What is Bitcoin?


Learn about bitcoin, including where and how to use it, as well as blockchain technology.

Summary

Do you have an interest in cryptography? You’ve probably heard of bitcoin, but do you actually know what it is or how it works? With the growing popularity of bitcoin and other cryptocurrencies, it’s time to take a closer look.

Contents

What Is Bitcoin?

Bitcoin is the most well-known and widely used of the digital currencies, which are also known as cryptocurrencies due to the encryption technology that secures them. Digital currencies are a new type of electronic money created specifically for the Internet age.

This may come as a surprise, but bitcoin has had such a significant impact on the financial world since its birth in 2009 that some analysts have speculated it may become a new world reserve currency and dubbed it “digital gold” or “gold 2.0.” Many central banks, including the Federal Reserve of the United States, the Bank of England, and the People’s Bank of China, are said to be looking towards creating their own bitcoin-like cryptocurrency.

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How Can I Use Bitcoin?

Bitcoin can be used to make payments in place of cash, but it has features that cash does not. It’s also a well-liked investment option:

Bitcoins and other cryptocurrencies, like gold, are limited resources that cannot be counterfeited or depreciated by a government looking to cut its debt. Although, like gold, it has been known to be quite volatile at times due to speculation and investor demand. Investors purchase and sell bitcoin on exchanges and directly from buyer to seller, just like they do with gold and other precious commodities.

To transfer value using a digital asset like bitcoin, you don’t need a payment processor, a bank, or a government. Instead of utilizing a bank as a middleman and paying its fees for significant purchases, you can safely send payments to anyone anywhere in the world, just like an email.

Cryptocurrencies like bitcoin are difficult to hack due to the technologies used to mint, store, and buy them. But like cash, a transaction involving bitcoin can’t be reversed. A bitcoin payment, unlike a credit card or certain forms of bank transfers, cannot be reversed.

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Bitcoin Is a ‘Virtual’ Currency

Bitcoins are created and stored electronically on a computer using publicly available software, making them a virtual currency that does not require a physical form like coins or paper money.

What about the images of coins that you’ve seen in photos? They aren’t bitcoins at all. Editors of newspapers and websites that needed to illustrate their content generated those visuals. ¹ What’s to stop someone from duplicating this data and creating more virtual money at will if Bitcoins only exist as virtual data?

Blockchain Technology and Bitcoin

The answer is the digital currency’s underlying record-keeping software. This is a type of electronic ledger known as blockchain that runs on several computers. No one can update a blockchain entry on a single computer unless the change is acknowledged and agreed to by all of the Bitcoin network’s computers. This, together with the encryption required to authorize Bitcoin transfers, makes it difficult for anybody to independently “mint” more bitcoins.

Bitcoin Is Independent of Central Banks

Bitcoins are not a direct component of the world’s financial system because they are not regulated by governmental bodies such as central banks, which have traditionally controlled the money supply and availability of paper currency.

Instead, balances are kept in a central location, linked to addresses, and transfers are authorised by the holder via unforgeable math. The costs for trading bitcoin do not increase in proportion to the cost or risk of the transaction.

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Bitcoin Is in Limited Supply

Bitcoin’s supply, like that of gold and other precious metals, is more-or-less fixed. There were just over 18 million bitcoins in circulation as of August 2019, and the total quantity can never reach 21 million without a change in the underlying system.

However, because a bitcoin may be divided into fractional pieces, its utility as a payment method is not limited by quantity.

Satoshi is the smallest unit of bitcoin, named after Satoshi Nakamoto, the currency’s alleged founder (although no one knows for sure if this is a real person or a pseudonym employed by a group of persons responsible for bitcoin’s creation). A Satoshi is one hundred millionth of a bitcoin (0.00000001), which is around two hundredths of a penny at today’s values. This means that system participants can own less than a single coin, and in some cases, far less than a single coin. This allows for smaller notional values to be used in commerce and transfers.

Where Can I Spend Bitcoins?

Bitcoin could not be used to buy anything when it was originally introduced ten years ago. While you still can’t use bitcoin to pay for a bus ticket or a lunch at a local restaurant, an increasing number of businesses are accepting it as a means of payment—especially through their websites.

These include well-known businesses such as: – Overstock.com – Newegg, an electronics shop – CheapAir and Expedia, airline and hotel booking firms – OKCupid, a dating site – Microsoft, for example, accepts bitcoin as payment for items made in its Windows and Xbox stores.

Dunkin Donuts, Best Buy, Home Depot, and Target are among the merchants who accept bitcoin payments in some form. Many merchants are using Flexa, a global cryptocurrency payment network that makes it easier for customers to pay with bitcoins in their establishments.

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Investing in Bitcoins

Until far, the major motivation for using bitcoin has not been to make payments; instead, the cryptocurrency’s investment potential has piqued global interest.

Bitcoins are exchanged under the symbol BTC or XBT on several markets. In 2011, the price of a bitcoin began at $0.30 and rose to a peak of $5.27 by the end of the year. The price peaked at $770 in 2013 after rising to a high of $13.30 in 2012. ⁴ On Apr 14, 2021, the digital currency reached an all-time high of $64,863.10.

Bitcoin prices have fluctuated in the past, falling to $6,914 on February 5, 2018, when the Chinese government banned bitcoin trading. In November 2019, prices were hovering between $8,200 and $9,500 as of this writing.

If you’re thinking about buying bitcoin, keep in mind that the IRS decided in 2014 that all virtual currencies, including bitcoins, will be taxed as property rather than cash. If you use bitcoin to buy something, this complicates your tax calculation because the value of your bitcoin “property” may have changed between the time you got it and when you used it as payment—and the IRS will want to know!

The Bottom Line

When it comes to investing, including in cryptocurrencies like bitcoin, everyone must determine their individual risk tolerance. Cryptocurrencies are still a new concept, but their popularity as a form of money is expected to expand.

This information is provided for educational purposes only and does not constitute investing, tax, or legal advice. Performance in the past may not be indicative of future outcomes. Before engaging in any transaction, you should consult your own adequately qualified and licensed tax, legal, investment, and/or accounting professionals.