BITCOIN 101: Bitcoin Made Easy – Your Basic Bitcoin Questions Answered:
The interest in Bitcoin have skyrocketed in the late months of 2017. In January 2017, Bitcoin price was $957 US dollars, in the middle of June 2017, it went up to US $3000, then by the middle of December 2017, it was US $17,000. Many people are interested in Bitcoin but are still confused as to what it really is. The great investor Warren Buffet has said, “Never invest in a business you cannot understand.” So now the key before investing or not investing in Bitcoin is to understand what it is. So, here’s Bitcoin 101 – Scroll down to read the whole post or skip to the topic you’d like to read by clicking the links below.
Bitcoin Basics: Topics Below (You may scroll down to read all or click on your chosen Topic)
- What is Bitcoin?
- The Bitcoin Network
- What is a peer-to-peer network?
- What is a Cryptocurrency Wallet?
- Your Private and Public keys
- What is a blockchain?
- Bitcoin 101: How to Own Bitcoin
- Get a Bitcoin Wallet
- How to Buy Bitcoins
- How Much Bitcoin Can You Buy?
- Why Are People Buying Bitcoins?
- Who Believes and Don’t Believe in Bitcoin?
Bitcoin 101: What is Bitcoin?
Bitcoin is an innovative payment network and a new kind of money – bitcoin.org
Bitcoin is a digital currency and cryptocurrency that was created in 2009 by Satoshi Nakamoto (an alias – more on this later). Bitcoin is also a worldwide payment system.
But what does cryptocurrency mean? A cryptocurrency is a digital asset which is designed to be used as a medium of exchange. The crypto part in the word is because the Bitcoin system uses cryptography to secure its transactions, and also uses cryptography to control the creation of additional Bitcoin units, and to verify the transfer of Bitcoins.
Okay, but then what is cryptography? Cryptography is a tool for protecting information in computer systems. In cryptography, techniques are used for secure communication so that third parties cannot read and meddle with the data being transferred. Cryptography in Bitcoin ensures that the transactions are authenticated, confidential, and can be trusted.
Bitcoin is also a decentralized digital currency – it is actually the first decentralized digital currency. Decentralized meaning – the Bitcoin system works without a central bank nor a single administrator.
Bitcoin 101: The Bitcoin Network
Because there is no Bitcoin central bank nor Bitcoin administrator, there is a Bitcoin Network.
The bitcoin network is a peer-to-peer payment network that operates on a secure system (uses cryptographic protocols). In the bitcoin network, users send and receive bitcoins, by broadcasting digitally signed messages to the network using bitcoin cryptocurrency wallet software. Transactions are recorded into a distributed, replicated public database known as the blockchain, with consensus achieved by a proof-of-work system called mining.
Wait what? Let’s simplify and define the terms:
What is a peer-to-peer network? In a Peer-to-peer (P2P) computer network, there is shared access to information and resources without the need for a central server. Peers make a portion of their resources, such as processing power, disk storage or network bandwidth, directly available to other network participants, without the need for central coordination by servers. Peers are both suppliers and consumers of resources.
What is a Cryptocurrency Wallet? A cryptocurrency wallet is a software program that you need in order to use, store, monitor, send and receive your Bitcoins (or other cryptocurrency). This cryptocurrency wallet stores private and public keys and interacts with various blockchains.
Your Private and Public keys in your bitcoin wallet are long random numbers that are used in cryptography to secure your Bitcoin transactions. You use your private key to digitally sign your transaction, and your public key is what everyone uses to verify your digital signature. (Private keys are supposed to be secret and you should not share it with anyone).
There are different cryptocurrency wallets designed for different types of cryptocurrency. Make sure you are downloading legitimate and official cryptocurrency wallet software.
What is a blockchain? A bitcoin blockhain is a ledger – a continuously growing list of records, called block. It records and validates bitcoin transactions. Everyone in the bitcoin network gets updated to keep track of all the bitcoin transactions. Block chains are also linked and secured using cryptography.
Bitcoin 101: How to Own Bitcoin
You could own a bitcoin by either (1) mining bitcoins (2) accepting bitcoins for your goods and services (3) trading bitcoins with people (4) buying from legitimate Bitcoin exchanges.
But, the first step is to get a Bitcoin Wallet. Your Bitcoin wallet is where you would store your bitcoins, and it is also how you can send/ sell and buy/receive bitcoins. You can either have a user-controlled wallet, or a hosted “user-controlled wallet”.
A user controlled wallet is where you manage your own Bitcoin wallet. (Like having your money in your person). You download a program either on your computer or phone in order to make Bitcoin transactions. In here, you keep your bitcoins where you installed your wallet (on your computer hard drive or phone).
A hosted wallet/ wallet service is managed by a third party. (Like having your money in a bank). The third party will handle your private keys and, you can do your bitcoin transactions using their website, software or phone app.
Bitcoin 101: How to Buy Bitcoins
With a user-controlled wallet, you can buy some bitcoins through Bitcoin exchanges like Coinbase, Gemini, and Circle. You could also buy some at a Bitcoin ATM or at a local exchange such as LocalBitcoins where you can arrange to meet up with someone who has bitcoins and then trade your money for their Bitcoin.
With Hosted wallets, you are able to connect to the traditional banking system, so that you can buy bitcoins through ACH, wire transfer or even check.
ACH (Automated Clearing House) is an electronic network for financial transactions in the United States. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit and vendor payments.
Bitcoin 101: How Much Bitcoin Can You Buy?
Bitcoin 101: Why Are People Buying Bitcoins?
When you invest in the stock market, you are lucky to have 12% return on investment in a year. For example, if you invested US$100 in a good performing stock, the following year, your money will be $112. People don’t usually like that. We are in the age where people want to see instant results. The idea of getting rich quick is so attractive. So with Bitcoins, having a return on investment of a whopping 1700% in less than a year – you get everyone interested.
Another reason for the interest in Bitcoins is the privacy and anonymity. Bitcoins are tied to bitcoin addresses – not people. This is why bitcoin is used in the dark web where people want to remain anonymous, it is also used for illegal activities such as ransomware payments.
Bitcoin 101: Who Believes and Don’t Believe in Bitcoin?
There are great arguments for and against Bitcoins. Here are some examples:
Bitcoin 101: Arguments Against Bitcoin
The European Central Bank has repeatedly warned about the dangers of investing in digital currencies. Vice president Vitor Constancio said in September that bitcoin isn’t a currency, but a “tulip” – alluding to the 17th-century bubble in the Netherlands – The Independent
Bitcoin’s gains looked “remarkably like a bubble.” – Grant Spencer, Acting Governor for the Reserved Bank of New Zealand ; Bitcoin is a “speculative mania” – Philip Lowe, Governor of the Reserve Bank of Australia. – Bloomberg
in 2016, China accounted for 90 percent of all bitcoin trade. In 2017, China banned initial coin offerings (ICOs) and regulators started to crackdown on bitcoin exchanges and fundraising through launches of token-based digital currencies. – CNBC
Nearly $64m in bitcoin has been stolen by hackers who broke into Slovenian-based bitcoin mining marketplace NiceHash. – the Guardian
Future Centralization: Vulnerability to Attacks – The network (bitcoin) is currently decentralized because it’s run by numerous miners (the people and businesses that run the computers and maintain the system behind bitcoin). These miners are currently paid by block rewards and transaction fees. However, block rewards account for practically all of their revenue for the time being. Over time, these block rewards will decrease in value, meaning that if transaction fees don’t increase, the miners could stop profiting, and bow out. Doing so could centralize bitcoin, since there would be fewer miners, and make it more vulnerable to attacks – The Motley Fool
Bitcoin 101: Arguments For Bitcoin
In 2017, there are almost 5000 stores in Japan that already accept Bitcoins. Nikkei (a Japanese financial newspaper) says that number could increase fivefold by the end of the year. – CNBC
Bitcoin has a first-mover advantage among the other digital currencies; Assuming Bitcoin is adopted for number of practical applications, the value will rise significantly; More and more people and businesses seem to be using Bitcoin; A higher price could increase transaction volume, which would then further boost the price… – Forbes
Bitcoin is being compared to Gold – BitcoinvsGold Infographic