You’ve probably heard a lot about bitcoin lately. While this digital currency has been around since 2009, it's been featured a lot in the media recently due to its market price exploding last year, reaching $20,000 USD in December.
But bitcoin is so much more than a hyped up internet craze - it is a transformative tool that is already shaping a new era of global finance.
Bity believes that bitcoin - and the technology it's built on - will make a huge and positive impact on our daily lives.
This guide will tell you about its history and philosophy, as well as everything you need to know about buying, storing and transacting in bitcoin.
What is cryptocurrency?
Cryptocurrencies are electronic ‘cash’ that use cryptography (advanced mathematical formulas and algorithms) to encrypt and verify transactions.
Each electronic 'coin' has a clear chain of ownership which is represented by permanent, time-stamped digital signatures.
Cryptocurrencies are not issued by central banks or governments, but are democratically produced and maintained by a network of people around the world, making them truly peer-to-peer.
Trust in traditional third parties (financial institutions) is transferred to these networks and the consensus mechanism which sustains them (more on this below).
Bitcoin is one such cryptocurrency.
What is bitcoin (BTC) and why is it important?
To really understand bitcoin as a disruptive and groundbreaking new technological development, it’s important to know why it was first created.
Bitcoin was born as a reaction to the 2008 global financial crisis. The unidentified creator/s of bitcoin, only known as Satoshi Nakamoto, wanted to create an online currency that was immune to financial corruption and greed, empowering global citizens with self-sovereign economic freedom. You can read the full bitcoin white paper here.
Bitcoin is a protocol which allows people to build new interactions based on value transfer.
Bitcoin enables people like you and me to transact with each other without the need for banks or financial institutions. It is truly an online payment system.
Many people say that bitcoin is the evolution of finance, transferring control over money from centralized authorities to people.
What makes bitcoin so different from the current financial system is that all bitcoin transactions are stored on the blockchain.
What is the blockchain?
The blockchain is the permanent and continuous record of all bitcoin transactions. The blockchain is entirely transparent – you can check any and every single transaction in the history of the blockchain if you’d like.
The blockchain is updated every ten minutes with a new ‘block’ of transactions, creating an ongoing chain. Each block is sealed using cryptography, so that it cannot be altered. This is to prevent double spending and fraud. The blockchain is designed to be ‘hack-proof’, as it would be too expensive and complicated to try and alter its history or forge transactions.
One of the blockchain’s most exciting and promising features is decentralization. The blockchain network is not controlled by any one single person or entity, instead it is democratically run by anyone in the world who chooses to participate by running nodes. Blockchains have also been labelled as distributed ledgers.
How are bitcoins issued?
All new bitcoins are created or ‘mined’. However, there is a finite amount of bitcoin - only 21 million will ever be created.
The bitcoin blockchain network uses a special algorithm called Proof of Work to confirm transactions and add new blocks to the chain. Miners (participating computers/nodes) in the network compete to solve a complex mathematical puzzle, proving they spent a lot of resources (computing hardware and electricity) to solve the puzzle the fastest. A majority of other nodes must verify the solution is correct, and if they reach consensus, the computer is rewarded in bitcoin. Every four years the amount of bitcoin rewarded halves, and currently miners receive 12.5 bitcoins per block. In 2020 this will halve to 6.25.
A single bitcoin was valued at USD$900 in January 2017, hit a high of $20,000 in December 2017 and has since fallen to $6000. As with traditional stocks, the price of bitcoin is determined by supply and demand, and the market is currently very volatile.
It’s important to note that there is a difference between bitcoin’s core value and its market price. Some people argue that bitcoin has no value, so its price should be 0.
Bity believes that bitcoin has an intrinsic value, based on components like its protocol, community, its 24/7 network and the millions of hours of work dedicated to sustaining it, its cryptographic security and the POW which is yet to be hacked. This value is then translated by the market. Price fluctuations are also influenced by investment in different cryptocurrency projects, and of course, there is speculation.
How do you store bitcoins?
If you’d like to own bitcoins you will need a wallet which ‘stores’ your coins. Each wallet has a unique address which is where your bitcoins are sent to. You are free to choose which kind of wallet you’d like to store bitcoins.
You can easily generate wallets online using various websites. You can see the pros and cons of your different options here.
These sites issue you a set of public and private keys, with linked wallet addresses. The public key is your official address, which is then simplified or ‘hashed’ to create shorter wallet addresses for you to share with people. You can generate as many wallet addresses as you need for privacy, but your public and private keys always stay the same. Your private key is the special password which ‘unlocks’ your funds, so make sure to keep this very private. You enter this private key every time you want to send bitcoin.
You can write down these keys on a piece of paper so they are kept completely offline. This is called cold-wallet storage, or a paper wallet.
You can also store your bitcoins on a hardware wallet, such as BitBox which are special USB drives with advanced security functions.
You can also buy and store bitcoins on a cryptocurrency exchange. Please be aware that most exchanges are centralized so they will store your funds for you. You will have an account with them which is linked to an address they generate for you. You will not be in charge of your private keys, and therefore your funds, and this can be quite risky as some exchanges have been victims of hacks in the past. It’s best to always have full control over your funds by moving them from an exchange to a paper or hardware wallet.
Note that before buying bitcoins from Bity you will need to set up a wallet first, as we do not offer this custodian service.
You can learn more about the technical side of wallets, public and private keys here.
What are the benefits of using bitcoin?
Bitcoin transcends borders, so anyone in the world can own and send them regardless of their demographic. Bitcoin is blind to nationality, age, and economic status. No corrupt government or bank can touch your coins or freeze your account.
Bitcoin transactions are much faster compared to traditional banking with fiat. There is no need for third parties to process or verify transactions, so in many cases bitcoin transactions are processed within minutes to hours.
If you’d like to check whether your BTC transaction has been confirmed on the blockchain, you can go to a blockchain explorer like blockchain.info and type in your public address into the search bar featured on the homepage. You will be able to see whether your transaction was processed, which address the BTC was sent to, and which block contains the record of your transaction.
It’s very easy to send bitcoin once you know how it’s done, and is often a far simpler process than online or phone banking. You just need a working internet connection and the recipient's one wallet address – no need for the numerous different login codes, recipient’s bank details and so on.
All bitcoin transactions are also pseudo-anonymous, as bitcoin wallet addresses are simply a string of 26 - 35 alphanumeric characters, rather than actual names.
What can I use bitcoins for?
There are more and more ways for you to spend bitcoins every day. Various merchants allow you to pay with bitcoins, including many e-commerce sites.
Bity’s platform enables you to spend your bitcoin on almost anything. Any transaction that can be made online using fiat, you can also make with bitcoin. You can pay your bills and rent, or go online shopping.
You can also send bitcoin to anyone in the world for lending or payment as long as you have their wallet address.
Many people also invest in bitcoin and simply hold coins without using them.
What are the fees?
Sending bitcoin requires a fee which incentivizes miners to add your transaction to a block. This fee depends on the size of your transaction, though is often a small amount, but you can increase the fee to increase your chances of having your transaction processed more quickly. You wallet provider may calculate the fee. More information on fees here.
Is bitcoin legal?
It depends where you live. Laws surrounding bitcoin differ across jurisdictions, with some countries banning ownership of bitcoin and others quite open to its use, including Switzerland. Many countries are in the process of trying to address regulation of the cryptocurrency market as a whole.
Many countries also tax your bitcoin holdings, so it’s best to check this out if you do own any.
Understanding the risks
Bitcoin has been associated in the past with illegal activity, such as buying goods on the online black market, Silk Road, due to its increased privacy and lack of regulated control.
There have also been many cases of exchanges being hacked. Bitfinex was hacked in 2016, with $72 million USD worth of bitcoin stolen.
As with traditional banking and finance, cryptocurrency users can fall victim to scams and phishing attacks which aim to steal their funds. Cybercriminals are attracted to crypto as transactions are pseudo-anonymous and irreversible, but crypto users can easily protect themselves by exercising caution and knowing what a phishing attack looks like.
A common and unfortunate mistake people also make is losing their private keys, as there is no way to recover your funds if you do this. There have been many cases where people have lost their paper wallets and consequently lost all of their bitcoins.
This may all seem very intimidating at first since with traditional finance if you make an error like forgetting your password, or sending money to the wrong person, banks can help you and usually rectify the problem. It's important to remember, though, that with bitcoin you are in total control of your finances. As with all new technology, there are risks when first interacting with bitcoin and the blockchain. But all these risks can be easily avoided by learning all you possibly can about cryptocurrency and how to safely navigate the space. It may seem tricky at first, but it shouldn’t take too long until you are a proficient user of cryptocurrency!
Educating yourself about how to properly purchase, securely store and transact with bitcoin is the only way to enjoy the immeasurable benefits they offer. Making sure you store bitcoins in a hardware wallet, or in cold storage, is the best way to avoid having them taken from you by hackers.
There are some great educational resources out there, and of course we at Bity are always here to help you! You can refer to our blog or FAQs for more information.
Bitcoin in the future
Unfortunately the true philosophy of bitcoin has been hijacked lately by speculators looking to make a profit. But we should all acknowledge and honor the real reason that bitcoin was created: to transform the global financial system.
Bity sees bitcoin as the foundation of the new digital economy, where every single interaction will be programmed. Bitcoin has a deep social impact as it redefines the governance models providing more certainty and transparency.
Satoshi envisioned a future that was founded on economic egalitarianism, where financial independence and power was given to every single person, and not just the financial elite.
You can get started on your bitcoin journey here.
Need more information?
Our FAQ may be able to help answer your questions.