What is Bitcoin and how does it work?

Key points

  • Bitcoin is a decentralized form of digital money, which are being managed and transacted between parties without a central authority, instead it uses the blockchain technology.
  • The initial purpose of Bitcoin was to create opportunities for making financial transactions without the high fees and to beat inflation.
  • Bitcoin mining is essential for the functioning of the entire Bitcoin network - it encompasses the process of searching for the right combination of symbols, which would unlock the next block in line.
  • You can buy and sell Bitcoin from almost any cryptocurrency exchange.
  • As of today we can't say that the regular Bitcoin users can use their crypto for purchasing everything they may need as normal human beings, but it is expected adoption to increase and therefore create new applications for Bitcoin as legal tender.

Ever since Bitcoin started gaining more popularity back in the 2010’s, this cryptocurrency has been under everyone’s radar due to its increasing value. It also wouldn’t come as a surprise that people who are not too familiar with crypto still know about Bitcoin, because it has made the news’ headlines more than just a few times and is therefore common for the mass media user to be aware of Bitcoin’s existence but still not acquire enough information about it directly from the mainstream outlets. It is indeed interesting that something like BTC, which was invented for the sake of common good is only being talked about when it’s failing or reaching an all time high in success. This is the reason why it would be ideal if everyone had a better understanding for the topic of Bitcoin and the crypto industry as a whole, that way BTC or other altcoins wouldn’t be treated as passive money making schemes, but rather as a tool for financial autonomy and equality.

In this article we have gathered the right amount of adequate information someone would need, if they’re just a beginner in this field. Our goal is to showcase both the good and the bad about BTC and the ways in which it can be beneficial for the future of managing personal finance.

Who invented BTC?

Satoshi Nakamoto is the name under which the white papers for the BTC cryptocurrency were published, however it is still a mystery who the actual person or people are behind that pseudonym. There has been a lot of speculation surrounding the inventor of Bitcoin and unfortunately no progress has been made so far. It does come to show though that the person/people responsible for that project sure do prove that anonymity is possible and the users of the Bitcoin blockchain can, too, take advantage of this high level of privacy.

What is the purpose of BTC?

Although the inventor of Bitcoin is still unknown, this shouldn’t affect the merit of their pioneer crypto project. The idea behind the Bitcoin cryptocurrency was to prevent inflation, which is possible due to the limited amount of Bitcoins that can be mined and used – only 21 000 000 BTCs.

It was also intended to make financial transactions cheaper and more secure. Sending money internationally can mean two things: 1) high transaction fees, 2) the bank, which is the mediator, keeps track of all the assets you send or receive and that means that you have no privacy whatsoever. The Bitcoin network provides solutions for the mentioned problems – Bitcoin transactions have minimal fees compared to traditional ones and thanks to the blockchain technology no personal information is available for anyone to see.

It could be debatable whether or not the initial purposes of using BTC are put centre stage, because more than a decade later this cryptocurrency still hasn’t achieved the greater adoption it was intended for. As we have mentioned earlier, many people, especially the crypto traders treat BTC as a way of easily becoming wealthy, which is the reason why the focus is always on the projected value of the currency, rather than it’s application in the mainstream world, where it would be used as fiat money for purchasing everyday essential items.

The purpose of every cryptocurrency is always dependent on the governmental regulations and the strategies of profit-driven global corporations, which want to exploit the current popularity of crypto as a way to benefit their monopoly on the market, oppose to let it be used by the regular people.

How does Bitcoin work?

In order to understand how Bitcoin works, one should first understand what the blockchain is and how significant this technology is to the initial purposes of this cryptocurrency. The blockchain is the digital Bitcoin ledger, on which all transactions are being recorded. Everyone who has bought an X amount of BTCs is part of the distributed ledger, but the only visible information about the user is actually their public key, which allows them to keep their privacy. This technology is very secure due to the way it operates – it is decentralzied and all the miners are those who help with keeping up with all the current Bitcoin transfer information.

And to find out more about the way Bitcoin works, it is inevitable not to mention and explain what Bitcoin mining is, which is salient to the functions of the blockchain.

How does BTC mining work?

Bitcoin mining is the process of calculating random symbols, which when encrypted, result in a combination that ends with a certain amount of 0’s. And after you have randomly guessed the exact combination, the other participants on the blockchain get to confirm whether the sequence is correct or not. When your work is proven to have been successful, you now have the power to decide which pending transactions you will validate. That way the miner receives both a transaction fee for each verified transaction and also a reward of a certain amount of BTCs for unlocking the exact block.

Bitcoin uses the Proof of Work (PoW) consensus mechanism, which makes sure that all the participants have the same reliable database. This mechanism implies mining because when you successfully reach the goal of guessing the correct block “password”, the other participants can be sure you have done the needed work, in order to receive an award for it. The mining process also helps update the blockchain and makes it possible for transactions to be completed.

There are different types of Bitcoin mining, depending on the computing equipment you choose:

  • CPU mining – the Computer Processing Unit is the brain of the computer and it can make many calculations in a given second, which is why many people use it to also mine BTC.
  • GPU mining – the Graphics Processing Unit can be very powerful, especially in more advanced computers used for gaming. It is a better and faster alternative to CPU mining and easy to navigate by beginner miners.
  • ASIC mining – the Application Specific Integrated Circuit is a special type of hardware used for mining BTC exclusively.

Although you can mine on your own, if you notice that your computing power isn’t good enough to compete with all the other mining hopefuls, then you can join a mining pool. These communities enable people to mine together by joining their calculating forces. That way there’s a bigger chance of mining more blocks and therefore making greater profits off of that.

Read more about Cryptocurrency mining here.

How to buy BTC?

You can buy Bitcoin from most crypto exchanges because it is the most well-known cryptocurrency and many investors continue to show interest in its value. If you want to invest in Bitcoin, exchanges like Coinbase, Binance and Kraken are great marketplaces for this certain cryptocurrency. Whenever you decide to start buying BTC, you have to first create a hot storage wallet or if you use a centralized exchange like Coinbase, it is easier for beginners to create a wallet account on such a platform. When you register yourself on any type of a hot wallet provider’s website, you will receive a public and a private key. The public key is what other people will need to identify your account and send you crypto. And the private key is most literally the only key to entering your crypto assets.

After you have chosen whether you want to create a wallet independent from the exchange or stick with the one provided by it, you can then enter the exchange and place orders which would be completed when another user agrees to make a deal with you. You can purchase BTC with either a debit card, bank transfer or even through PayPal, depending on the payment options the exchange provides.

The official Bitcoin website bitcoin.org  offers its users to buy Bitcoin directly from it, but you will be transferred to a third-party exchange – MoonPay, through which you can also sell Bitcoin.

It is recommended that you keep your BTCs in your exchange wallet, at least as long as you don’t feel secure having a lot of crypto stored online, because you’ll be charged with extra fees everytime you want to send your assets to an eternal hot or cold wallet.

How to store BTC?

Depending on the amount of BTC and the investment strategy you have chosen, there are a few ways to store your assets:

  • hot storage – hot wallets are mandatory when dealing with BTC, they’re an online software which is programmed to store any type of cryptocurrency. A great hot wallet for beginners is Exodus, which is also integrated with the Trezor cold storage wallets.
  • cold storage – these types of wallets are called “cold” because they resemble a special type of USB, which is intended to store your crypto off-line. The cold wallets with best reviews are the Ledger Nano X and the Trezor Model T.

Your choice of a Bitcoin wallet is very important, because it is what will keep your BTCs in a safe on/offline environment. It is important to not leave your crypto in the exchange, but rather transfer it to the hot wallet.

If you prefer the long-term approach that would mean that you would like to invest in a certain amount of BTC but you don’t want to sell it soon after that, instead you will wait as long as you find appropriate, in order to make sure the Bitcoin’s price is high enough for you to sell and make a profit. Thus said, if you have a larger amount of BTCs you should consider storing them in a cold wallet, but if you feel comfortable with your assets staying in the online wallet, it’s still a good option.

And if you want to become an active trader, then you will have to have easy access to your BTCs at all times, then using a trustworthy hot wallet should be your main goal.

There are different ways to store Bitcoin – cold storage is by far the most secure because it is not connected to the Internet, but hot wallets are reliable, too, when chosen reasonably.

What can you do with BTC?

Investing in Bitcoin would mean that you expect to hold onto it as long as the Bitcoin prices go up you can try selling it. If you’re a consistent trader then these short-term crypto investments are a convenient way for you to strategically create a decent amount of income. But the greatest question for all Bitcoin holders is how could they use these digital assets in the real world.

The most rewarding part for any Bitcoin owner is to actually be able to spend it as though it was fiat money. The progressive practices in the Western world have made it possible for people to take advantage of purchasing different services and consumer goods with BTC. Keep in mind that the following businesses accept Bitcoin as a payment option mainly in Northern America and Europe.

A simple Bitcoin transaction can get you anything from your favorite sandwich from Subway to a BMW car. As crazy as it may sound, there have been quite a few high-end businesses which have started to accept Bitcoin payments, which laid the path for smaller merchants to do the same.

Thanks to the BitPay app you can now shop with your BTCs from the following businesses:

  • Grocery stores – Whole foods, Walmart and Tesco
  • Fast food chains – Burger King and Subway
  • Furniture stores – Beliani
  • Tickets for events – booking a ticket for a sports game or other cultural events.

Check the Ultimate lists of businesses that accept BTC in 2022 here.

Online e-commerce platforms like Etsy and Shopify allow users to make a Bitcoin purchase, too. More clothing merchants operating online like Macy’s and H&M also accept BTC. Thanks to Expedia – an online booking platform, you can now pay for your dream holiday with crypto.

Yes, people have become very creative with the ways you can spend your BTCs but there’s still a lot of room for improvement. It is safe to say that as of today Bitcoin may be the most popular cryptocurrency worldwide but that still doesn’t mean that it has been adopted enough to be freely used for purchasing basic items and services. Hopefully, this will change in the near future and the advantages of using crypto will most definitely be welcomed, especially by those who travel a lot and wish not to deal with the traditional taxes and fees when abroad.

Check out the ultimate list of what can you buy with Bitcoin in 2022.

Should you buy BTC?

Cryptocurrencies are not always the way to spend your extra money, they’re volatile and therefore you should be prepared to both feel like you’ve made the right choice investing in crypto and also feel disappointment when the prices drop unexpectedly. It is a risk that you have to be willing to take, otherwise you won’t be able to experience such great investment opportunities. Know that the crypto market is going up and down by the minute and that is both good and bad. After Bitcoin reached its peak in April of 2021, it has been gradually going down. This may be bad for those who would like to sell but it is still a great chance for beginners to buy it when it’s cheaper and simply wait for it to go back up and then sell it.

Due to inflation and other global issues, 2022 hasn’t been good to BTC at all and it is still hard to make predictions about it’s future price, but that can only mean that you just have to keep holding onto it, until there are substantial changes. Keep in mind that the recovery may take time and only patience will save the day. Especially, if you’re new to BTC, just start with smaller amounts and don’t expect to all of a sudden become rich because of an investment you made. It may take a lot of time before we see the BTC chart reach $69 000 again but the best thing about crypto being volatile is that you never know which way it will go and that will give you just enough hope to wait for the next price peak.

Either way, you have to stay updated with the constant changes in Bitcoin’s price, in order to make the strategy which would help you stay afloat. Ultimately, it won’t be a rip off to invest in BTC, because of its popularity and dominance on the market it will always find its way back up on the crypto ladder and you will eventually be able to at least retrieve the initial investment.

*The information in this article is aimed at serving educational purposes and is not provided by a professional financial advisor.

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