What is Bitcoin, BTC?

By Chantal

Bitcoin is a set of technologies and concepts that make up a decentralized digital currency system. We all use money, but most people have not thought about what it is or how it came to be. Hence, the first question to ask ourselves is: What is money? Money is simply anything of value which is accepted as an exchangeable item for goods and services in any community or setting. Thus, money can take many forms. The most stable form that money has taken from time past, was and is still gold, because it is rare, and desirable.

The drawbacks of using gold, and similar precious metals as currency were growing by the day as people began using it in increasing quantities. Gold is heavy. Carrying it around would not be convenient especially in large quantities. Therefore, banks try to solve this problem by creating monetary certificates (paper money) which is proof that you own a certain amount of actual money (gold) in the bank. So people changed from carrying gold around, to carrying and using gold certificates. Since these certificates were identical, there was problem of counterfeit. Hence banks also developed more complex and hard to copy methods of printing their money.

The institution issuing this currency, becomes the centralized authority of that currency system, determining how much money is in circulation, and determining who owns what. This central bank controls all digital transfers of money, then validates transactions which allows someone elsewhere to use that money. The bank also places charges on every transaction as a running cost which is paid by those using their system.

Bitcoins are completely virtual in existence, and do not exist physically or even digitally. The ownership of bitcoins is proven by transaction keys which prove that bitcoin units previously owned have been transferred to a particular address or user. Units of the bitcoin currency are transferred from one user to another to convey value. Bitcoin currency ownership of units are proven by possession of transaction keys which prove that that user possesses the said value. The Bitcoin currency is in use today to do practically everything that normal money is used for. It is used to buy and sell, send money to other users and organizations and to extend credit. The bitcoin price today is at such an all-time-high, that has startled everyone. A look at the bitcoin price chart seems to be a positive prophecy.

Bitcoins are virtual, hence they are not printed. Their generation follows a very strict process called mining, which is being done all over the world by attempting to solve a difficult mathematical problem. The difficulty of the problem is adjusted by the bitcoin protocol by an in-built algorithm so that a solution is found by one random device every 10 minutes. This computer that solved the problem is rewarded with brand new bitcoins, and also, all the transactions done in the past ten minutes are also validated. Mining can be done by any device running the full bitcoin protocol. This means that every 10 minutes, new bitcoins are mined, and every 10 minutes any transaction done using bitcoins is validated by same minning computer. This speed of transactions makes the bitcoin currency system very attractive to those considering using it for business transactions and will not like the delay which is the norm of the conventional banking systems.

When you own bit coins, you store them in a wallet. Your digital bitcoin wallet can either exist on a server or on a computer. The creation of the wallet is first done by selecting a random private key, from which a public key is generated through a secure process which hides the private key. From this public key, the address of this wallet is calculated. The process of generating a private key is so complex that to guess it is practically impossible. Hacking your way into a wallet is definitely not possible within current technological infrastructure, but it is possible to hack access into the cloud, or the computer storing the wallet. So it is good that if you want to get a wallet, you should first strongly secure the space where you will keep your wallet especially if you plan to invest heavily with bitcoin.

The price of Bitcoin over time.

The Bitcoin currency has become such a big deal as it’s price has so dramatically changed since the time of its invention in 2009. The bitcoin price today as of 12th December 2017 is about $7,000 on the lower margin. The bitcoin exchange rate is seen on public platforms such as coinbase; a bitcoin converter website, which accepts Bitcoin in exchange for other flat currencies, as well as sells bitcoins for flat currencies.

The development of the bitcoin currency is dependent on how many individuals actually invest into it, and just like every other scarce thing on earth, it becomes more expensive as more and more people want it. The algorithm for its production is designed in such a way as to limit the amount of bitcoins in circulation such that it remains scarce and does not experience deflation. As such, the availability of too much bitcoin in the circulation will never be a problem.

Also, bitcoin has several advantages which have attracted the interest of so many people. One way of acquiring bitcoin is by buying from a bitcoin converter and since you can send to any addresses you choose, you may actually sell your personal bitcoins at an increased price from the normal, depending on how badly someone needs to buy it.

In the beginning, bitcoin was worth almost nothing compared to the US Dollar. In 2009, a student named Kristoffer Koch was writing his thesis based on encryption at the time. Smart guy, he bought bitcoins worth $27, actually 5000 full bitcoins. That places the value of a bitcoin at the time to be around $0.0054 per bitcoin, as this was the bitcoin exchange rate at the time. Looking at the bitcoin exchange rate year by year suggests that the price is not about to go down. The price increased to a maximum of $0.39 in the year 2010, a whooping increase considering the beginning bitcoin exchange rate in the year 2009.

As the years progressed, the bitcoin price chart spiked continuously as more and more organizations and institutions around the world began to trust it, and accepted donations and payments for goods and services through it. We have institutions like the Swiss Public University which accepts bitcoin, not to talk about the countless number of online organizations and websites that accept payments in bitcoin, functioning as bitcoin converters.

Looking at the bitcoin price chart, the price has fluctuated repeatedly, due to the fact that people will always be slow to realize investment opportunities. The student who heard a lot of talk about bitcoin went to check his account and discovered that his joke of an investment had made him very rich. By the year 2017, January, the bitcoin exchange rate was between $ 800 – $ 1150, and bitcoin price today has arrived at a maximum of $18,000 so far. As far as currency appreciation is concerned, looking at the bitcoin price today and studying the bitcoin price charts so readily available on the websites of bitcoin converters like coinbase, one can see that those who bought in early and kept their bitcoins have become very rich as at now with the currency appreciation on such a rise.

The exchange rate of the bitcoin currency varies with the following characteristics:

1.      Demand: The demand for bitcoins determines the bitcoin exchange rate because as bitcoin becomes more and more usable and desirable to an ever-increasing number of people, the scarcity of the coins directly causes an increase in price, since the total number of coin available in the market are limited due to the limited amount of bitcoin in circulation and the limit of mining. This is a simple economic principle. If demand overwhelms supply, the cost increases.

2.      Supply: The supply of bitcoins in the market is another factor which can greatly affect the bitcoin price today. By design, the Bitcoin protocol ensures that there is not too much bitcoin currency in circulation. The amount of bitcoins already in circulation and those being produced through the process of mining tend to be lower than the demand, hence the price increases steadily. This could rapidly change if those who own a great share of the bitcoin begin to go all out, selling their coins. As is the case with every other company, that will very rapidly lower the bitcoin exchange rate.

As an investment opportunity, the bitcoin currency proves to have some hope. We shall go ahead now to examine the various characteristics of bitcoin that have made the bitcoin currency especially attractive.

Characteristics of Bitcoin

-  Bitcoin is proving to be more stable in availability than any flat currency in the world. First of all, the total amount of bitcoins which can be in circulation will be 21 million bitcoins, hence, inflation or change in the value of bitcoin needs never be a problem.

- Bitcoin is decentralized, meaning it is not controlled by a central bank, but is controlled by a vast number of devices running the bitcoin core software. These devices all work together, to give the network speed and accuracy in terms of validating transactions and keeping everything secure. The network takes hold of donated processing power, which ensures that after every 10 minutes, any transaction done anywhere in the world is validated.  All of these compared to conventional banks gives you an idea of what it is like to move huge amounts of money out of the country or to send it to someone.

The time and stress involved is overwhelming. There is also the setback of spending limits which is completely not applicable with the bitcoin system. You can send any amount to anyone anywhere in the world and it really does not make a difference, after a few seconds, the transaction is validated without any questions asked, and if you so desire, with complete anonymity.

The number of addresses an individual may own is not limited in any way, neither is there any need to identify oneself with any organization before owning a bitcoin wallet. A wallet is simply seen as an electronic address, and even though every financial transfer is visible for the rest of the world to see in the publicly available ledger, no information on the ledger can help track an individual.

-  As you can see on the bitcoin price charts displayed on bitcoin converter websites, the Bitcoin currency’s appreciation rate beats the dollar’s inflation rate. That is not a point to belabor. It is common knowledge that many people have made a fortune for themselves simply by investing into bitcoin with relatively small amounts. Some tried and they have reaped wonderful results, as is the case with the previously quoted example, Kristoffer Koch who probably bought it as a hobby, while doing his thesis on cryptography.

As it turns out, some people are getting on board the bitcoin wagon, not really because they like the idea of cryptography, but because of the potential financial gain involved. All over the world other cryptographic currencies modeled after bitcoin, and many are trying out their luck. Even now, there are further prospects of growth in the bitcoin exchange rate, so it still may be a good time to invest.

-  Security is and has always been a major issue whenever people think of money. The Bitcoin system is by far more advanced at security than any other currency system in existence. With bitcoin, you don’t just lose money as is possible with cash that you can carry about with you. You cannot misplace your wallet or even forget it unless you don’t take the necessary preventive methods. Someone cannot break into your vault and carry off your money; in fact, there is no current technology with a narrow possibility of breaking the security. Also, personally you have unlimited methods of securely backing up your wallet to ensure that it remains secure. And as a plus, there is no chance of having a counterfeit bitcoin in existence. There is no other recorded currency which has not been counterfeited.

-  Bitcoins are not about to rust or get destroyed. The durability is ensured. The system, which is completely digital and up to date remains the most durable way to store your money. Also because of the decentralization, the bitcoin system cannot have a situation in which someone’s account is mistakenly deleted. Everything is validated across so many bitcoin systems such that any false transaction is identified and discarded even at the first node. Since it is a completely digital system, there is no question of portability.

In fact, there’s nothing physical to carry. You only need to execute your transactions, and anywhere in the world, you have access to your wallet and your spending ability is not geographically bound in any way.

-  There is also much reduction in fraud, such that a merchant receiving payment from you does not receive any information that grants them the ability to use your account in any way. With bitcoin, what recipients receive in actual fact are more or less transaction certificates. In the case of credit cards, the owners of the accounts just go on trust that their credit card details remain safe with the merchants they submit them to.

Now we shall explore a step-by-step guide on how a bitcoin account or wallet may be created and used. Setting one up is basically free, so feel free to create one.

A bitcoin wallet is an electronic container, or can be referred to as a bitcoin bank account which allows you to send and receives coins, and also to keep them. You may install and keep one on your device either computer or mobile device, or you can host one using many available cloud based services.

As far as the cloud is concerned it’s like creating a free account with Google. You just have to trust that they keep your data safe. But if you prefer to secure your own wallet yourself, you may download and install any of the many top-level security wallet software applications which give you the full responsibility of securing your wallet. But if you are not ready to take on a challenge, it is better to use the cloud hosted wallets as they are much easier to use.

With regards to cloud hosted wallets, blockchain.info and coinbase.com are two web host establishments which have made a name for stability and security in the milieu of bitcoin. The sign up process is pretty simple. Usually, you just have to provide a name, email, choose a username and password and you are already set to go. In fact, on BLOCKCHAIN, they do not even require a name to set up the wallet.

If you prefer to handle your own affairs, then there are actually several reliable and high security apps you can install to get you started. Examples include; Bitcoin-Qt which is the original bitcoin wallet application, there is Armory which is one of the most secure. If you want to install your wallet in your mobile device, you could download the android app, or apps for other platform, it comes ready to go. Owning a wallet will give you the ability to receive, send and store bitcoins.

Next step is knowing how to operate your bitcoin wallet. As previously stated, keys are possessed as proof of ownership of bitcoins. These keys are stored in the wallet of the possessor and not in the network. The keys in the wallet are completely under its control. Some, like the offline wallet do not even need an Internet connection to operate.

From these keys, the wallet can generate signatures which will sign the generated transactions. Keys therefore, once you have them, gives you the access to the bitcoins they represent so that you can spend them. This shows how much you need to secure your wallet data. It only takes hacking the computer where an unsecured wallet is stored to have access to the bitcoins in the wallet. This means that even if the wallet is stored on a password system, extra security measures should be taken and the wallet backed up, just to be sure.

Receiving bitcoins is easy, only one thing is required, your bitcoin address, which can be generated from your wallet. It is this address that the world can see. This works well to make sure that when receiving no other protocol is needed. It is this method of reception that provides the anonymity in the bitcoin protocol. Like a public address system, where the addresses of buildings are known but no one knows the occupants of that address. Anyone may operate any account when they know the private keys stored in that account.

There is also another way of storing bitcoins, which is to run a bitcoin node. This is simply a computer running the bitcoin protocol. Each full node is equal to every other full node in the world, performing the functions of validating and conveying already done transactions similar to what we have in a bit torent peer to peer network. Each node also gets to compete in the mining competition, which actually lets that node win a bonus of newly created bitcoins and transaction charges if it gets to succeed in the competition.

Presently, the reward is 12.5 bitcoins, including the transaction fees for the past 10 minutes of all bitcoin transactions. This way, every node gets the chance to play central bank, and there is very efficient decentralization. There is much more to know than can ever be covered in this very short article. If you are interested in getting into bitcoin, you need to make sure that your funds are secured and safe because the bitcoin world does not recover stolen coins. Once coins are moved, they belong to the new possessor of keys, who has the liberty to spend at will.

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