03 December 2021
Bitcoin is the first decentralized digital currency, called cryptocurrency. Decentralized means that no particular person or company controls it. Millions of computers around the planet maintain Bitcoin functionality. Anyone can join this peer-to-peer network by installing special software on his PC. Bitcoins do not exist in the physical world. Instead, there are only records of transactions between different balancing addresses. Every transaction that has ever taken place is stored in a ledger called a blockchain. All you need to send coins is your private key and the bitcoin address of the receiver. Most countries around the world have recognized Bitcoin as a legal means of payment. Nonetheless, before you start investing in cryptocurrency, you should familiarize yourself with the laws of the country where you live. There may be several exceptions.
Bitcoin transactions do not disclose any personal data of involved parties. Nobody knows exactly who owns this or that bitcoin address.
Bitcoin is extremely hard to steal. Entries in its database can’t be deleted or changed, so there is not much space for fraud. It is decentralized and can’t be confiscated by any government as no party controls the network. Access to your coins is granted by a pair of public and private keys. You can think of them as a login and a password.
The number of coins is limited. By design, it is impossible to create more than 21 million bitcoins. Once this max number is reached, it will be impossible to emit more bitcoins, so the very root of inflation is excluded. We can only imagine how high the Bitcoin price will go. This makes Bitcoin a perfect store of value, like gold, but much more convenient.
The fun fact is we don’t know who created Bitcoin. The anonymous developer officially called himself Satoshi Nakamoto. Though the pseudonym is a Japanese name, there are reasons to believe that Satoshi originates from an English-speaking country. This could be a team of developers also. In 2009 the author of the system created the first bitcoin wallet and generated the first block.
The idea of a cryptocurrency appeared due to the development of a non-cash transfer system. The basic anti-fraud algorithms were suggested long before the first Bitcoin coin appeared:
1983 Blind Signature Algorithm and Electronic Cash Protocol created (David Chaun worked on them).
1997 Hashcash (anti-spam protection developed by Adam Black) appeared.
DigiCash is a company that created digital money before Bitocin or even blockchain technology existed. The DigiCash payment system was developed by David Chaum in the late 1980s and was the first major attempt to create a viable electronic payment system. It allowed users to securely pay for goods and services on the Internet and sought to make electronic payments anonymous. DigiCash went bankrupt even before it was fully implemented. Most likely because eCommerce was not really a thing back then, so there was not enough demand for online payments.
Created in 1998 by computer scientist Wei Dai, B-money was an anonymous distributed electronic money system. It has introduced many features of modern cryptocurrencies. The main one is the Proof-of-Work algorithm used for broadcasting and signing transactions in a decentralized ledger. B-money was never officially launched.
In 1998 Nick Szabo attempted to bring the decentralized virtual currency Bit Gold to the world. The project itself never came to fruition but had yielded groundwork for Bitcoin protocol. Because the Bit Gold and Bitcoin protocols are so similar, many people believe that Sabo is the creator of Bitcoin.
New bitcoins are generated by a decentralized method – mining. It takes people who are called bitcoin miners. Their computers all over the world solve mathematical tasks to find a single password from millions of combinations. Such passwords are called hashes. A hash matches each new block in the blockchain. Many "miners" are simultaneously competing for a reward, trying to guess the hash. The miner who solves the password first attaches a new block to the chain and receives some newly generated bitcoins as a prize. It takes an average of 10 minutes to generate each block. As soon as the hash is guessed, the block with all transactions is closed forever, data inside can’t be deleted or edited. The miners move on to the next block and so on.
Almost 90% of all bitcoins have been mined so far. Most of them are in circulation, and some have already been lost forever. Every four years, the amount of the reward per new block is halved. Thus, the scarcity of bitcoins will grow further. Someday miners will receive the minimum possible reward equal to 1 satoshi for each block. If you translate these numbers into years, you get 132 years. The last satoshi can only be mined in 2140.
You can buy almost anything with bitcoins. Some sellers officially accept Bitcoin as a means of payment. The main examples of what can be purchased with bitcoins in the world right now: real estate, trips, fast food, hotel room, transport, gift certificates, online subscriptions. In case you wondering how do you buy some coins, here is how to do it:
How to buy Bitcoin with a credit/debit card:
Long-term investors expect Bitcoin to appreciate further in the future. Consequently, they buy and hold it. Those investors who work in the short term are actively trading bitcoins in pairs with other cryptocurrencies. There is also a hybrid strategy that some investors use. They hold bitcoins as an investment for a long time and trade in a separate portfolio of trading pairs in a short to medium time. Lending bitcoins are becoming another popular form of passive income. What does it mean? You give your coins to another person, and in return, some percentage will be credited to your account.
Because there’s no bank involved, you’re responsible for keeping your coins secure. Some prefer to store them on exchanges, while others use a variety of wallets. If you use a wallet, you must write down your seed phrase so that you can restore it. By design, it is impossible to reverse a Bitcoin transaction. If you happen to transfer coins to the wrong address, there is no way to return your funds. So be careful.
You can store Bitcoin in digital wallets of two types:
Hot wallet – in case you need an Internet connection to access it.
Cold wallet – if the wallet is stored on the disk drive.
The difference between these storage methods is safety and convenience. Hackers will not be able to access the cold wallet as it can only be physically stolen. This is the best way to store your bitcoins safely. The downside is the speed of payments: it will take time to complete the transaction. Hot wallets allow you to quickly pay, but in terms of security, they are much inferior to cold ones. Therefore, you should not store all your cryptocurrency savings in only one wallet. It is much better to divide the wallet into hot and cold.
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