What is Bitcoin, and what are the benefits of using Bitcoin? How do you get hold of Bitcoin?
In this introduction to Bitcoin, we tell you everything you need to know about the world’s largest and most popular cryptocurrency.
Bitcoin meaning: What is Bitcoin?
Bitcoin (BTC) is a cryptocurrency, a form of virtual cash. Whilst it wasn’t technically the first cryptocurrency around, it is certainly the most well-known, and it paved the way for the emergence of second-generation virtual currencies, like Ether and Lithium.
As a cryptocurrency, Bitcoin is created and facilitated electronically on what is known as a blockchain. Bitcoin’s blockchain is a public ledger in which all Bitcoin transactions are recorded and in which they are verified by different members of the community. This constitutes one of the main innovations of Bitcoin: it is totally decentralised, and it enables peer-to-peer transactions without any intermediaries.
This makes it radically different from traditional currencies like the Euro or US Dollar, which are controlled by central banks and governments. Bitcoin is not under the control of any central power. Rather, it is managed by developers and users themselves.
Is Bitcoin legal?
It is legal to trade and own Bitcoin in lots of western countries, including the UK, the US, and Canada. However, this doesn’t mean that it is a legal currency with the status of GBP or USD. It just means that it is not necessarily against the law for businesses or individuals to own or exchange them.
Rather, governments commonly describe Bitcoin and other cryptocurrencies as a “commodity” or “asset”, rather than a currency. In the UK, along with other countries, that does mean that you have to pay tax on your gains if you sell your Bitcoin, exchange them, or give them away.
Of course, just because it is legal, it doesn’t mean that vendors are obliged to accept them. And, just because there have been stories of criminals using Bitcoin, it doesn’t mean that it is unsafe, either.
When was Bitcoin created?
Bitcoin was created in 2009 by a developer – or a group of developers – calling themselves Satoshi Nakamoto. It is generally assumed that this title is pseudonymous and, since the publication of the founding Bitcoin whitepaper, there has been a lot of speculation about the founder’s identity. Nobody, however, has yet been able to uncover it.
And why? What is the point of Bitcoin?
In that original whitepaper, the point of Bitcoin was explicitly to bypass the mediation of financial institutions when transferring cash. After the 2008 crash of the global economy and the bailout of major banks, the (widely assumed to be pseudonymous) Satoshi Nakamoto wanted to create a “peer-to-peer” alternative to the cash system – an alternative that was based not just on trust but on clear proof of every transaction.
That was the lure of Bitcoin, combined with the fact that it can be easily and anonymously traded globally. The intention was that transactions would be fast and costs low, making the movement of money seamless.
What is a Bitcoin and how does it work?
The curious thing about Bitcoin is that, from the beginning, the limit to the number of Bitcoins has been set at 21 million. About 1800 new Bitcoins are created daily, yet, when that limit is reached, no more coins will be produced.
A single Bitcoin is basically a computer file with which you can trade – and each Bitcoin can be divided into units of a “Satoshi”, or one hundred millionth of a Bitcoin. The price of Bitcoin can fluctuate wildly, with one Bitcoin being worth as much as $20,000 and as little as $3,000 in the last three years.
How does Bitcoin work?
Given that Bitcoin is decentralised, and thus not printed by a central bank, you can’t necessarily gain access to the cryptocurrency in the same way that you would GBP or EUR. Rather, Bitcoin can only be acquired and traded digitally.
You can get bitcoins in three ways:
- You buy them. Bitcoins can be purchased from specialized exchange websites using regular currency.
- You sell things. Bitcoin can be traded electronically in exchange for goods and services
- You create new coins. Bitcoins can be mined.
What is Bitcoin mining?
Given that Bitcoin is not regulated by any central authority, its value cannot be artificially inflated or deflated through printing more money. Instead, it can only be discovered or “mined”.
Bitcoin mining is one of the most notorious parts of the cryptocurrency – and it involves massive computers that solve computational maths problems. Yet, alongside producing new coins, this process also verifies every transaction in the currency too. In this way, mining is the crucial part of Bitcoin.
It starts with the verification process. Without a central authority, it’s the users themselves that have to keep track of who owns what in the Bitcoin system. To do this, every transaction is recorded in a “block” which is added into an electronic ledger known as the blockchain.
However, to verify the data in these blocks and to add each block to the blockchain, users need to show a “proof of work”. In other words, their computers have to solve a hugely complex maths problem which verifies the block.
Because this problem is so complex, those users or “miners” are rewarded for their work – and for the computational power they have used. And so, in exchange for their record-keeping, they receive newly created or “mined” bitcoins.
👉 Thirsty for more? Read our full article about Bitcoin mining!
Why use Bitcoin?
Bitcoin is hugely complex for those developers who are maintaining the system. However, you don’t need to get bogged down in all of this to reap the benefits of the cryptocurrency itself.
Why, then, would you use Bitcoin? Here are some of the currency’s perks.
It is decentralised:
The Bitcoin currency is not controlled by a central authority such as a bank or government. This means that no authority can artificially regulate its value, or freeze or move your funds. Decisions are made collectively. However, disagreements can cause the emergence of new currencies, such as Bitcoin Cash.
Setup is free and easy:
Unlike setting up a bank account, for which you might need a proof of address and supporting documents, you can set up a Bitcoin account with any online wallet in just a few clicks. Setting up the account is free, and there are no prerequisites.
It can be used worldwide:
Bitcoins are accepted by a growing network of merchants in exchange for goods and services around the world. It is not unheard of these days to be paid in Bitcoin too. Do be aware of the laws regarding Bitcoin in your local country, however – as cryptocurrencies are not always permitted.
Transfers are fast, with low fees:
While a traditional bank account may take days to transfer funds to another bank, Bitcoin transfers can happen in a matter of minutes. Because Bitcoins are transferred from person-to-person via the internet without going through the intermediary of a bank, each transfer incurs minimal fees. Miners do need to be paid for verifying the blockchain, however – so fees still do exist.
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