The first mention of a product called Bitcoin was in August 2008 when two programmers using the names Satoshi Nakamoto and Martti Malmi registered a new domain, bitcoin.org.
A type of cryptocurrency, Bitcoin is a digital currency created in January 2009 following the housing market crash. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies.
There are no physical bitcoins, only balances kept on a public ledger that everyone has transparent access to, that – along with all Bitcoin transactions – is verified by a massive amount of computing power. Balances of Bitcoin tokens are kept using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them.
The public key serves as the address which is published to the world and to which others may send Bitcoin. The private key is meant to be a guarded secret and only used to authorize Bitcoin transmissions.
How does Bitcoin work?
Bitcoin is built on a distributed digital record called a blockchain. As the name implies, blockchain is a linked body of data, made up of units called blocks that contain information about each and every transaction, including date and time, total value, buyer and seller, and a unique identifying code for each exchange. Entries are strung together in chronological order, creating a digital chain of blocks.
Blockchain is decentralized, which means it’s not controlled by any one organization. “It’s like a Google Doc that anyone can work on,” says Buchi Okoro, CEO, and co-founder of the African cryptocurrency exchange Quidax. “Nobody owns it, but anyone who has a link can contribute to it. And as different people update it, your copy also gets updated.”
While the idea that anyone can edit the blockchain might sound risky, it’s actually what makes Bitcoin trustworthy and secure. In order for a transaction block to be added to the Bitcoin blockchain, it must be verified by the majority of all Bitcoin holders, and the unique codes used to recognize users’ wallets and transactions must conform to the right encryption pattern.
These codes are long, random numbers, making them incredibly difficult to fraudulently produce. In fact, a fraudster guessing the key code to your Bitcoin wallet has roughly the same odds as someone winning a Powerball lottery nine times in a row, according to Bryan Lotti of Crypto Aquarium. This level of statistical randomness blockchain verification codes, which are needed for every transaction, greatly reduces the risk anyone can make fraudulent Bitcoin transactions.
What is Bitcoin mining?
Mining is the process of spending computing power to process transactions, secure the network, and keep everyone in the system synchronized together. It can be perceived as the Bitcoin data center except that it has been designed to be fully decentralized with miners operating in all countries and no individual having control over the network. This process is referred to as “mining” as an analogy to gold mining because it is also a temporary mechanism used to issue new bitcoins. Unlike gold mining, however, Bitcoin mining provides a reward in exchange for useful services required to operate a secure payment network. Mining will still be required after the last bitcoin is issued.
How to use Bitcoin
Bitcoin is different than what you know and use every day. Before you start using Bitcoin, there are a few things that you need to know in order to use it securely and avoid common pitfalls.
Choose your wallet
Free Bitcoin wallets are available for all major operating systems and devices to serve a variety of your needs. For example, you can install an app on your mobile device for everyday use or you can have a wallet only for online payments on your computer. In any case, choosing a wallet is easy and can be done in minutes.
You can get Bitcoin by accepting it as a payment for goods and services. There are also several ways you can buy Bitcoin.
There are a growing number of services and merchants accepting Bitcoin all over the world. Use Bitcoin to pay them and rate your experience to help them gain more visibility.
How to accept Bitcoin
Bitcoin does not require merchants to change their habits. However, Bitcoin is different than what you know and use every day. Before you start using Bitcoin, there are a few things that you need to know in order to use it securely and avoid common pitfalls.
You can process payments and invoices by yourself or you can use merchant services and deposit money in your local currency or Bitcoin. Most points of sales businesses use a tablet or a mobile phone to let customers pay with their mobile phones.
Accounting and taxes
Merchants often deposit and display prices in their local currency. In other cases, Bitcoin works similarly to a foreign currency. To get appropriate guidance regarding tax compliance for your own jurisdiction, you should contact a qualified accountant.
There is a growing number of users searching for ways to spend their bitcoins. You can submit your business in online directories to help them easily find you. You can also display the Bitcoin logo on your website or your brick-and-mortar business.
Bitcoin: The pros
- Private, secure transactions anytime — with fewer potential fees.
- The potential for big growth.
- The ability to avoid traditional banks or government intermediaries.
Bitcoin: The cons
- Price volatility.
- Hacking concerns
- Limited (but growing) use
- Not protected by Securities Investor Protection Corporation
Is it secure?
The Bitcoin technology – the protocol and the cryptography – has a strong security track record, and the Bitcoin network is probably the biggest distributed computing project in the world. Bitcoin’s most common vulnerability is in user error. Bitcoin wallet files that store the necessary private keys can be accidentally deleted, lost, or stolen. This is pretty similar to physical cash stored in a digital form. Fortunately, users can employ sound security practices to protect their money or use service providers that offer good levels of security and insurance against theft or loss.
Where can I buy Bitcoin?
- Cryptocurrency exchanges
- Investment brokerages
- Peer-to-peer purchases
- Bitcoin mining
Do online brokers offer Bitcoin?
Bitcoin is an incredibly speculative and volatile buy. It’s worth remembering that stock trading can give you a similar thrill — and picking stocks of established companies is generally less risky than investing in Bitcoin. The value of Bitcoin will increase or decrease anytime, but as an investor, you have to take risks and invest in Bitcoin.