What is Bitcoin — an Ultimate Guide

What is Bitcoin — an Ultimate Guide

25.08.2020
What is Bitcoin

The frequency of Bitcoin mentions in print and electronic sources is growing exponentially. Against this background, more and more people are directly or indirectly familiar with this term. Bitcoin has long ceased to be the sphere of interest of “geeks”, and is quite firmly established in the lives of ordinary people. And sooner or later you will have to face Bitcoin directly. We invite you to prepare for this meeting, and learn bitcoin more closely through this guide for beginners.

What is Bitcoin and why do we need it?

Bitcoin (BTC) — is an electronic payment system in which virtual “money” (bitcoins) circulate.

Do you have VISA or Mastercard plastic cards? Both Visa and Mastercard are also electronic payment systems. However, they use the usual currency – dollars, euros, rubles and all transactions are banking processing. Such currencies are called fiat currencies. Bitcoin uses cryptocurrency, a purely digital currency that is not tied to any global bank or economy of any country. It has its own value (rate), formed against the background of demand.

Key features of Bitcoin:

  • The whole system is decentralized. This means that Bitcoin is not regulated by any bank, agency or state entity. All members of the network are absolutely equal regardless of nationality or other characteristics. For example, Visa and Mastercard have Gold, Platinum, Vip cards, systems like Webmoney or iWI have user levels. There are limits on the size of transactions. And in Bitcoin – all are equal and there are no limits.
  • Pseudo-ananymity. When transferred to BTC, participants do not disclose their identity. Transactions use an address (hash with 27-34 characters) without disclosing other data of the recipient and sender. Think of translations between maps or other electronic systems. Transactions often reveal the person’s name or the name of the organization.
  • All transactions in Bitcoin are irreversible. They cannot be undone, stopped or blocked. In theory, a complete rollback of the system (blockchain) is possible. In practice, this is extremely difficult to implement.
  • It is impossible to hack Bitcoin wallet. All the data is stored in a special file that only you have access to. It is unrealistic to “intercept” data in a transaction, as is the case in the banking system. Bitcoin uses cryptographic records – encrypted data that guarantees privacy and security.
  • The direct nature of operations. In Bitcoin, transfers are made directly between participants – the P2P (peer to peer) principle is used. The transaction takes place without the participation of a third party: a bank, a processing center, a server. Therefore, the bitcoin operation cannot be traced by anyone but its participants.

The history of Bitcoin

The history of cryptocurrency creation doesn’t have a clear chronology. For decades, cryptography specialists have been working to create a unique decentralized system based on mathematical calculations. Using the experience of their predecessors and their own developments, Satoshi Nakamoto and Hal Finney in 2008 created the world’s first cryptocurrency – Bitcoin. Nakamoto gained the main frame – he published a file with the protocol of bitcoin and briefly described the features of the new payment system. The smallest fractional part of the coin is named after him – 0,000,000 01 BTC.

Why was bitcoin created? Part of the reasons for developments in cryptocurrencies reveal their features: anonymity, decentralization, security, publicity. Ideally, the Bitcoin ecosystem should guarantee quick transactions without the participation of a third party (bank, cash) with a high level of security.

How Bitcoin Works

How Bitcoin Works?

The entire Bitcoin ecosystem is based on the blockchain. If it is difficult to say, the blockchain is a continuous chain of blocks of all transactions. The block is closed after a digital signature has been found. A new block can then be formed. Now let’s decipher it in simple words. Imagine that every translation (transaction) in Bitcoin is recorded on a separate page. A sequence of pages forms a chapter of the book – a block.

To write a new page (to conduct a new transaction), we need to “turn over” all the past pages and chapters. That is, each new transaction is carried out along a chain – with the processing of old blocks (turning pages and chapters). The new chapter of the book can only begin after the old chapter is over. And all chapters form a book, and blocks – blockchain. Pages and chapters cannot be snatched or altered. And access to the blockchain is open to all participants of the system.

That is, blockchain is a large open database, which stores encrypted information about all the transactions committed.

Blockchain and its potential are one of the reasons for the constant growth of the bitcoin exchange rate relative to fiat currencies and a key feature of BTC. Here are the other differences between “virtual” bitcoin and ordinary money:

  • Bitcoin is an electronic currency that has no material appearance. There are physical “coins” with a zR code or coin-shaped drives where BTC is stored. However, they can not be called money in the truest sense of the word. We can say that Bitcoin is a set of numbers generated by the algorithm. Not a paper banknote or a metal coin.
  • The rate of fiat currency depends directly on the economic and political development of the country or the confederation to which it is tied. In fact, the money of more than 100 countries of the world is tightly tied to the dollar. The value of bitcoin is determined by demand and does not directly depend on economic processes (although it is indirectly linked).
  • Theoretically, the emission ceiling of ordinary money does not. They can be printed as much as you like. THE BTC has its own ceiling in the system – 21,000,000 coins (20,999,999, 9769). This figure is projected to be reached in the middle of the 22nd century.
  • Direct translations. Even if we are talking about an electronic version of ordinary money (card, wallet), the transaction is carried out with the participation of a third party. In Bitcoin, the transaction is carried out directly (P2P).

Objectively assessing BTC is not so easy. Some features of bitcoin can be attributed to its advantages, and to its shortcomings. Take this characteristic as the irreversibility of operations. On the one hand, you will get cryptocurrency in any case – no system failure will not block the transaction. On the other hand, bitcoin is exploited by fraudsters or representatives of the “black” market.

The main advantages include:

  • Anonymity – the other person in the transaction will only know your Bitcoin address or zR code. Other details were not disclosed.
  • The decentralized nature of the system – all members of the network are equal and independent.
  • Security – hacking wallets, data swapping, intercepting transfers is impossible.
  • Globality – Bitcoin allows you to quickly conduct transactions between people from different countries, time zones.
  • Mining – there is an independent way of extracting BTC, considered by many as earnings.

Bitcoin’s advantages often include the speed of transactions. It’s not that simple. The transaction can last 10-20 minutes and sometimes an hour. To complete it, you need 6 confirmations of other participants. They happen automatically. When the network is loaded, translations slow down. Another drawback is the regulatory activity of the authorities of different countries in relation to cryptocurrencies. Formally, BTC creates the same conditions for all potential members of the network. However, in some countries (Vietnam, India, Ecuador, partly China) bans have been issued.

Other downsides:

  • Unstable rate – because of this, the potential of BTC as a payment option is reduced;
  • Fraud – Bitcoin itself is very reliable. However, inexperienced people can fall for divorce schemes: fake exchanges, fraudulent investment projects, viruses.

How to use Bitcoin

Where to get Bitcoin?

Bitcoin, like any other cryptocurrency, is extracted through the use of hardware power of computers, or rather processors and graphics cards. This process is called mining. If in 2009-2010. for the extraction of bitcoins, it was possible to use a regular computer, now it requires powerful installations – farms. These farms combine dozens, sometimes hundreds, of graphics cards or special ASIC processors. It costs thousands of dollars and requires additional care and technical skills. For beginners, this method of getting BTC is not suitable. First, it takes a lot of costs. Secondly, there are too many nuances. And in some countries mining is not allowed at all. There are other ways to get bitcoin:

  • The network has services that exchange fiat currency for cryptocurrency.
  • Cryptocurrency exchanges. Resources on which cryptocurrency is traded.
  • Trading floors. And for Bitcoin you can sell goods. Where is? At least in Amazon or Ebay.
  • Self-service terminals. You can get BTC through the usual terminals. There are also specialized Bitcoin ATMs – they have a better rate, and the technology is more modern.

How to use Bitcoin?

Well, we know what bitcoin is and how to get it. Now it remains to get acquainted with the storage tools of this cryptocurrency. It’s purses. The most reliable are hardware wallets, as they keep your private keys safe, i.e. offline and without access to the Internet.

In order to start using bitcoin, it is enough to set up and top up the wallet in accordance with the instructions.

What you can buy for Bitcoin?

Bitcoin is a payment system. Accordingly, it is used to make purchases. In the early years of the cryptocurrency, all transactions were conducted informally. Buyers and sellers communicated in chat rooms, social networks, forums. It was at the forum that the most famous purchase of goods for bitcoin happened. It is considered the first purchase of anything for cryptocurrency.

A user with the nickname laszlo on May 18, 2010 created a theme on the BitcoinTalk forum with the name “Pizza for bitcoins?” (Pizza for bitcoins?). In it, he asked who would have ordered him two pizzas for 10,000 BTC. At the time it was the equivalent of $30. Some English user agreed to the offer and ordered pizza laszlo. And so was the first and most famous purchase using BTC.

Not much time has passed since then, and BTC as a payment option has developed to a global scale. In the summer of 2017, it was announced that 260,000 retail stores in Japan would start accepting BTC. This is an important step towards the globalization of payments in BTC.

Every month there is news that in some part of the world opens a coffee shop, bar or restaurant with support payments in cryptocurrencies. In some countries, bitcoin is used by taxi drivers. The Coinmap card allows you to find stores and services that accept bitcoin near you. To understand the payment capabilities of bitcoin, we have compiled a table of popular companies supporting cryptocurrency.

BTC is suitable for buying food, car, apartment, booking a plane ticket or booking hotels. Moreover, individual universities accept tuition fees in bitcoins. In the U.S., Supporters of the Republican Party can donate money for its development in the BTC. Cryptocurrency even reached space. It is used by Virgin Galactic, a space tourism company.

In the future, payments in bitcoins can replace payments with cards. Cryptocurrency transactions are realistically carried out using a mobile device alone. One simple scan of the zR code and the operation is complete.

Conclusion

It is impossible to know everything about bitcoin. In this guide for dummies, we spoke in simple language about the key features of the main cryptocurrency. Now you know how to earn bitcoins, who needs them and how to use them. If you have read this material to the end, then you are guaranteed to have additional questions. The answer to some of them can be obtained on our website and on thematic resources:

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