Bitcoin (BTC) - What it is & How to Buy

Bitcoin is the most popular cryptocurrency today. 

It is perhaps best-known as an investment opportunity and for its volatility, but relatively few people understand the logic of the currency itself.

So why is bitcoin such a successful cryptocurrency? Let’s start at the beginning.

What Is Bitcoin?

Founded by Satoshi Nakamoto, bitcoin is a decentralized digital currency. 

This means that it is free from interference by third parties (such as banks or governments) who might seek to regulate its value or charge fees for transactions. It can be sent between peers without third-party involvement or mediation.

While there is no central system of control, it’s still a form of currency, which means you can use it in exchange for goods or services. It enables secure transfers of money anywhere around the world. Rather than to a central mediator, transaction fees instead go to the miner responsible for mining the block that is used for any given transaction.

There is a finite supply of 21 million units (bitcoins) which are divisible up to 8 decimal places (0.00000001BTC).

How Does Bitcoin Work?

The two most important components of Bitcoin are: nodes and the blockchain.

• Nodes are the computers used to run the code. The processing power (known as hashing power) of these computers indirectly protects Bitcoin from bad actors and makes it secure. The ‘correct’ history of the blockchain is that which is understood by the majority of nodes in the network. Therefore, you would need to command over 50% of the network’s total computing power to commit a fraudulent transaction.
• Blockchain is a public ledger that provides a running tally of payments made and received to keep account of finances. The basic rule is that if ledgers don’t match, something dodgy is up.

Bitcoin Blockchain

Blockchain is an automated public ledger system made up of blocks — a series of constantly updating ledgers dating back to the genesis block (the first block of a cryptocurrency).

Ledgers that deal with fiat (conventional) currencies also record transaction fees made to the third party who facilitates the exchange. With traditional currency, a central bank facilitates this exchange.

Blockchain removes the central authority and the need for a third party while still ensuring the ledgers of the involved parties match. If there is any discrepancy between the basic money sent and received, the blockchain spots it.

Bitcoin Mining

Mining bitcoin relies on computers (referred to as ‘nodes’ or ‘bitcoin miners’) that run the currency’s code and keep track of the blockchain. All computers running this code are up-to-date with the blockchain, thus making transactions ultra-secure.

Mining relies on powerful computers to solve complex mathematical puzzles: each solution found releases a set amount of new bitcoins into circulation.

Bitcoin Network

The network consists of thousands of mining nodes. These computers generate a tremendous amount of processing power, preventing bad actors from interfering with the blockchain.

You would need over half the mining power of the entire network to corrupt the ledger. Even if someone were to achieve this, bitcoin miners (owners of mining computers) would simply move to a new blockchain network. The attack would thus be redundant. The decentralized model enables extra security.

Bitcoin Transactions

Transactions between wallets use two ‘keys’ — a public key and a private key.

• The private key is essentially a password unique to you and something that you are responsible for protecting.
• The public key is the address of your wallet. It is how other parties send currency to you and vice versa.

Timestamping Scheme

The currency operates on a ‘proof of work’ system. When a node solves the mathematical problem required for successful mining, this is the ‘work’ in question.

Each successfully mined block generates a ‘hash’, a long string of numbers and characters which is recognized by the network as proof of work. The block in question is perma-stamped with that hash, indicating exactly when and by which node the block was mined.

The blockchain timestamps every interaction, making the ledger virtually foolproof. Every node has a timestamped record of when bitcoin users have sent currency and from and to which wallet.

Bitcoin Wallet

The wallet operates similarly to a bank account: you can send bitcoins from one wallet to another.

Your wallet is encrypted with the keys mentioned above. There isn’t a physical ‘wallet,’ of course. Instead, your wallet simply represents the agreement of how much currency moves between nodes.

Bitcoin ATMs

A crypto ATM is similar to a Bureau de Change. You can purchase a relative amount of BTC using a fiat currency such as the US dollar. The amount that you can purchase is relative to the currency’s value at the time, as determined by investors.

How Secure Is Bitcoin?

It is exceptionally secure on account of the sheer amount of processing power its node network has. The computers used as miners tend to be powerful machines, as using your standard laptop would be inefficient for problem-solving.

Those wishing to undermine the blockchain would require an unbelievable amount of processing power and time to do so. It is what some experts consider ‘unhackable.’

How to Buy Bitcoin

If you’re not involved in mining, you can use bitcoin ATMs or crypto exchanges to buy into the currency. You can find our in-depth discussion and comparison of crypto exchanges here. eToro scored highest in our reviews.

Exchanges allow you to purchase currency using fiat money or other cryptocurrencies. For more information on how to buy bitcoin, take a look at our buyer’s guide.

History of Bitcoin

On January 3, 2009, the network went live.

Who Is Satoshi Nakamoto?

Nobody knows who Satoshi Nakamoto is. The founder is probably a group of people rather than an individual, given how complex the currency is.

Bitcoin Whitepaper

The entity known as Satoshi Nakamoto authored the original whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System,” sharing it with a select group of cryptography enthusiasts and researchers on October 31, 2008.

Bitcoin Price and Volatility

The currency has gone through several ‘price bubbles’ in its time. Its value increased almost tenfold during 2020, making it an exciting prospect for investors but a cautionary tale of crypto’s volatility.

Bitcoin Legal Status, Tax & Regulation

No central authority regulates it, which is partially why it appeals to users — there is no central bank determining the worth of your currency, only the community’s agreement.

The currency is entirely legal. You can legally convert it into fiat currency by selling it on a cryptocurrency exchange. The issue with this is that you may pay a transaction fee to the exchange and potentially have to pay tax, which partly is what the currency intended to avoid.

What Makes Bitcoin Unique?

There are many cryptocurrencies out there. Some of these are known as altcoins. 

So what makes bitcoin different from fiat currency and other altcoins?

For a start, there will only ever be a limited number of bitcoins in existence (21 million total). Any currency with an infinite supply is subject to devaluation. The scarcity of units maintains the value of the currency.

Secondly, it is fully decentralized. No central authority regulates the distribution or value of the currency. Peer-to-peer transactions don’t require third-party mediation, making them frictionless. This is not the case for many other cryptocurrencies.

Altcoins also don’t have the same kind of network powering them, which is what makes a cryptocurrency secure. Therefore, unless a radical shift happens, this will always be the only genuinely safe cryptocurrency.

Finally, its value is far less volatile than most altcoins, whose popularity spikes and dips dramatically as a result of fluctuating investor hype and caution. It is partly because of this that bitcoin is the most widely-accepted cryptocurrency on exchanges, as it held to be more secure and trustworthy.

Bitcoin Energy & Carbon Footprint

A major concern with mining is the amount of energy needed to drive the currency. Nodes require a great deal of power to run, which generates a large carbon footprint. 

It’s worth noting that fiat currencies also generate massive carbon footprints indirectly via funding and other schemes.

Bitcoin in the Media

The medias current image is that Bitcoin is volatile and unsustainable. This can partly be explained by the novelty of cryptocurrencies, and a degree of scepticism is healthy. 

However, the subject is also still poorly understood by many commentators, and media reports tend to portray its value as strictly relative to that of fiat currency.

The media misses the fundamental point of cryptocurrency — it is not designed to be a fiat investment opportunity. 

Instead, it is supposed to be a universally accepted currency (which would stabilize its value) that doesn’t rely on central systems that demand transaction fees.

Companies Who Have Invested in Bitcoin

Square, a US financial services & digital currency company, is perhaps the largest investor in the currency. Elon Musk’s Tesla has also invested heavily.

The Future of Bitcoin

The future depends on whether the currency sees widespread adoption. Fluctuations and spikes in ‘market value’ are not reliable indicators of the currency’s success or failure because this is a false metric.

While currency trading will exist as long as there are competing currencies (including crypto), we shouldn’t be talking about the ‘price of bitcoin.’ It exists independently, and once you’re involved, fiat values are irrelevant. If enough people and businesses adopt it, this currency may well have a strong future as a secure and transaction-free method of exchange.

Summary

It’s impossible to know the future of any currency. What we do know is that bitcoin has changed the money game irreversibly, with the success of blockchain posing an existential challenge to the exchange system dominated for so long by banks and governments.

Widespread adoption of this system will cause further fascinating changes to the way we understand value. Of course, the currency has problems it needs to solve: for example, work must continue to reduce the carbon footprint of mining. Still, the challenges that bitcoin poses to an unstable fiat system and the fiscal relationship between individuals and central authorities make it an exciting prospect to watch in the coming years.

Bitcoin FAQ