Bitcoin

Updated on April 4, 2024
Article bySayantan Mukhopadhyay
Edited bySayantan Mukhopadhyay
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Bitcoin?

Bitcoin is a digital currency that came into existence in January 2009, speculated to be created by Satoshi Nakamoto, whose true identity is yet to be authenticated. It provides lower transaction fees than the traditional online payment systems, is controlled by a decentralized authority, and is not like government-issued currencies.

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They operate on a network known as blockchain, which is a peer-to-peer network. This network makes the process secure and transparent; thus, there is no need for any intermediate authority like banks to control the process. It is the first cryptocurrency that came into the market and gained a lot of attention.

Key Takeaways

  • Bitcoin, a digital currency introduced in 2009, features lower transaction fees and operates with decentralized authority, distinguishing it from government-issued currencies. However, the true identity of its creator, Satoshi Nakamoto, remains unverified.
  • A Cambridge University study in 2017 estimated 2.9 to 5.8 million Bitcoin users. Bitcoin’s blockchain technology creates a permanent and unalterable public record, helping combat forgery and fraud.
  • Bitcoin technology is utilized to establish dispute-free wills and secure voting records, ensuring tampering is not possible. This innovation has the potential to revolutionize record-keeping and enhance trust in critical processes.

How Do Bitcoins Work?

Bitcoin is a digital currency that is decentralised and operates through a technology called blockchain, which is a peer-to-peer network. Blockchain is a public ledger where the transactions are continuously recorded and it maintained using a huge network of computers which are known as nodes.

The best part is there’s no third party in this system. Every transaction happens only between users, without an intermediary, in a clear and transparent network. This makes the entire system easy, less time consuming and at the same time secured. For this reason, it has gained a lot of attention in the financial market, eventually leading to a steady rise in its usage.

The reward that is given for using bitcoins is called mining. In February 2015, it was found that around 100,000 businesses approved and accepted these as the mode of payment.

 It can be used as an investment option, as an asset, or as a digital currency. However, it is necessary to understand the concept clearly and also have a high-risk appetite because the system is subject to a lot of fluctuations resulting in high level of risk along with high reward.

As per the research of Cambridge University in 2017, around 2.9 to 5.8 million users of bitcoins were reported. But it is always advisable to do proper research and keep track of the latest rules and regulations while investing in it.

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History

In the year 2008, the world went through a great financial crash. Banks and government money systems weren’t working, and people asked various questions about the system.

Amid such an explosive atmosphere, on 18th August 2008, a domain name, ‘www.bitcoin.org,’ was registered. Till now, no one could find out who registered the domain name. After two weeks, an individual (or a group of people) named Satoshi Nakamoto published a 9-page document. Nakamoto introduced ‘bitcoin,’ a peer-to-peer electronic cash system in that document.

No one paid heed to Nakamoto since people were dealing with the unprecedented crash in the stock market.

Moreover, people didn’t think that kind of system would scale.

A few months later, on 3rd January 2009, the first-ever 50 bitcoins were released. And that was the beginning of a new form of money, the money that could change the way we look at the world’s economy.

Features

Let us look at some features of the same:

  • Decentralization – Since any central authority does not control it, it relies on a secured distributed network.
  • Supply is limited – The supply is limited, resulting in control over its value and limiting inflation.
  • Secured – It is secured because it uses cryptographic algorithms. They are recorded in blockchain that cannot be misused by unauthorized users.
  • Anonymous – In this system, the identity of the users remain undisclosed. However, the transaction can be traced upto a certain extent.
  • Fluctuations – The price of Bitcoins are subject to significant fluctuations within very short period, making the system very volatile and risk. A rise in price can render significantly high profits but sudden fall leads to heavy losses. Factors like demand or investor sentiments can influence prices to a great extent.

Thus, these are some of the important features of this cryptocurrency.

How To Buy?

Bitcoin

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  • First step: To be able to purchase these. First, you need to install a “virtual wallet” onto your smart device – your mobile phone or your laptop. This wallet is the software that helps you track all of your transactions and balance.
  • Second step: To buy it, you should be ready to spend real money. You can deposit the money through an online payment gateway. Or you can transfer it directly from the bank to the account of a third-party website that connects bitcoin buyers and sellers.
  • Third step: Once the payment is made, you will be able to order from the website. Treat it just like buying stocks. The way you would buy stocks by transferring the required amount, you would need to buy bitcoins similarly. You would use an exchange like “bitstamp” for placing your order.
  • Fourth step: This is not the next step but is an alternative way. If you feel that the above steps are cumbersome, you may use a third-party host like “bitinstant,” which cuts the effort in half and sends bitcoins directly into your “virtual wallet.”

Example

Let us try to understand the concept with the help of an example.

Let us assume that John wants to send Bob 0.2 Bitcoin. John will initiate a ansaction containing the details like Bob’s Bitcoin address and the amount. John’s message will then spread in the network. The miners will collect all such the transaction details and store then in blocks. They will not solve a mathematical problem and the first solver will add a block to the system. This confirms the validity o the transaction. Bob can detect this and receives the required cryptocurrency from John. Now the transaction is complete and is recorded in the network. Both John and Bob gets an update on their balances accordingly.

The above example clearly explains the system.

Uses 

From the above, bitcoins may seem an alien concept. But it is not. It has many practical uses and applications, and it can be used beyond just monetary transactions. It will help the individual as well as society –

  • Using this technology, a permanent and unchangeable public record can be created. It will help reduce forgery and fraud.
  • By applying this technology, you would be able to create business contracts. These business contracts can be used as evidence that the agreements were made prior.
  • By using this technology, one can create their will. If that is being done, there would be no dispute regarding a deceased person’s will. As a result, after the individual’s death, the right people will get the inheritance.
  • Using the same technology, national voting records can be built and maintained. As a result, nobody would be able to tamper with it. If anyone does any tampering, it will be immediately caught.

These practical uses can be implemented if most of the population realizes the value of bitcoin technology and starts to embrace its magnificence.

Advantages

Just as every system in the economy has advantages and disadvantages, even this cryptocurrency has the same. Let us analyze the various points that add to its benefits for the users.

  • Hidden identity: Bitcoin technology is security against cyber-theft is the ability to keep oneself under camouflage. With this technology, you would be able to keep your identity hidden. Since transactions or accounts have nothing to do with real-world identities, one can only analyze the flow of the transaction. It wouldn’t be possible to find the real-world identities of anybody. You would receive or send bitcoins to addresses that are just the chains of 30 characters.
  • No gatekeepers: To use the banking system, you have many gatekeepers who would prevent you from making the transaction. There would be no gatekeepers, and anybody with the open software could receive or send bitcoins. Under this technology, you would have to take responsibility on your own.
  • More secured: Its almost impossible to hack your account under bitcoin. Its funds are securely locked under a cryptography system. If you’re the owner of a private key, only you can send crypto-currency i.e. bitcoins. Since it is made by using solid cryptography and huge numbers, it’s impossible to hack the address.
  • Swift and global: It is super fast. Once the transaction is initiated, it is propagated instantly to the global network; and the transaction would be confirmed within a couple of minutes. And since it is done with a wide global network, the owner’s physical location doesn’t count. Using this technology, you can send bitcoins to your relatives nearby or a friend abroad.

Thus, the various advantages of the system is elaborated above.

Disadvantages

Along with the benefits it is also important to understand the disadvantages which are as given below.

  • The only possible disadvantage is that every transaction is irreversible. No one can reverse this transaction. Once the transaction is initiated, it’s done.
  • In the usual banking system, a safety net is there in case of critical transactions. Under bitcoin technology, there’s no safety net. If you send your funds to a scammer, your scammer will have the money.
  • That’s why it’s important to first confirm to whom you’re sending your funds. You need to be more responsible in sending funds under bitcoin.

Frequently Asked Questions (FAQs)

1. Are Bitcoins a good investment?

Investing in Bitcoin can be a high-risk, high-reward proposition. Bitcoin has experienced significant price volatility, and its value can fluctuate dramatically over short periods. While some investors have made substantial profits, others have faced losses. Before considering Bitcoin as an investment, individuals should thoroughly research the market, understand the risks involved, and only invest what they can afford to lose.

2. What are the risks associated with Bitcoin?

Several risks are associated with Bitcoin investment, including price volatility, regulatory uncertainty, security vulnerabilities, and market manipulation. The lack of a centralized authority or government backing also means that investors have limited recourse in case of fraud or theft. Additionally, technological risks, such as software bugs or blockchain forks, could impact the value and usability of Bitcoin.

3. Are Bitcoin ATMs profitable?

The profitability of Bitcoin ATMs depends on several factors, including their location, transaction fees, operating costs, and demand for Bitcoin in the specific area. While some Bitcoin ATM operators have reported profitable ventures, it’s not a guarantee for every location. The competition, regulatory environment, and fluctuations in Bitcoin’s price can also influence the profitability of Bitcoin ATMs.

This has been a guide to what is Bitcoin. We explain its history, features & how to buy it along with example, uses, advantages & disadvantages. To learn more about Investments, you may refer to the following articles –