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What is Bitcoin?
Bitcoin is the first decentralized anonymous cryptocurrency and only exists in digital form. You cannot hold it in your hand like traditional money.
Bitcoin makes it easy to carry out online transactions by bypassing the central banking system.
No central authority like a government or bank controls it. It is a store of value like gold, and also a medium of exchange like fiat currency.
Bitcoin is a currency (bitcoin with a small 'b'), and it is also a payment system (Bitcoin with a big 'B').
It is actually clever computer code. This code is open source, which means anyone can use it to create their own cryptocurrency. This is why thousands of other cryptocurrencies now exist.
Cryptocurrencies are digital currencies that use military grade cryptography to enable them to control the creation of new coins, and to be securely stored and transacted on the blockchain.
A blockchain is a digital ledger that is anonymous and distributed. Bitcoin is just one of the many blockchain applications possible. Bitcoin is not a blockchain (some people get confused).
Transactions on the blockchain are verified by computers working on complex maths equations. These computers act as nodes and prevent errors such as the same coin going to two different people (double spending).
Sending and receiving bitcoin is simple. As long as you have the right software/hardware, you can simply scan a QR code or input an address to send bitcoin.
Bitcoin can be sent to anyone, anywhere in the world, without having to go through a bank or 3rd party payment service. This reduces the amount paid in fees dramatically.
Anyone anywhere can buy, send, receive, or store bitcoin. No restrictions imposed.
Who created bitcoin?
Bitcoin was created in 2008 by Satoshi Nakamoto. No one knows who Satoshi Nakamoto is, or whether that is his real name. It might not even be one person.
What he created will change the world by taking the power away from governments and banks, and empowering people instead. It will disrupts systems and industries and not everyone will be happy with what Satoshi gave us. So maybe Satoshi did a smart thing by disappearing.
Since we do not know who Satoshi Nakamoto is, we cannot ask any questions. This gives everyone the opportunity to decide how bitcoin and blockchain is to be used, and takes away any central influence.
However, Satoshi Nakamoto does hold 20% of the total bitcoin. Around 500,000 bitcoins. If bitcoin goes mainstream, Satoshi will be the richest man on the planet.
Satoshi Nakamoto released the Bitcoin whitepaper in 2009 in which he explained that bitcoin was designed to be a medium of exchange and a store of value.
What does bitcoin look like?
Bitcoin is lines of code. It is programmable money. Unlike fiat currency, bitcoin is not printed. It is a virtual currency that you store in digital wallets and use for online transactions from person to person without an intermediary.
The image below is of a physical representation of bitcoin. Some of these are just novelty, and there are some physical bitcoins with a public key or QR code engraved on it.
How is bitcoin created?
Bitcoins are created by connecting their computer to the Bitcoin network and contributing their computer's processing power to solve maths problems.
The process of creating bitcoins is called mining. Just like gold, there is a limited supply of bitcoins. Only 21 million can ever be mined. Over 16 million are already in circulation. Around 2 to 3 million are most likely to be lost due to people losing their private keys. It will be the year 2140 by the time the last bitcoin is mined.
To mine for gold, you need man power. To mine for bitcoin, you need computer power. The computers work hard to solve a mathematical puzzle in order to confirm blocks of bitcoin transactions on a digital ledger.
The bitcoin protocol (rules) states that the amount of computational power needed to solve a block increases as the bitcoin network grows. So basically, as more and more computers join the bitcoin network, the puzzle increases in difficulty. Therefore more powerful mining machines are needed to keep bitcoin mining profitable for the person running the miners.
At first, bitcoin was mined with CPU of desktop/laptop computers. Then as the difficulty increased, gaming computers with powerful graphics cards were used. By 2013, powerful computers (ASIC miners) built specifically to mine bitcoin were used.
The miner is rewarded with newly mined bitcoin when a puzzle is successfully solved, and therefore a block of transactions confirmed.
Miners sometimes join other miners to work on the same block, and then share out the bitcoin rewards when the block is solved.
The amount of bitcoin that is rewarded is halved every 4 years. In 2015, the reward amount reduced from 25 bitcoin to 12.5 bitcoins. This increased the price of 1 bitcoin from $300 to $500. The next halving will take bitcoin to another level.
How valuable is bitcoin?
As more people start using bitcoin, the value of bitcoin will increase. In 2012, 1 bitcoin was around $27.
The value of bitcoin exceeded that of an ounce of gold for the first time in March 2017. By November, 1 bitcoin was worth more than $10,000!
In the near future, very few people will be holding one whole bitcoin. As the price increases, not everyone will be able to afford to buy 1 bitcoin. Even at the current price, many would struggle.
According to the BBC, 3-6 million people were using cryptocurrencies at the beginning of 2017. This number increased to 10-20 million by November.
As more people understand bitcoin, the demand for it will increase. It won't be long before bitcoin becomes the most common payment method in the world. Give it 10 years.
As long as you have internet access, you can start using bitcoin.
Because people know that there is a chance that bitcoin will appreciate in value, a lot of people are holding it, rather than using it to buy goods and services.
Risks
In November 2017, 1 bitcoin passed $11,000 and then lost over a fifth of its value in a few days. It is important to understand that bitcoin is a new technology and the price is highly volatile.
Only buy as much as you can afford to lose. It is not backed by a government and is only worth something if people are willing to pay for it and use it. But that's the same with money too.
Bitcoin transactions are not reversable. Unless the person you sent your bitcoin to actually sends them back, there is no way of reversing a sent transaction. If something goes wrong, there's no central authority to complain to.
Because of the increasing value of bitcoin, there are a lot of bitcoin scams taking place. Do not send your bitcoin to anyone that you do not trust.
Hackers and scammers are targeting bitcoin users. Hackers have used ransomeware to demand payment in bitcoin in return for access to data systems that they've blocked access to.
People are also losing bitcoin to scammers on social media. Scammers usually use greed and fear to get people to willingly send them the bitcoins, only to never return them again.
Hacks and scams are increasing because the value of bitcoin is increasing. There is a demand for it and as more and more people educate themselves around bitcoin, they will be able to keep their bitcoins secure.
Bitcoin is highly volatile. Events like hacks, hard forks, and regulations in certain countries, have all had an impact on the price of bitcoin in recent years. However, in the long term, bitcoin keeps on rising because the demand is increasing.
Do I have to buy a whole bitcoin?
No, you don't have to buy a whole bitcoin. If you want to own some bitcoin, you can buy a fraction of a bitcoin to spend or invest.
One bitcoin can be broken down into 8 decimal places. The smallest unit of a bitcoin is 1 Satoshi. 100 million Satoshis make 1 bitcoin.
So you can spend $100 and buy a fraction of a bitcoin and slowly build up to owning one whole bitcoin or more.
My recommendation has always been to aim to hold at least 1 bitcoin. However, with the ever increasing price of bitcoin, it's getting more and more difficult to afford for a lot of people.
In a few decades, very few people will have 1 whole bitcoin. Those who do, will most likely be multi-millionaires. No joke.
This meme has been circulating social networks and will mostly likely evolve as time goes on.
Is it too late to mine or buy bitcoin?
The difficulty of mining bitcoin increases as the network grows. Mining bitcoin can be profitable if you have cheap electricity and the latest ASIC miner. It also depends on the value of bitcoin at the time. Basically, if it is cheaper to buy bitcoin, just buy some.
Buying bitcoin is also getting expensive, but you can buy in small amounts.
You can also buy alternative cryptocurrencies and trade them to increase your bitcoin.