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What is Bitcoin?

Updated: Aug 11, 2021

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Chapter 1 - Introduction to Bitcoin

Contents

  • What is Bitcoin?

  • What is Bitcoin used for?

  • What makes Bitcoin valuable?

  • How does Bitcoin work?

  • What is the blockchain?

  • Is Bitcoin legal?

  • A History of Bitcoin

    • Who created Bitcoin?

    • Did Satoshi invent blockchain technology?

    • Digital cash before Bitcoin


What is Bitcoin?


Bitcoin is a digital form of cash. But unlike the fiat currencies you’re used to, there is no central bank controlling it. Instead, the financial system in Bitcoin is run by thousands of computers distributed around the world. Anyone can participate in the ecosystem by downloading open-source software.

Bitcoin was the first cryptocurrency, announced in 2008 (and launched in 2009). It provides users with the ability to send and receive digital money (bitcoins, with a lower-case b, or BTC). What makes it so attractive is that it can’t be censored, funds can’t be spent more than once, and transactions can be made at any time, from anywhere.

What is Bitcoin used for?


People use Bitcoin for a number of reasons. Many appreciate it for its permissionless nature – anyone with an Internet connection can send and receive it. It’s a bit like cash in that no one can stop you from using it, but its digital presence means that it can be transferred globally.

What makes Bitcoin valuable?


Bitcoin is decentralized, censorship-resistant, secure, and borderless.

This quality has made it appealing for use cases such as international remittance and payments where individuals don’t want to reveal their identities (as they would with a debit or credit card).

Many don’t spend their bitcoins, instead choosing to hold them for the long-term (also known as hodling). Bitcoin has been nicknamed digital gold, due to a finite supply of coins available. Some investors view Bitcoin as a store of value. Because it’s scarce and difficult to produce, it has been likened to precious metals like gold or silver.

Holders believe that these traits – combined with global availability and high liquidity – make it an ideal medium for storing wealth in for long periods. They believe that Bitcoin’s value will continue to appreciate over time.


How does Bitcoin work?


When Alice makes a transaction to Bob, she’s not sending funds in the way you’d expect. It’s not like the digital equivalent of handing him a dollar bill. It’s more like her writing on a sheet of paper (that everyone can see) that she’s giving one dollar to Bob. When Bob goes to send those same funds to Carol, she can see that Bob has them by looking at the sheet.


The sheet is a particular kind of database called a blockchain. Network participants all have an identical copy of this stored on their devices. The participants connect with each other to synchronize new information.

When a user makes a payment, they broadcast it directly to the peer-to-peer network – there isn’t a centralized bank or institution to process transfers. In order to add new information, the Bitcoin blockchain uses a special mechanism called mining. It is through this process that new blocks of transactions are recorded in the blockchain.

What is the blockchain?


The blockchain is a ledger that is append-only: that is to say, data can only be added to it. Once information is added, it is extremely difficult to modify or delete it. The blockchain enforces this by including a pointer to the previous block in every subsequent block.


The pointer is actually a hash of the previous block. Hashing involves passing data through a one-way function to produce a unique “fingerprint” of the input. If the input is modified even slightly, the fingerprint will look completely different. Since we chain the blocks along, there is no way for someone to edit an old entry without invalidating the blocks that follow. Such a structure is one of the components making the blockchain secure.


Is Bitcoin legal?


Bitcoin is perfectly legal in most countries. There are a handful of exceptions, though – be sure to read up on the laws of your jurisdiction before investing in cryptocurrency.

In countries where it’s legal, government entities take varying approaches to it where taxation and compliance are concerned. The regulatory landscape is still highly underdeveloped overall and will likely change considerably in the coming years.

A History of Bitcoin

Who created Bitcoin?

Nobody knows! Bitcoin’s creator used the pseudonym Satoshi Nakamoto, but we don’t know anything about their identity. Satoshi could be one person or a group of developers anywhere in the world. The name is of Japanese origin, but Satoshi’s mastery of English has led many to believe that he/she/they originate from an English-speaking country.

Satoshi published the Bitcoin white paper as well as the software. However, the mysterious creator disappeared in 2010.

Did Satoshi invent blockchain technology?


Bitcoin actually combines a number of existing technologies that had been around for some time. This concept of a chain of blocks wasn’t born with Bitcoin. The use of unalterable data structures like this can be traced back to the early 90s when Stuart Haber and W. Scott Stornetta proposed a system for timestamping documents. Much like the blockchains of today, it relied on cryptographic techniques to secure data and to prevent it from being tampered with.

Interestingly, at no point does Satoshi’s white paper make use of the term “blockchain.”

Digital cash before Bitcoin


Bitcoin wasn’t the first attempt at digital cash, but it is certainly the most successful. Previous schemes paved the way for Satoshi’s invention:

DigiCash

DigiCash was a company founded by cryptographer and computer scientist David Chaum in the late 1980s. It was introduced as a privacy-oriented solution for online transactions, based on a paper authored by Chaum.

The DigiCash model was a centralized system, but it was nonetheless an interesting experiment. The company later went bankrupt, which Chaum believes was due to its introduction before e-commerce had truly taken off.

B-money

B-money was initially described in a proposal by computer engineer Wei Dai, published in the 1990s. It was cited in the Bitcoin white paper, and it’s not hard to see why.

B-money proposed a Proof of Work system (used in Bitcoin mining) and the use of a distributed database where users sign transactions. A second version of b-money also described an idea similar to staking, which is used in other cryptocurrencies today.

Ultimately, b-money never took off, as it didn’t make it past the draft stage. That said, Bitcoin clearly takes inspiration from the concepts presented by Dai.

Bit Gold

Such is the resemblance between Bit Gold and Bitcoin that some believe that its creator, computer scientist Nick Szabo, is Satoshi Nakamoto. At its core, Bit Gold consists of a ledger that records strings of data originating from a Proof of Work operation.

Like b-money, it was never further developed. Bit Gold’s similarities to Bitcoin have, however, cemented its place as the “precursor to Bitcoin.”


Chapter 2 - Where Do Bitcoins Come From?

Contents

  • How are new bitcoins created?

  • How many bitcoins are there?

  • How does Bitcoin mining work?

  • How long does it take to mine a block?

How are new bitcoins created?


Bitcoin has a finite supply, but not all units are in circulation yet. The only way to create new coins is through a process called mining – the special mechanism for adding data to the blockchain.

How many bitcoins are there?


The protocol fixes Bitcoin’s max supply at twenty-one million coins. As of 2020, just under 90% of these have been generated, but it will take over one-hundred years to produce the remaining ones. This is due to periodic events known as halvings, which gradually reduce the mining reward.

How does Bitcoin mining work?


By mining, participants add blocks to the blockchain. To do so, they must dedicate computing power to solving a cryptographic puzzle. As an incentive, there is a reward available to whoever proposes a valid block.

It’s expensive to generate a block, but cheap to check if it’s valid. If someone tries to cheat with an invalid block, the network immediately rejects it, and the miner will be unable to recoup the mining costs.

The reward – often labeled the block reward – is made up of two components: fees attached to the transactions and the block subsidy. The block subsidy is the only source of “fresh” bitcoins. With every block mined, it adds a set amount of coins to the total supply.

How long does it take to mine a block?


The protocol adjusts the difficulty of mining so that it takes approximately ten minutes to find a new block. Blocks aren’t always found exactly ten minutes after the previous one – the time taken merely fluctuates around this target.

Chapter 3 - Getting Started with Bitcoin

Contents

  • How can I buy Bitcoin?

    • How to buy Bitcoin with a credit/debit card

    • How to buy Bitcoin on peer-to-peer markets

  • What can I buy with Bitcoin?

  • Where can I spend Bitcoin?

  • What if I lose my Bitcoins?

  • Can I revert Bitcoin transactions?

  • Can I make money with Bitcoin?

  • How can I store my bitcoin?

    • Storing your bitcoin on Binance

    • Storing your coins in a bitcoin wallet

      • Hot wallets

      • Cold wallets


How can I buy Bitcoin?

How to buy Bitcoin with a credit/debit card

Binance allows you to seamlessly buy Bitcoin in your browser. To do so:

  1. Go to the Buy and Sell Cryptocurrency portal.

  2. Select the cryptocurrency you want to buy, and the currency you wish to pay with.

  3. Log in to Binance, or register if you don’t already have an account.

  4. Select your payment method.

  5. If prompted, insert your card details and complete identity verification.

  6. That’s it! Your Bitcoin will be credited to your Binance account.

How to buy Bitcoin on peer-to-peer markets

You can also buy and sell Bitcoin on peer-to-peer markets. This allows you to purchase coins from other users directly from the Binance mobile app. To do so:

  1. Launch the app and log in or register.

  2. Select One click buy sell, followed by the Buy tab in the top left corner of the interface.

  3. You’ll be prompted with a number of different offers – tap Buy on the one you wish to go with.

  4. You can pay with other cryptocurrencies (the By Crypto tab) or fiat currency (the By Fiat tab).

  5. Below, you’ll be asked for your payment method. Pick whichever one suits you.

  6. Select Buy BTC.

  7. You now have to make the payment. When you’re done, tap Mark as paid, and confirm.

  8. The transaction is completed when the seller sends your coins.

What can I buy with Bitcoin?


There are a lot of things you can buy with Bitcoin. At this stage, it can be difficult (though not impossible) to locate merchants that accept Bitcoin in physical stores. However, you’ll still be able to find websites that accept it or allow you to purchase gift cards with it for other services.

Just to name a few, some of the things you can buy with Bitcoin are:

  • Airplane tickets

  • Hotel rooms

  • Real estate

  • Food & drink

  • Clothing

  • Gift cards

  • Online subscriptions

Where can I spend Bitcoin?


You can spend your Bitcoin at a growing number of places! Let’s go through a few of them.

Save on hefty credit card fees while traveling the world! You can book flights and hotels with Bitcoin and other cryptocurrencies through TravelbyBit. Register and book with crypto with a 10% discount on your purchase.

Spendabit is a search engine for products that you can buy with Bitcoin. Just search for what you’d like to buy and get a list of merchants who you can buy it from with Bitcoin.

Search for all the cryptocurrency merchants and ATMs around your area. If you’re eager to spend your Bitcoin and just looking for a place to spend it, this might be an ideal choice for you.

You can buy gift cards for hundreds of services and top up your phone with Bitcoin and other cryptocurrencies here. It’s quite easy to do, and you can also use the Lightning Network to pay.

What if I lose my bitcoins?


Because there’s no bank involved, you’re responsible for keeping your coins secure. Some prefer to store them on exchanges, while others take custody with a variety of wallets. If you use a wallet, it’s crucial that you write down your seed phrase so that you can restore it.

Can I revert Bitcoin transactions?


Once data is added to the blockchain, it’s not easy to remove it (in practice, it’s virtually impossible). This means that when you make a transaction, it can’t be undone. You should always double- and triple-check that you’re sending your funds to the right address.


Can I make money with Bitcoin?


You can make money with Bitcoin, but you can also lose money with it. Typically, long-term investors buy and hold Bitcoin believing it will rise in price in the future. Others choose to actively trade Bitcoin against other cryptocurrencies to make short- to mid-term profits. Both of these strategies are risky, but they’re often more rewarding than low-risk approaches.

Some investors adopt hybridized strategies. They hold bitcoins as a long-term investment while simultaneously trading some (in a separate portfolio) in the short-term. There isn’t a correct or incorrect way to allocate assets in your portfolio – each investor will have a different risk appetite and different goals.

Lending is an increasingly popular form of passive income. By lending your coins to someone else, you can generate interest that they will pay out at a later date. Platforms like Binance Lending allow you to do this with Bitcoin and other cryptocurrencies.

How can I store my bitcoin?


There are many options to store coins, each with their own strengths and weaknesses.

Storing your bitcoin on Binance


A custodial solution refers to storage where the user doesn’t actually hold the coins themselves but trusts a third party to do so. To make transactions, they would log in to the third party’s platform. Exchanges like Binance often use this model as it’s vastly more efficient for trades.

Storing your coins on Binance allows you to easily access them for the purposes of trading or lending.

Storing your coins in a bitcoin wallet

Non-custodial solutions are the opposite – they put the user in control of their funds. To store funds with such a solution, you use something called a wallet. A wallet doesn’t hold your coins directly – rather, it holds cryptographic keys that unlock them on the blockchain. You have two main options on this front:

Hot wallets

A hot wallet is software that connects in some way to the Internet. Generally, it will take the form of a mobile or desktop application that allows you to easily send and receive coins. An easy to use example of a mobile wallet with a lot of supported coins is Trust Wallet. Because they’re online, hot wallets are generally more convenient for payments, but they’re also more vulnerable to attack.

Cold wallets

Cryptocurrency wallets that are not exposed to the Internet are known as cold wallets. They’re less prone to attack because there is no online attack vector, but they consequently tend to provide a clunkier user experience. Examples include hardware wallets or paper wallets.


Source: Binance



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