29 December 2020
Bitcoin is a type of cryptocurrency and global money system that is purely digital. It doesn’t have any banknotes to print, coins to mint, or a centralized authority to control it. Bitcoin can be used to buy a couch off of eBay, or to book a hotel for your next vacation. Many people also simply trade Bitcoin, without using it to purchase anything.
Launched in 2009 by a person or group of people known as Satoshi Nakamoto, Bitcoin was the first cryptocurrency and remains the most popular. Bitcoin is also the largest cryptocurrency by market capitalization valued at $352 billion as of November 2020.
How Does Bitcoin Work?
Each Bitcoin is essentially a computer file stored inside a “digital wallet”. You can get yourself acquainted with the different types of wallets [link] that store Bitcoin and other cryptocurrencies. People can send Bitcoin (or parts of Bitcoin) to each other from wallet to wallet. Each transaction is recorded on the public ledger known as the blockchain.
What are Bitcoin’s Main Properties?
It Uses Encryption and Guarantees Anonymity
The sophisticated encryption software used in Bitcoin is referred to as “military grade” and is thought to be impenetrable.
Transactions are Instant and Permanent
Cryptocurrency transactions are recorded on the blockchain, and since the blockchain is immutable (unchangeable), once a transaction is made it becomes permanent and irreversible.
Additionally, by cutting out the middleman (like a bank or any other institution), you also cut down the time it takes for your transaction to occur. Sending and receiving a Bitcoin does not require an endless number of working days, rather it is done within a matter of minutes or even seconds on elevated networks. This also works to eliminate all the processing fees that such institutions often impose on users.
It Exists in a Decentralized, Peer-To-Peer Network
Unlike conventional cash, Bitcoin is not governed by a single entity such as a person, bank, government, or regulatory authority. This results in a system that is free of monetary policies, immune to bank and system collapses, and that is free of the constraints of exchange rates.
What are the Main Advantages of Bitcoin?
Given the decentralized and distributed nature of Bitcoin, there are several key advantages that it possesses over traditional government-issued currencies.
Bitcoin is new-age money where you can send Bitcoins worth billions of dollars across borders straight from your hard disk. Unlike gold or cash, you do not have to worry about physically moving the amount securely.
2. Censorship Resistance
As we know, the Bitcoin network is highly decentralized which makes Bitcoin immune to local-specific regulations. Unlike credit cards and bank accounts, there are no limitations on who can own and use Bitcoin, so long as they have an internet connection. Centralized systems with governing bodies can decide to implement new policies and restrictions without consulting or providing notice to impacted citizens or businesses. This cannot happen with Bitcoin since there is no single regulatory authority.
The Bitcoin network is a secure network that has significant advantages over traditional banks and credit card companies. The decentralized and distributed nature offers significant protection against hackers who are unable to target a single computer server (or small number of servers) to access customer information. Any effort would be futile since they would never be able to identify who or where the millions of independent computers are that each have a copy of the latest Bitcoin “block of data”.
Furthermore, Bitcoin offers its owners much greater identity theft protection than banking and credit cards since the customer’s real name and address are never used. Instead, each Bitcoin owner is identified by a series of 26-35 letters and numbers that represent their address on the blockchain. This address cannot be accessed unless a special digital password – known as a “private key” – is used to initiate and validate the transaction. An example of how secure this is would be this: it would take a hacker over 10 billion years to break into your Bitcoin account. Financial institutions are hacked many times every single day.
How Can You Get Bitcoin?
1. Bitcoin ATMs and Exchanges
A simple way to purchase Bitcoin would be to head to a Bitcoin ATM (they are scattered in cities across the world) and to use your debit card or hard cash (in any currency) to purchase some Bitcoin.
2. Sell products/services for crypto
Another way includes selling products and services and accepting payment in Bitcoin. You would just need to set up your digital wallet for people to forward the Bitcoin to you.
3. Or you can mine Bitcoin.
Mining for Bitcoin (think of it similar to mining for gold) means setting up your computer(s) to solve complex equations and get rewarded with Bitcoin in return. Mining is not as simple as it sounds since it requires heavy-duty high functioning computers that could end up running high electricity bills.
Why is Bitcoin Valuable?
Simply put, Bitcoin is valuable because people are willing to trade good and services for it. Much like the Aztecs of Mezoamerica decided that cocoa beans were valuable enough to trade (with 100 beans buying you a hen!), our current events determine that Bitcoin is indeed valuable.
Furthermore, Bitcoin differentiates itself from paper and coin currency by having a finite supply. The founder of Bitcoin created a governing system that would ensure a limit of 21 million Bitcoin. When governments and entities print and issue an overflow of cash currency, that currency becomes devalued. Due to its finite nature, no one can generate an endless supply of Bitcoin, making the risk of its devaluation significantly lower.
How is Bitcoin Regulated?
At this time, there are still legal issues surrounding Bitcoin in some jurisdictions. For example, countries like China have banned trading of Bitcoin and crypto.
In the United States, anybody can trade, own, or mine virtual currencies; but there are different ways that US government agencies and financial regulatory bodies classify Bitcoin and cryptocurrency. As it relates to buying and selling Bitcoin, the Internal Revenue Service (IRS) classifies Bitcoin as property, which differs from stocks and bonds which are taxed based on capital gains or income on your annual tax return. Taxes can be complicated, but we break it down in easy-to-understand terms in our Getting Started in Bitcoin and Cryptocurrency video course for those who want more information.