What is Bitcoin?
Cryptocurrency is a relatively new technology in the financial sector. As a result, many people are still unsure about what it is and how it works. Bitcoin is the most well-known Cryptocurrency by name, but what is Bitcoin, and why is there so much buzz around it?
What is Bitcoin?
In years gone by, people traded physical commodities such as silver and gold in exchange for goods and services. However, these were at risk of theft and loss. And so, banks offered to hold the physical assets and issued notes to prove how much wealth someone had. Over time, the link between these notes and the physical goods they represented broke down, and governments decided the notes themselves had worth. Today, we trust banks to be responsible and honest with the value of our currency so that we can take cash as payment, and others will accept it from us in return.
Bitcoin is essentially a digital version of money that doesn’t rely on the established frameworks of governments and banks. Unlike traditional currencies, Bitcoin is not issued by a central bank but by individuals who use special software to generate or “mine” them.
People can use Bitcoin to purchase products and services online or trade them for other currencies. Bitcoin allows two parties to buy and sell without involving a centralised financial service. Each party in the transaction trusts that the asset they have to trade has value without a third party guaranteeing it.
As Bitcoin is still a somewhat new technology, it’s not as widely accepted as more traditional currencies. However, a growing number of businesses now accept Bitcoin as payment, and there is a large and active community of users who trade this currency online. As the popularity of Bitcoin grows, its use will undoubtedly become more widespread.
Who Created Bitcoin?
Bitcoin was first released in 2009 by an anonymous person, or group of people, using the alias Satoshi Nakamoto. Mining and trading began shortly after Bitcoin’s launch. However, Satoshi Nakamoto has since disappeared and has not been actively involved in the further development or management of Bitcoin.
There are a few reasons Bitcoin’s inventors may want to keep their identity private. One reason is that they may not want the attention of governments or banks who may see Bitcoin as a threat to their control over the monetary system. In addition, they may simply not want the fame and responsibility that comes with being the creator of such a groundbreaking technology. Or another explanation could be regarding their personal safety.
In 2009 alone, 32,490 blocks were mined. At that time, each block had a reward rate of 50 Bitcoin. Bitcoin was newly emerging at this time, so it’s easy to assume that Satoshi Nakamoto possesses a large share of that total. As a result, the Bitcoin creator may have taken precautions to stay safe from criminals and other undesirables who could pose a risk. Whatever the reason, Satoshi Nakamoto’s true identity remains a mystery 13 years later.
Understanding Bitcoin
Understanding the terminology used when dealing with Bitcoin can make it easier to use and trade. Here are some of the most common terms:
Blockchain
A blockchain is a digital ledger that records all Bitcoin transactions. A network of nodes maintains the blockchain rather than one person or entity.
Nodes
A node is a system or computer connected to the Bitcoin network and helps verify and transmit transactions. Nodes are essential for the security and stability of the Bitcoin network.
The more nodes there are, the more secure the network is. As a result, it becomes more difficult for bad actors to attack or tamper with the blockchain as it would require them to hack all the nodes in the network.
Mining
Mining is the process by which people, or miners, create new Bitcoin. Miners receive rewards of Bitcoin for verifying and transmitting transactions on the blockchain. Miners are integral to the smooth running of the Bitcoin network. They help to ensure that transactions are verified and transmitted accurately and quickly.
Bitcoin Addresses
A Bitcoin address is a unique identifier used to send and receive Bitcoin. They are usually a long string of alphanumeric characters. They can be generated at no cost by any user.
Bitcoin addresses are used to send and receive payments, not store the Bitcoin themselves. Instead, digital “wallets” store the Bitcoin you hold.
Bitcoin Wallet
A Bitcoin wallet is a digital program that stores the private and public keys used to send and receive Bitcoin. Wallets are important because they allow users to access funds and provide security from theft. There are many different Bitcoin wallets, including desktop wallets, mobile wallets, web wallets and hardware wallets.
Private Keys
Private keys authorise Bitcoin transactions. Therefore, it is essential to keep your private key safe and secure. If someone else gains access to your private key, they can steal your Bitcoin.
Private keys should be stored safely, such as with a password-protected file or a hardware wallet.
Bitcoin Transactions
A Bitcoin transaction is a transfer of Bitcoin from one party to another. Nodes verify transactions on the Bitcoin network and add them to the blockchain. Transactions are usually quick and cheap. Moreover, they can be performed from anywhere globally and are not subject to government or bank control.
Bitcoin Price
Supply and demand determine the price of Bitcoin, and it changes constantly. When demand for Bitcoin is high, the price goes up. When demand is low, the price goes down. No physical asset backs Bitcoin, so it doesn’t have a fixed value. Therefore, the price of Bitcoin can go up or down, depending on demand at that particular time.
Bitcoin Forks
A fork is a split in the blockchain of a Cryptocurrency. A division in the blockchain creates a new type of Cryptocurrency. Forks can be positive or negative for a Cryptocurrency. A positive fork means that the Cryptocurrency is improving and expanding. A negative fork means that the Cryptocurrency is in trouble and may not survive. Bitcoin has experienced both positive and negative forks throughout its history. The most famous Bitcoin fork was the creation of Bitcoin Cash in 2017.
More on Bitcoin Mining
Mining creates new Bitcoin. Miners are people who use their computers to help process Bitcoin transactions by verifying and committing them to the blockchain. In return for their services, miners receive rewards of Bitcoin.
The first miner to solve each block gets a set amount of Bitcoin. However, the total reward of Bitcoin that miners receive is slowly decreasing over time. The block reward halves in value after every 210,000 blocks are mined, or roughly every four years. These halving events exist to reduce the rate at which new bitcoins are released into circulation, lower the inflation rate on them and keep the price of Bitcoin stable.
In 2009, each completed block was worth 50 Bitcoin. Today, and following three halving events, each completed block is worth 6.25 Bitcoin. As of September 2021, 18.828 million of the 21 million Bitcoin allowed to exist, based on Satoshi Nakamoto’s hard cap limit, have been mined and are in circulation. The price per completed block will continue to decrease by half every 210,000 blocks until all 21 million Bitcoin have been mined. Currently, this is estimated to happen sometime in 2140.
How Bitcoin Works
When you want to make a payment with Bitcoin, you’ll need a Bitcoin wallet, a digital account that stores your money. You can transfer Bitcoin to someone else by using that person’s unique Bitcoin address.
When you make a payment with Bitcoin, miners process the transaction. These miners use special software to solve complex mathematical problems. Once they have verified the payment, the miner records the transaction on an online shared ledger. No one can amend or delete these records once created, which means it would be tough for someone to allege they own more Bitcoin than they actually do.
Miners verify multiple transactions at once. These transactions are organised into blocks. Each block has a limited amount of space, and when it becomes full, a new block is made.
Each newly created block contains linked information on previous transactions. The links between blocks form a data chain that goes back to the first-ever Bitcoin transaction.
You can determine how much Bitcoin any given wallet holds by checking the shared and public blockchain ledger.
Peer-to-Peer Technology
Bitcoin uses a technology called peer-to-peer (P2P). P2P is a method of exchanging information or files between two or more devices or people without needing a centralised server.
In the context of Bitcoin, this means that transactions are carried out directly between users, which cuts the cost and time associated with using a financial institution such as a bank. It also allows users to be in complete control of their own money.
How to get Bitcoin
There are a variety of ways to acquire Bitcoin. The most common way is to buy it with traditional currency or “fiat”. You can also earn Bitcoin through mining or by completing tasks and services for others. Finally, you can also receive Bitcoin as a gift or donation.
Buy it
You can use an online exchange or broker to buy Bitcoin with traditional currency. Anyone can buy Bitcoin, and more than 1.9 million people in the UK currently hold Cryptocurrency. However, the present value of one Bitcoin is nearly £29,000, so chances are, you will be buying a share of one whole Bitcoin.
Mine it
Mining Bitcoin can be a profitable endeavour, but it requires a lot of dedicated hardware and consumes a lot of electricity. Therefore, to make a profit mining Bitcoin, your hardware needs to earn more than the cost of your electricity bill. When Bitcoin first launched, a regular desktop PC was adequate for mining. However, as more people have begun to mine Bitcoin, the difficulty creating a new block and the space required to store all the previous data links has increased exponentially. Therefore, to remain competitive and profitable, miners now need specialised hardware, such as Application-Specific Integrated Circuit (ASIC) chips, which can cost thousands of pounds to buy and run, so they are not usually attainable for most individuals.
Earn interest on the Bitcoin you already own
There are a few ways that you can earn interest on your Bitcoin. The most common way is to use an online exchange or broker that allows you to lend your Bitcoin to others (P2P lending) and receive interest in return. You can also use a Bitcoin savings account to earn interest on your deposited funds. Finally, a few platforms allow you to invest your Bitcoin in various digital assets and receive returns based on the performance of those assets. Learn more about how you can earn interest on Bitcoin here.
Do tasks and services for others
Many businesses now allow users to earn Bitcoin by completing tasks or services for them. These tasks could involve watching videos, filling out surveys, testing their website or sharing their posts on your social media.
Receive it as a gift or donation
You can also receive Bitcoin as a gift or donation from friends, family, or strangers. To receive Bitcoin as a gift or donation, you can use your Bitcoin wallet address. Gifting Bitcoin is not usually taxable for the sender.
How to use Bitcoin
People use Bitcoin in several ways. For example, some people use it to buy goods and services, while others use it as an investment.
Buy goods or services
Bitcoin is gaining in popularity each day. There are now more than 100,000 merchants worldwide that accept Bitcoin as payment. This number is growing as more and more people recognise the benefits of using Bitcoin. Some of the biggest names in business are starting to accept Bitcoin. For example, Microsoft, Dell, and Expedia now accept Bitcoin payments. The growing popularity of Bitcoin has the potential to revolutionise the way we do business.
Investment
Bitcoin is also becoming increasingly popular as an investment. The value of Bitcoin has been steadily increasing over the years, meaning that investors who have held onto their Bitcoin from the early days have seen significant profits. In addition, because Bitcoin is not tied to any country or regulated by a central authority, they are seen as a safe investment.
Some companies even offer high-interest rewards by investing your Bitcoin with them. For example, you can receive up to 0% APY on the Bitcoin you buy, transfer or hold with AQRU.
Risks Associated with Bitcoin
As with any investment, there are risks associated with Bitcoin. The most common risks include:
Price volatility
The price of Bitcoin can be highly volatile and can fluctuate rapidly. As such, it can lead to significant losses if you sell your Bitcoins at a low price or large profits if you sell your Bitcoins at a high price.
Illegal activities
It is possible for people to use Bitcoin for illegal activities, such as buying drugs or weapons on the dark web with limited traceability. As a result, governments and financial institutions may not support Bitcoin and may even attempt to ban it.
Lack of regulation
As no central authority regulates Cryptocurrencies, there are currently no consumer protection laws in the UK to protect people if their funds are lost or stolen.
Cybercrime
Bitcoin is a digital currency and, as such, is vulnerable to hacking and cybercrime. There have been cases where hackers have stolen Bitcoin, so it is vital to use strong passwords and keep your Bitcoin wallet safe.
Taxation
As Bitcoin and Crypto are relatively new forms of currency, their tax obligations can be complicated and not fully clear. Around the world, institutions are beginning to provide further guidance but it isn’t possible to predict what sort of taxes might be due on any profits you make from Bitcoin in the future.
Benefits of Bitcoin
Despite the risks, there are many reasons for people choosing to invest in Bitcoin. These include:
Potential for high returns
Bitcoin is still a relatively new currency, and its value can be highly volatile. However, over the long term, it has tended to increase in value, meaning that investors who hold their Bitcoin over time can make significant profits.
Portability
Bitcoin can be easily transferred between countries and is not subject to restrictions like foreign currency. As a result, it is a desirable currency for international trade.
Global
Bitcoin is a global currency and can be used to purchase goods and services from anywhere in the world.
Faster and cheaper
Transactions using Bitcoin are faster and cheaper than traditional methods such as bank transfers or credit cards.
Anonymity
As Bitcoin is a digital currency, it is semi-anonymous. Therefore, you do not need to provide your name or other personal information when using it.
Decentralisation
Bitcoin is a decentralised currency, meaning that no one institution controls it. As a result, users have more control over their money, making it more difficult for governments or banks to manipulate the currency.
Conclusion
Bitcoin is a digital currency that can be used to purchase goods and services or as an investment. It has attracted the attention of many investors as it tends to increase in value over time, meaning you could make significant profits from holding your Bitcoin for long periods. The services we offer at AQRU allow you to earn interest on your Crypto assets while you wait for them to do so. While its market volatility and lack of regulation pose some risks, the benefits of Bitcoin, such as its global reach, faster and cheaper transactions, and anonymity, make it an attractive alternative investment choice.