Bitcoin 101 Introduction
Grab a cup of coffee and enjoy our Bitcoin 101 guide. We will cover everything you need to know about Bitcoin and how it made its place in the world. Knowledge is power and we tend to find that the better you understand how major coins function and how they got their start, it will be easier to search for market trends and know what you’re investing in for your future.
Getting Started With Bitcoin
Bitcoin was the world’s first cryptocurrency created in 2009 by an anonymous man called Satoshi Nakamoto. What made bitcoin very unique at the time was blockchain technology. This technology made it possible to transact using bitcoin without the need for a centralized authority.
Ever since its creation, bitcoin and cryptocurrencies, in general, have been making headlines on various news platforms. Yes, you may have heard or read about bitcoin, but do you know what it is and how it works? In this article, I will discuss everything you need to know about bitcoin, including how it works, how to buy it, and its pros and cons. Shall we begin?
What Is BitCoin?
Bitcoin is simply virtual (digital) money that people can use to exchange value. It runs on a blockchain software platform, making it possible to do the transaction without an intermediary in between.
Unlike centralized payment methods like VISA and MasterCard, Bitcoin has no central servers. So, transactions are processed on decentralized computers (nodes) running Bitcoin’s blockchain software. This brings us to our second question; How does bitcoin work? To understand how bitcoin works, we need first to know how blockchain technology works.
What Is A Blockchain?
A blockchain is a decentralized digital ledger that is used to store transaction data. Data on the blockchain is duplicated and distributed on different computers on the blockchain network. People who put up their computers to be used on this network are called miners, so they are rewarded based on the computing power they offer on the network.
Blockchain is a revolutionary technology because it doesn’t need to be maintained by the centralized authority to manage the platform – it is fully autonomous. Data added onto the blockchain is also immutable, making it almost impossible to alter and make unauthorized changes.
Bitcoin’s blockchain data has now accumulated to over 250GB. Each block is currently 1MB and is capable of storing data for over 2000 transactions. However, the small size of Bitcoin’s blockchain is affecting its transaction processing speeds. Currently, bitcoin is only able to process about four transactions per second.
The debate about increasing the size of the blockchain to boost transaction speeds was fueled in 2015. When the different players in the Bitcoin community disagreed on the best way forward, a new cryptocurrency called Bitcoin Cash was formed by those who supported the change. Bitcoin cash is now an independent cryptocurrency that has gradually been appreciating over the last four years.
Apart from processing and storing transaction data of crypto transactions, blockchain technology has many more use cases. For instance, the Ethereum blockchain has other use cases, including decentralized gaming, selling and buying non-fungible tokens (NFTs), smart contracts, and many more.
How exactly does Bitcoin work?
Now that we have an idea about blockchain technology, I will explain how bitcoin works in simple English to make it easy for the common person to understand. As we have earlier shared, Bitcoin is virtual money that can easily be sent from one person to another on the blockchain. Each of the coins is digitally signed every time it changes ownership. So, that means every coin on the blockchain has a unique digital signature.
The process of adding new bitcoins into circulation is what we call mining. The total supply of bitcoins is fixed at 21 million, and so far, over 18.9 million coins have been mined. So, as people continue to buy bitcoins, we shall reach the 21 million limit, making it impossible to add more bitcoins to the blockchain.
The idea of having a fixed supply was to make bitcoin scarce, which is a fundamental attribute of money. When we hit the 21-million-mark, bitcoin prices will likely be increasing as demand will always surpass the limited supply.
How To Buy & Sell Bitcoin
Before sending or receiving bitcoin, you will need to have a bitcoin wallet or an account with any popular crypto exchange platform, including Coinbase, Binance, and many more. The advantage of having a bitcoin wallet overusing a crypto exchange platform is privacy and security.
If you choose to store your bitcoin with an exchange platform like Coinbase, your coin’s security entirely relies on Coinbase. So, if it gets hacked, you will likely lose all your digital coins. However, you should not worry about this because these platforms use sophisticated cybersecurity systems to secure their clients’ digital assets.
The main advantage of using crypto exchange platforms is the ease of selling and buying. If you want to buy and sell bitcoin frequently, you are better off using a crypto exchange platform. With these platforms, it is very seamless to buy coins with your credit card. You can also easily sell your bitcoins to get fiat money or exchange them for other cryptocurrencies like Ethereum and Litecoin.
Which Crypto Exchange Platform Should You Choose?
There are several crypto exchange platforms in the market that you can choose from. However, choosing which one to trust with your hard-earned cash is important to consider their reputation over the years, leadership, and how long they have been in business.
The two most popular exchange platforms that we recommend are Binance and Coinbase.
These two are very popular because of the security, reliability, and trust they have built over the years. Coinbase has been around the longest; it was established in 2012. On the other hand, Binance was founded in 2017, so it is relatively new to the game compared to Coinbase.
Each of these two has pros and cons that you should be aware of before making a choice. Binance has more cryptocurrency options, lower fees, and crypto-trading options compared to Coinbase. On the other hand, Coinbase is a more trusted platform in the US, much simpler to use, and offers multiple ways of buying bitcoin and other cryptocurrencies.
The downside with Coinbase is that it supports few coins (about 100) and has higher transaction fees than Binance. So, these two exchange platforms have different target markets. If you are looking at a platform that you can use for the constant buying and trading of bitcoin and other cryptocurrencies, Binance is a better alternative, thanks to its lower fees and a wide variety of coins to choose from.
However, for those who want a simplified platform for buying and saving bitcoin, Coinbase is the best alternative. Coinbase is also available in about 100 countries compared to 180 for Binance. So, you need to confirm which of the two supports your country before making a choice.
Pros & Benefits Of Bitcoin
Lower Transaction Fees- One of the major benefits of bitcoin is its lower transaction fees. It is way cheaper to send and receive money with bitcoin, especially if the transaction crosses borders. That is why several businesses that involve online payments are starting to accept bitcoin to generate more revenue from customers living in different countries worldwide.
Accessibility & Liquidity- One can easily buy and sell bitcoin without going through the registration bureaucracy in the mainstream financial systems. This encourages financial inclusion because over a billion people around the world are still unbanked. Bitcoin is also easy to liquidate once to get back your fiat money if you wish, making it a good alternative for saving money.
High Privacy Levels- Your bank and probably the government know how much money you have saved so far and all the transactions you have made ever since the year began. However, with Bitcoin, each user is identified by their public address, a set of random characters that don’t contain information about the user.
That means no one, including your government, will be able to monitor your financial activities. To get a higher level of security and privacy, it is best to store your bitcoins in a bitcoin wallet instead of using exchange platforms.
High Potential For Returns- If you are looking into bitcoins to invest in, it is one of the assets that offers a high ROI within a short period. For instance, the price of Bitcoin was less than $2000 five years back. It has fluctuated in the recent past between $55,000 and $65,000. That’s about 30x appreciation in the space of about five years.
No Centralized Control- Decentralization is one of the core principles of Bitcoin and all cryptocurrencies in general. With decentralization, no central authority controls the rules of how transactions are made on the platform. The bitcoin community that involves miners and developers determines the features and changes on bitcoin’s blockchain.
Cons & Limitations Of Bitcoin
Highly Volatile- The price of bitcoin is determined by demand and supply market forces since no central authority regulates it. We have seen bitcoin’s price drop by thousands of dollars within hours. These changes in prices are highly influenced by people’s opinions about the coin at the time.
No Governmental Regulations- Decentralization is one of the significant advantages of Bitcoin but is also one of its significant downsides. The lack of regulation leads bad actors like terrorists and money launderers to move money without being tracked by the relevant authorities because following bitcoin transactions is no easy job.
Irreversibility Of Transactions- If you ever send the wrong number of bitcoins or use an incorrect wallet address while sending, you can absolutely do nothing about it after clicking the send button. That means no room for error while transacting with bitcoin. So, if anyone ever gets access to your wallet and sends all your coins to theirs, you don’t have a way of tracking them down and recovering your coins.
Not Quite Mainstream- Even though several big brands such as Microsoft, PayPal, and Starbucks accept Bitcoin, it is not yet a mainstream currency like the USD or Euro. The main reason for this is the high volatility and lack of regulation, making it hard for businesses to maintain a similar price for the product over time.
Negative Environmental Impact- Processing Bitcoin transactions consume a significant amount of energy, making the platform unsustainable in the long run. A report by the Cambridge Center for Alternative Finance (CCAF) shows that Bitcoin transactions consume over 110 terawatts of power annually, equivalent to 0.55% of global energy production.
Each transaction of Bitcoin consumes about 1,449 kilowatts of energy, which is equivalent to the energy required to power a typical American home for 50 days! This level of energy consumption is mainly due to Bitcoin’s “Proof of Work” methodology that they use to process transactions.
How Other Blockchains Are Addressing Bitcoin's Limitations
Yes, bitcoin is the most popular cryptocurrency, but to become mainstream, solutions to some of its major limitations need to be mainstream. The good news is other blockchain platforms such as Ethereum are already fixing some of these limitations. Here is how;
• Ethereum is transitioning to using Proof of Stake other than Proof of Work to verify transactions. Proof of Work rewards miners with the most powerful resources when verifying transactions. This has led to huge investments in mining hardware to earn more rewards. With Proof of Stake, priority is given to miners who own more coins. This significantly reduces the amount of energy required to process transactions.
• Ethereum processes transactions faster, making it ideal for handling millions of transactions daily. Ethereum’s blockchain makes it possible to process over 15 to 45 transactions per second, making it six times faster than bitcoin’s transaction speeds.
Bitcoin is still by far the most popular cryptocurrency globally, with 105 million users worldwide. Bitcoin and cryptocurrency, in general, have been one of the fastest adopted technologies in history, thanks to their many advantages over the mainstream financial systems. Like any other new technology, Bitcoin has several limitations that have to be addressed if it is to become mainstream. The good news is other blockchain platforms like Ethereum are already addressing some of these limitations.