinhood
  • Uphold
  • Revolut
  • Paypal

You can also buy at a Bitcoin cash machine or use a Peer to Peer exchange like Localbitcoins

After you complete your registration and confirm your Email, you need to go through a know-your-customer (KYC) process with most of the services. 

Step 1a: Secure your account

This is an optional but essential step. I recommend immediately securing your account and using all available security measurements to harden your account. Most exchanges offer at least Two-Factor-Authentication (2FA), and you should set it up to decrease the chances that something happens to your funds. 

Step 2: KYC - Confirm your Identity

To fully use the Exchanges services, you need to identify yourself and show some proof of residence. Usually, personal IDs, passports, or driving licenses are accepted.

Now you are ready to transfer funds to your newly created account.

Step 3: Send funds to your Exchange

Here you usually have multiple options; you can send Cryptocurrencies, make a Bank Transfer or use your Credit or Debit Card to put funds into your account. A Bank Transfer can take a couple of days; if you send Cryptos or use your Credit or Debit Card, you can start buying Bitcoin or other Cryptocurrencies within minutes. 

Step 4: Buy Bitcoin or whatever you believe in

The moment has come; you can exchange your trade your traditional money for a cryptocurrency like Bitcoin. If you plan to hold your cryptos over a more extended time, we recommend transferring them to a cold wallet, like Trezor or Ledger. That's all. 

Summary

After reading the article, you have an idea of what Bitcoin is, how it works and how it came alive. You also should be able to decide for yourself if Bitcoin has some value and is worth investing for you after hearing about all the potentials and risks coming along with it. You also learned how to best store your Cryptocurrencies.

You get a little bonus using my signup links (e.g., at Crypto.com or Binance.com) if you decide to buy. That's all you need to get started. 

Do not forget this is not financial advice, and my content is for educational purposes only. Also, never forget to do your own research before putting your money into a project you like. 

Enjoy and stay weird!

Disclaimer

The article contains affiliate links. If you are using them, you and I will get a Bonus. 

This website includes information about cryptocurrencies and other financial instruments. All these areas are complex instruments and come with a high risk of losing money. We are NOT giving financial or investment advice; this page is for educational and informational purposes only. Please be careful and make sure that you understand how these instruments work. Also, think about whether you can afford to take the risk of losing your money.

Weirdo.Rocks encourage you to do your own research before you make any investment decision.

Resources

Bitcoin on Coingecko

The Giving Block

Tokenview

BTC.com

Blockchain

Whitepaper "Bitcoin: A Peer-to-Peer Electronic Cash System

Bitcoin BIPs

 

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