Bitcoin is a cryptocurrency that is powered through a system of peer-to-peer transactions and based on blockchain technology. It is a decentralized currency, meaning that no government, bank, or person controls it.
People use Bitcoin to buy goods and pay for services. One can also invest or donate Bitcoins, exchange them for other currencies, store, send or receive them. In many ways, Bitcoin works like any other currency. Still, the critical difference is that all Bitcoin transactions are encrypted and securely stored on a great number of devices that form a vast network, making it fairly impossible to meddle with it.
We, at Changelly, treat Bitcoin with respect, as it’s the pioneer of cryptocurrency. In this article, we’d like to explain everything about Bitcoin: how the transaction works, the time of block creation, where to store, and trade BTC coins.
Technology Behind Bitcoin
Bitcoin uses blockchain technology to operate and secure transactions. Blockchain is an encrypted database with no central authority and transparent records. It consists of units, or blocks, that form an orderly chain, unbreakable and append-only. New Bitcoin transactions are recorded into the latest block. When a block is formed, it gets added up to the chain, and there is no way of altering the order of the stacked up blocks.
Due to its decentralized nature, Bitcoin is stored on every computer that participates in the network – those are called nodes. Every node stores a complete ledger of all Bitcoin transactions, transparent and accessible for all users. However, the identity of the parties involved remains concealed as Bitcoin transactions are anonymous by nature and reflect only users’ public address (a multi-digital code).
Bitcoins are generated in a process called mining. Not unlike real-life miners, determined users devote their time and computer power to the cause. They verify Bitcoin transactions, add them to the Bitcoin’s public ledger, and get Bitcoins as a reward. Computers are the ones doing all the “gold extracting” – mining involves solving complex mathematical problems that can only be performed by highly-powered machines.
As of June 2020, the reward for mining is 6.25 Bitcoins per block. It takes a lot of computing power to mine cryptocurrency, so miners often congregate and form mining pools in order to augment their computational resources.
There is a finite amount of Bitcoin to be mined – 21 million coins in total. For the sake of keeping a tight rein on inflation, there is a halving mechanism embedded into Bitcoin: approximately every four years, the reward for mining is cut in half. Halvings ensure a steady increase in demand for Bitcoin and overall price growth.
Bitcoin is the first crypto asset and the first successful implementation of a distributed cryptocurrency, partially described in 1998 by Wei Dai on the cypherpunks mailing list, a popular discussion platform for computer science enthusiasts at the time. Building upon the notion that money is an object or any record accepted as payment for goods and services and repayment of debts in a given country or socio-economic context, Bitcoin is designed around the idea of using cryptography to control the creation and transfer of money, rather than relying on central authorities.
Bitcoin does not require any government-issued ID to use it. It makes it suitable for unbanked, privacy-conscious people in areas with poor financial infrastructure.
Bitcoin transactions are propagated nearly instantly in the network and are usually confirmed in a couple of minutes. Since they run in a global network of computers, they are utterly indifferent to your physical location.
Origins of Bitcoin
In October 2008, a person or a group of people by the name of Satoshi Nakamoto published a paper that described fundamental operating principles of a blockchain-based cryptocurrency. This document, known as the Bitcoin whitepaper, described consensus algorithms, development roadmap, and various technical aspects of Bitcoin. Two months before that, the bitcoin.org domain name had been quietly registered by an unknown party. In 2009 the genesis block was mined – the first Bitcoin block. It had a 50 BTC reward.
That’s where the Bitcoin story begins. Or at least its more public phase. Admittedly, numerous earlier studies had preceded Bitcoin’s emergence, some of them dating back to the 80s In 1983, scientist David Chaum thought out a system for sending anonymous payments using the so-called “blind signature.” In the late 90s, researchers Adam Beck and Nick Sabo worked on a prototype of digital currency. Their groundwork underpinned the Bitcoin network.
Here are some important milestones of Bitcoin’s path to being the world’s most known cryptocurrency:
August 18. The domain name bitcoin.org is registered.
October 31. Satoshi Nakamoto’s Bitcoin: A Peer-to-Peer Electronic Cash System is published.
Bitcoin beta testing period.
January 12. The first BTC transaction occurs (block 170). Sender: Satoshi Nakamoto. Recipient: Hal Finney.
October 5. USD to BTC exchange rate is announced: $ 1 = 1.309.03 BTC.
December 30. The complexity of mining Bitcoin increases.
February 6. The first official Bitcoin market opens.
May 22. The first online purchase is made. A certain Laszlo buys two pizzas for 10 000 BTC (around $25 at the time).
July 11. Bitcoin v0.3 is released and then mentioned on Slashdot. The amount of Bitcoin users significantly increases.
July 12. Bitcoin value goes from $ 0.008 / BTC to $ 0.08 / BTC.
November 6. Bitcoin capitalization reaches $ 1 million.
February 9. Bitcoin catches up in value with the dollar.
June 8. MtGox exchange rate is at 1 BTC = $ 31.91 USD.
November 25. The first conference on cryptocurrency takes place in Prague.
Other cryptocurrencies based on the open-source Bitcoin code begin to appear.
The Rise and Rise of Bitcoin, the first documentary on cryptocurrency, premieres.
Several songs about Bitcoin, such as Ode to Satoshi, are released.
Elliptic Vault, the first storage service for Bitcoin private keys, is opened.
January. Network speed exceeds one PH/sec.
March. The Japanese Cabinet of Ministers recognizes virtual currencies as payment instruments on par with fiat money. Bidorbuy, the largest South African online cryptocurrency market, opens.
April. The Steam Service begins accepting Bitcoin as payment for video games and other online media.
September. The number of Bitcoin ATMs doubles over 18 months and reaches 771 worldwide.
November. The Swiss railway operator SBB (CFF) wires its automatic ticket machines to sell Bitcoin.
January. Bitcoin passes the $ 1.000 mark.
April. Japan recognizes Bitcoin as a legal payment method.
August 1. Bitcoin splits into two digital derivative currencies: classic Bitcoin (BTC) and Bitcoin Cash (BCH).
September 1. The Bitcoin exchange rate exceeds $ 5.000.
November 29. The Bitcoin exchange rate exceeds $ 10.000.
December 17. The Bitcoin exchange rate reaches record-breaking $ 19.783.
January 22. South Korea prohibits trading under a concealed identity, hence Bitcoin circulation is banned.
February 1. China outlaws Bitcoin.
Bitcoin price steadily declines over the year, dropping by 72% by January 1, 2019.
Cryptocurrency market capitalization grows by 32% and reaches $ 165 billion.
There are 5.457 Bitcoin ATMs worldwide.
Bitcoin price increases during the first half of the year and peaks in June at $ 12.069, then begins its smooth decline.
January. Qatari authorities have banned cryptocurrency transactions. The price of Bitcoin began to grow up to $8,000.
February. Bitcoin has updated the year’s maximum with a price of $8,000. So did the hashrate.
A French court has accepted Bitcoin as fiat money.
In March, the price of Bitcoin went down to $6,000.
In April, the Bitcoin rate went up to $9,000.
11th May, Bitcoin halving occurred. It reduced the halving reward from 12.5 BTC to 6.25 BTC.
In June, the price of BTC cryptocurrency reached $9,000.
Where to Store Bitcoin?
Bitcoin users store their coins in digital wallets. Technically, a cryptocurrency wallet is a software program that enables you to store, receive, and send coins using a unique multi-digital address. There are hot and cold Bitcoin wallets. Hot storages are connected to the web and tend to be less secure than other types of wallets. They are quite handy, easily accessible, often free, and come as apps or web extensions. Some good examples of hot wallets are Coinomi, Electrum, and BRD, among others.
Cold storage, on the contrary, exists offline and is considered much more secure. An example can be a hardware wallet such as Trezor or Ledger Nano. These wallets usually cost up to $100 and are not as convenient for regular transactions as hot storage. Usually, they look like a USB drive or a small device that you can plug into your computer to access your Bitcoins.
Paper wallets are a type of cold storage for Bitcoin that involves printing a private key on an actual piece of paper. Users fancied this method between 2011-2016, but lately, it has been labeled highly unsafe and is no longer in widespread use.
How to Buy Bitcoin?
Since Bitcoin is the most well-known cryptocurrency worldwide, it is quite easy to buy it. You can use an online exchange platform, Bitcoin ATMs, a peer-to-peer platform, or through your Bitcoin wallet (if it has such a function).
If you want to buy Bitcoin for fiat money, including cash, banking card, or any other means of payment of your choice, you can use the instant exchanges. They differ in velocity, the simplicity of purchase procedure, and the level of anonymity.
The Changelly platform offers you a way to buy Bitcoins with your banking card swiftly, safely, and with minimal authentication procedure. The fiat payment process is powered by our partners Simplex and Indacoin. It takes just a few simple steps. Check our cross-rates to find the best offer.
Buying Bitcoin Pros & Cons
Here are some arguments for and against buying Bitcoin.
Security. Transferring Bitcoins is the most secure way to purchase goods and pay for services due to its encryption algorithms and decentralized nature.
Privacy. All Bitcoin transactions are anonymous, as no personal information is required to carry them out. Your identity is protected.
Future potential. Bitcoin was the first cryptocurrency to appear on the market, and it keeps drawing a great deal of public attention. Experts predict that Bitcoin will continue to cement its position as the leading world cryptocurrency.
Hacks. Though Bitcoin is based on virtually unhackable blockchain technology, there are ways to compromise transactions. Hot wallets are the most vulnerable spots: several high-profile cyber attacks were carried out in the past few years, leading to great money loss.
No SIPC protection. Cryptocurrencies are not subject to the Securities Investor Protection Corporation insurance.
Volatility. Bitcoin’s exchange rate is highly unstable and may be influenced by a tremendous variety of factors.
Bitcoin is far from being the only currency in the crypto space: there are many others. So, why Bitcoin? What is so special about it?
Bitcoin has many advantages compared to other cryptocurrencies, and we will take a close look at some of them.
BTC is the oldest and most reliable cryptocurrency. It is the mother of all coins in the crypto exchange market, which means that most other cryptocurrencies are mainly traded to and from Bitcoin. It has the most real usage of any others, the largest market capitalization, and the lowest volatility. Bitcoin-based securities are most likely to be approved by regulators and become part of institutional investments and offerings. Bitcoin has the advantage of being better known, more widely used, and has much better liquidity.
Bitcoin users and companies implemented various scaling upgrades that have added significant capacity to it. Three main scaling upgrades affect the network right now:
Segregated Witness (SegWit) can theoretically provide over 100 % of extra capacity for the network. Currently, approximately 40 % of the system is making SegWit-based transactions. It provides a significant capacity boost.
Lightning network, which potentially could have a massive effect on capacity, is already being used for real Bitcoin payments. At this moment, the impact of Lightning on the congestion and fees of the network is minimal, but it is expected to have a more substantial effect in the future. One real-life example of how Lightning is being used is Satoshi’s Place, where people paint pixels using Lightning. At its peak, there were over 1.000 transactions made per day in this service with low fees, and they did not cause almost any congestion on the Bitcoin blockchain. In summary, it has been proven that Bitcoin is highly reliable and can scale, which is a very positive fundamental value.
Transaction batching, which can provide an even more considerable boost than SegWit, has recently been implemented by more and more Bitcoin services. Meaning, instead of sending each payment in a separate transaction, exchanges and other services will wait until they have a larger amount of payments and batch them into a single transaction. It saves a tremendous amount of space, and more efficiency is expected in the future as there are still certain large exchanges that do not execute batching.
Finally, it is worth mentioning that Bitcoin is getting improvements in the privacy department. Future protocol upgrades such as Schnorr signatures will improve privacy, and payments made using the Lightning network are generally considered significantly more private than regular Bitcoin transactions.
Bitcoin Review – Summary
Bitcoin is a cryptocurrency created in 2009 by an anonymous user named Satoshi Nakamoto. It operates on blockchain technology and has no central authority. Basic Bitcoin principles are transparency, security, and anonymity. The process of generating Bitcoins is called mining. Miners get rewarded for transaction validation; as of July 2020, the reward equals 6.25 Bitcoins per block. It is cut in half approximately every four years to avoid currency depreciation. There is a finite number of Bitcoins to be mined – 21 000 000 coins.
In 2017 the Bitcoin exchange rate reached record-breaking $ 19.783. It’s value smoothly declined over the following years, relatively stabilizing in 2019. Most cryptocurrency experts are optimistic about the future of Bitcoin and predict an inevitable growth in the years to come. Some market analysts, such as Chamath Palihapitiya and Wences Casares, predict that Bitcoin will hit the price of $ 1 million in a decade or so – years 2037 and 2027 accordingly. Meanwhile, Bitcoin remains one of the safest cryptocurrencies and one of the most profitable ways to invest.