What is Bitcoin?
Understanding Bitcoin
Bitcoin is a groundbreaking invention that, for the first time in history, allows a group of software users to create and manage a digital currency supply independent of any government or bank control. Launched in 2009, Bitcoin was initially a revolutionary idea and continues to have impacts that technology experts and economists are still trying to understand.
The answer to "What is Bitcoin?" can vary depending on who you ask. To start with, it can be helpful to think of Bitcoin as a software protocol—similar to how you interact with protocols like SMTP or HTTP. The Bitcoin protocol allows computers running its software to manage a set of data (the blockchain) and enforce a set of rules that make this data scarce and valuable. The key components of the Bitcoin protocol include:
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Public Key Cryptography: Wallet software provides Bitcoin owners with a public key (used to prove ownership of Bitcoin via the protocol) and a private key (a type of password that guarantees only the owner can access their Bitcoin if kept secure).
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Peer-to-Peer Network: Nodes (computers running the software) validate transactions to ensure they adhere to the software's rules. Miners (nodes using specialized computer chips) compete for the right to group these transactions into blocks periodically added to the blockchain.
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Limited Supply: According to the software's rules, only 21 million Bitcoin can ever be produced, creating a cap that gives Bitcoin its value.
The Bitcoin blockchain is a complete record of the network's history, validated by those running the Bitcoin software (nodes). Unlike most digital data, which can be freely copied and altered, Bitcoin is unique in its scarcity, divisibility, and transferability, making it a viable form of money.
What Gives Bitcoin Its Value?
Bitcoin shares many qualities with traditional commodities and government currencies that give them value—scarcity, durability, portability, divisibility, fungibility, and acceptability. In fact, Bitcoin arguably has advantages over state currencies and commodities in many of these categories.
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Scarcity: The supply of Bitcoin is more limited than that of silver or gold, as only 21 million BTC will ever exist within the network's economy. When the first block was mined in 2009, 50 BTC were released. As of 2020, over 18 million BTC had been introduced. The amount of BTC released per block is halved roughly every four years in an event known as "halving" to maintain the limited supply.
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**Durability: Any form of money must be durable enough for repeated use. BTC private keys are a series of numbers and letters that can be backed up, stamped on stainless steel, or divided into parts, enhancing their durability.
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Portability: With BTC, you can carry your entire wealth on a flash drive, memorize it in your brain, or transfer it instantly over the internet.
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Divisibility: All currencies have denominations, allowing people to purchase goods of varying values. BTC is also divisible, down to eight decimal places. The smallest unit of currency is called a Satoshi, named after Bitcoin's creator. 1 BTC equals 100,000,000 satoshis (sats).
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Fungibility: All forms of money should be interchangeable and usable in the same way. Like paper money or gold, BTC’s fungibility can vary depending on how it was acquired. For example, BTC involved in a crime may not be accepted by exchanges or merchants. (This remains an active area of research for Bitcoin developers.)
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**Acceptability:** For something to store value, people must recognize and accept it as valuable. Currently, thousands of individuals and vendors, from Microsoft to Subway, accept Bitcoin payments. Many small businesses also accept Bitcoin for payments and donations. Additionally, you can buy and sell BTC alongside other cryptocurrencies or traditional currencies on exchanges like Kraken, which are online 24/7 to meet your trading needs.
How to Buy/Sell/Invest in Bitcoin
Investing in Bitcoin is as simple as purchasing some BTC. Here are the primary methods:
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Centralized Exchange: This is the most common method for buying and selling Bitcoin. Many companies sell Bitcoin and other cryptocurrencies, often with direct connections to your bank account or via bank transfer. The largest among these are Binance, Coinbase, Kraken, and Bitstamp.
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P2P Exchange: Peer-to-peer (P2P) exchanges connect buyers directly with sellers. Some of the best-known P2P exchanges include LocalBitcoins.com and Paxful.com. This method allows you to buy Bitcoin in person with cash or through other methods like PayPal, using the built-in escrow services of these websites.
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Mining: In Bitcoin’s early days, anyone could mine on a PC. Today, mining requires highly specialized equipment and resembles a full-time job rather than a hobby.
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Self-Directed IRA: Many alternative investment companies now offer "Bitcoin IRAs." These companies specialize in setting up self-directed IRAs for cryptocurrencies. Crypto IRA dealers work with SDIRA custodians and vault storage providers to establish your account, transfer retirement funds, and ensure you comply with IRS tax rules.
What Is the Best Strategy for Investing in Bitcoin?
Generally, the safest strategy for investing in Bitcoin is to hold it in a secure place, most likely a hardware wallet or paper wallet, for the long term. Due to price fluctuations, some investors recommend dollar-cost averaging. Instead of purchasing a large amount of Bitcoin at once, dollar-cost averaging involves making regular purchases, sometimes weekly or monthly. This reduces the risk of buying at a high price and missing out on better buying opportunities in the future. Trading Bitcoin is simple—buy low, sell high. Simple, right? In reality, most day traders lose money, although a few do very well. The situation here is similar to day trading stocks.
What Does the Future Hold?
The future of Bitcoin is uncertain. However, one thing is clear: Bitcoin is changing the world, and there's no turning back. Central banks are starting to respond to the cryptocurrency revolution by developing their digital currencies. However, it is unlikely they will be willing to give up their power to control monetary policy. As long as there are people who distrust bankers, Bitcoin will likely retain its appeal.
The value of a technology is often proportional to the size of the problem it solves. Bitcoin’s explosive growth is driven by structural issues, and while Bitcoin has already made a splash on the world stage, those same issues remain very much alive and present. Many analysts see the cryptocurrency boom as similar to the dot-com boom of the 1990s. So, is Bitcoin the next Amazon or Facebook? It certainly has the potential. And the effects of this stage in the internet's development could be even greater.
While the internet revolutionized the retail and media industries, cryptocurrencies like Bitcoin are disrupting finance, banking, and even the concept of money itself. Disrupting money and finance may be the biggest way the internet has yet to affect our lives.
