BITCOIN
What is Bitcoin?
You’ve probably heard about bitcoin from friends or in the media before. In 2017, bitcoin was experiencing a massive boom and a lot of people started dabbling in cryptocurrency and that number is continuing to increase.
Created by an anonymous person or group using the name Satoshi Nakamato, bitcoin’s obscure origins have shrouded this cryptocurrency in mystery.
If you’re thinking about buying Bitcoin or are just intrigued by the concept of it then read on.
In this article, we will answer all the questions you may be wondering about from ‘What is a cryptocurrency?’ to ‘How do you buy bitcoin?’
What is bitcoin?
Bitcoin (BTC) is a digital currency that is produced by computers and held electronically in programs called wallets. This digital currency sometimes referred to as a bitcoin token, has encryption for security, and can be sent electronically from one user to another, globally and instantly. Bitcoin is also the name of the payment network where bitcoin tokens move.
Unlike payment networks like Visa or MasterCard, no single company or person runs the bitcoin network. Bitcoin is a decentralized system that works by a network of computers around the world that keep track of all transactions that are stored on a blockchain.
Bitcoin can’t be seen in a physical form and is literally software. It’s run across a network of connected computers which facilitates transactions between people. The smallest unit of a Bitcoin is called a satoshi. One satoshi equals one hundred millionth of a Bitcoin (0.00000001).
People can use Bitcoin to pay for goods and services electronically, but you can’t pay for everything currently with this digital currency. It’s also impossible to reverse a transaction with Bitcoin like you can with a credit card or PayPal.
What is a decentralized system?
A decentralized system, like Bitcoin, allows people to pay each other directly over the internet without the need for a trusted third party, such as a bank or government. The Bitcoin network is maintained by a group of volunteer coders who confirm/validate transactions - referred to as ‘miners’ and powered by a distributed computing network around the world, dedicated to running this open network.
For example, when you owe your friend money you transfer money from your bank account to their bank account, so the transaction is going through a middleman – your bank. Bitcoin transactions go through its peer-to-peer network, and all transactions are recorded in a public ledger known as the “blockchain” and validated by miners.
Bitcoin was born from the idea that fiat (eg. USD, AUD) currency is uncertain because it’s looked after by governments and central banks who determine its value. Even when the world isn’t going through a global crisis, central banks can change the price of money through interest rates which creates inflation.
Are bitcoin and cryptocurrency the same thing?
Bitcoin is a type of cryptocurrency but it’s the most well-known because it was the first one created. After bitcoin was created in 2009, more and more cryptocurrencies were created in light of bitcoin’s pioneering and revolutionary premises.
You may have heard of some other cryptocurrencies that have emerged as bitcoin competitors such as Etherum (ETH), Ripple (XRP), and Litecoin (LTC). While bitcoin was radical due to it being a new form of digital money that was a decentralized system, people began to see the potential of using blockchain technology. Ethereum, for example, wanted to also use the technology as a way to store computer code for decentralized financial applications and contracts.
What are the origins of bitcoin?
No one knows the real name of the person or persons who created bitcoin, but it was introduced under the pseudonym Satoshi Nakamoto. The first time bitcoin was mentioned was in 2008 when Satoshi and another programmer Martii Malmi registered the domain, bitcoin.org. A paper was initially released that proposed the idea of Bitcoin in 2008 called ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, which laid out the problems it seeks to solve and how it would function leveraging Blockchain technology. A Year Later, the bitcoin network was officially launched.
Bitcoin: A Peer-to-Peer Electronic Cash System
This document outlined this decentralized electronic payment system that would be secure and verify all transactions. It would be a new form of currency that allows for trustless payments on the internet, meaning that no trust would be needed between parties in order to exchange money.
Compared to fiat currencies (eg. USD, AUD) there is a finite amount of bitcoin, which is 21 million. This makes bitcoin an attractive asset because if demand grows the value will increase because the supply remains the same.
The bitcoin software was released in 2009 and anyone in the world can now download and use this software meaning that Satoshi has no more control over the network than anyone.
Bitcoin price movement from 2009 to 2020
There was some scepticism during its inception as to whether bitcoin would ever take off. In January 2009, the first bitcoins were issued at a value of $0.06 USD. While a small amount of interest arose, the price of bitcoin remained at zero until 2010.
Bitcoin’s first breakthrough came in 2010 when the value of bitcoin rose to a peak of $0.39, and the first bitcoin exchange, Bitcoinmarket.com, was launched. People were trading bitcoins on forums prior to this, including a now-infamous transaction that resulted in two pizzas being traded for 10,000 bitcoin on May 22.The following year, two other cryptocurrencies (Namecoin and Litecoin) appeared.
In 2013, at the same time the Cointree platform launched in Australia, bitcoin became part of the mainstream financial world and its value soared to around $1000 USD. Bitcoin’s price fell below this level from 2014 and didn’t look like it would reach it again, however in 2017 bitcoin really hit its strides. By the end of the year the price of bitcoin had nearly reached $20,000 USD per coin. The reason for its explosion isn’t really clear but what did become clear was cryptocurrency was here to stay.
The price had fallen since then ending 2019 at around $10,000 USD a coin, and in January 2021, it reached it’s new all time high of around $40,000 USD.
What is bitcoin mining?
The word ‘mining’ conjures up images of someone digging up the earth for diamonds. While bitcoin tokens cannot be physically dugout, it works in a similar way. Previously we mentioned that there was a finite amount of coins with a maximum of 21 million bitcoins. Those don’t all exist right now, so just like diamonds need to be found to be brought to light, so too do bitcoins. So how do bitcoins get mined? That’s where bitcoin miners come in.
A bitcoin miner doesn’t do any digging, but they are using a computer to try and solve a puzzle, that is, verifying a ‘block’ of transactions on the bitcoin network. As transactions take place on the bitcoin network, they are recorded in ‘blocks’ which also include a reference to the block that preceded it. It’s a miner’s job to review these blocks of information and verify their legitimacy in the network. The references, combined with the network’s peer-to-peer verification, is what makes the system so secure. Anyone trying to hack the system would need to alter the references for thousands of blocks of information, as well as create new ones and get them accepted by the network.
Mining benefits the whole network because bitcoin miners are spread throughout the whole world and it’s their responsibility to monitor transactions that are being made to regulate the system. The reason why bitcoin mining appeals to individuals however is that they have the potential of being rewarded with valuable bitcoin tokens if they are successful.
Is bitcoin mining profitable?
Bitcoin mining has become more and more profitable as the value of the crypto currency has increased, however consideration needs to be given to hardware requirements and running costs.
In the beginning, people were using their laptops to mine bitcoin, so it was relatively easy to mine. Nowadays people and organisations have high performance computers setup, sometimes referred to as ‘rigs’, that are used for one sole purpose – to mine bitcoin. This is because as more miners enter the network, competition increases, and so does the ‘difficulty rate’ to solve the puzzle and earn bitcoin, helping stabilise the production of bitcoins into circulation. However the increased difficulty requires more powerful computers.
Additionally, as the computational requirements increase, so does the level of electricity needed to power the mining firmware and hardware.
While it’s easy to calculate your net profit with bitcoin mining because you know the nature of the difficulty, you know the performance of your miners and you know your running costs - there’s plenty of calculators available online to help. What you don’t know is the value of bitcoin, so you depend on its volatility.
How do bitcoin transactions work?
So let’s say John wants to send some Bitcoin to his friend Sarah.
First of all, John needs Sarah’s Bitcoin address. Without her address, he cannot send her Bitcoin, just like you cannot send mail in the post without the receiver’s residential address.
Unlike a home address though, Bitcoin addresses are a string of letters and numbers, making it impossible to remember.
Anyone can send Bitcoin to an address, but only the owner of that address can access the Bitcoin.
Bitcoin transactions are stored in a public place, known as the blockchain. On the blockchain is a continuously growing list of transactions.
So John sends some Bitcoin to Sarah and it’s stored on the blockchain where anyone can see the transaction, but only Sarah can access that Bitcoin.
Sarah takes the Bitcoin that John has sent her from the blockchain and she unlocks it using a password that only she has access to, and can now send it on to others or withdraw it using an exchange.
Two takeaways of Bitcoin transactions
- Anyone can send Bitcoin, but only the person who owns that address can unlock it
- Transactions are added to the blockchain, which is a public list that anyone can look at
Why do some bitcoin transaction confirmations take so long?
Another reason why your transaction confirmation might be taking a while is that blocks are limited to 1 MB. With an increased number of transactions taking place on the network comes an increased number of blocks requiring validation, which causes some blocks to get stuck in a queue waiting to be validated. This 1 MB limit may be increased in the future but for the moment this can sometimes slow down confirmation times and the Bitcoin network itself.
When you make a bitcoin transaction you usually include a ‘miner fee’ which pays the miner. This is also how miners prioritise which transactions go in the block. So to get your transaction through quickly, it’s important to include a sufficient miner fee.
What is a bitcoin exchange?
It’s important to note that different exchanges use various different payment methods that can be used for depositing funds. If you are trading on an exchange and would like to withdraw money from your account, you can do this using the options that your exchange provides such as depositing your funds into a nominated bank account.
How does bitcoin trading work?
If you’re new to trading in bitcoin it’s a good idea to get to learn the bitcoin landscape and what affects its price. Factors that can trigger the bitcoin price to move up or down include:
Bitcoin supply
Media and news
Integration with payment systems and banking frameworks
Performance of other asset types
Major events
Bitcoin halving
You should also pick a trading style and strategy that aligns with your bitcoin goals. A few different strategies include:
- Day trading
- Trend trading
- Long term holding
Day trading
This strategy involves opening and closing all positions in the same trading day. This means someone is typically not left exposed to possible changes that can happen overnight and is often a strategy people looking to profit from short-term price movements choose.
Trend trading
Trend trading involves following the current trend. For example, if the market was going well but someone noticed it starting to slow or reverse, then closing their position and opening when the next trend emerges.
Long term holding
This strategy is where someone buys and holds onto their bitcoin. This strategy is used when someone sees a positive outlook on bitcoin’s long-term price.
How much are bitcoin transaction fees?
Every time you make a bitcoin transaction you’ll need to pay a fee and this can be due to increased demand for processing transactions through the bitcoin network. Bitcoin transaction fees fluctuate, just as the price of bitcoin itself does. If you look at this data from Bitinfocharts, you can see how much the transaction fees can increase and fall.
The money you pay in transaction fees goes to the bitcoin miners that secure the network and confirm the transactions. When miners solve the next block, they also get to claim the transaction fees for the transactions on that block. For example, the reward per block is currently around 6.25 BTC, but once the transaction fees they’ll receive the 6.25BTC plus whatever fees are associated with the transactions on the block.
So while there is no obligation for you to add a fee to the transaction, there is also no obligation for the miner to include your transaction in the block. That’s why it’s worth including a fee to incentivize the miner to include your transaction in the block. People wanting to push to the front of the queue will pay the highest possible fee which will mean it’ll get confirmed a lot faster. This could mean the difference between 5-15 minutes and 30+ minutes.
How do you set up a bitcoin exchange account?
If you want to set up a cryptocurrency exchange account, you’ll need to provide some personal information to get trading. While every exchange registration process is slightly different, they generally follow a similar process.
First you’ll need to provide your name and email address. Then you’ll need to set up a payment method to use for deposits. Some exchanges have different trading tiers, so you may need to provide more information depending on the level of trading you plan on doing.
Some other information you may be asked to supply include:
- Date of birth
- Phone number
- Residential address
- Driver’s licence, passport or proof of age card
- A document with your address on it (eg. utility bill)
Once you have supplied all the information you’ve been asked for and it’s been approved, you’ll be able to start trading on a cryptocurrency exchange.
How does a bitcoin exchange account work?
Now that you have an account set up, it’s time to explore the cryptocurrency exchange. You’ll need to buy some bitcoin first, so to start you’ll need to transfer some money into your account. Each cryptocurrency exchange has different prices and that’s because exchanges aren’t connected to each other, there will be different buyers and sellers on each exchange and at different volumes. Prices for different currencies depends on the activity of the buyers and sellers on each different platform.
When you search the price of bitcoin into Google for example, they calculate it using an aggregate price. It’s also important to note that bitcoin exchanges serve different purposes. Some are purely for traders while others are made to exchange crypto into fiat currency. Exchanges that are designed for traders generally have lower commission fees, however may lack diversity in investments and be overly complex for those just getting started.
Cryptocurrency exchanges share some similarities to traditional stock exchanges but they are also very different. While both types of exchanges allow you to trade, a stock exchange trades in company stocks or shares, while a cryptocurrency exchange trades in digital currencies. When you buy shares in a company you own a small (or large) part of the company, but buying bitcoin doesn’t mean that you own part of the network.
How do you get a bitcoin wallet?
Without a bitcoin wallet, you won’t be able to buy, trade or use bitcoin so it’s a necessity. A bitcoin wallet is where you’re going to hold your bitcoins but it’s not like a regular wallet that you carry in your pocket. This is a digital wallet that can be on your computer, phone or a physical hardware device that you can carry with you.
You can set up a bitcoin wallet in a few different ways. The easiest is to download and install a free software app on your phone or computer. You can also set up a bitcoin wallet using a web service. Most modern cryptocurrency exchanges however provide free wallets through their platform.
The most secure way to store your bitcoin is on a hardware wallet. These are physical devices and should be put in a safe place when not in use. Many people will have more than one type of wallet. You can think of a hardware wallet as your bank account where you keep the majority of your money and an online wallet as the cash you carry around when you want to buy things.
How does a bitcoin wallet work?
To send and receive bitcoin you need a bitcoin wallet. A bitcoin wallet is a software program used to store them. Each wallet has a private key and a public bitcoin address (public key). When you set up your bitcoin wallet, your private key is the password to access your cryptocurrency which you shouldn’t give out to anyone. Then there’s your public bitcoin address which you can give to other people so they can send you bitcoin. If you want to send someone your bitcoin, then you’ll need their public bitcoin address otherwise you won’t be able to send them any.
What is the best and safest bitcoin wallet?
There are two main types of bitcoin wallets: ‘hot’ wallets and ‘cold’ wallets. What’s the difference? When a wallet is ‘hot’ that means it has a connection to the internet, such as a software app. A ‘cold’ wallet is a physical device and these offer a greater level of protection but are usually used by people who have over $1000 in bitcoin.
Hot wallets
Hot wallets are by far the most popular type of bitcoin wallet because of their accessibility and convenience. Sending and receiving bitcoin can be as simple as scanning a QR code and you can access your bitcoin directly on your mobile or computer. Another advantage of hot wallets is that most are free and easy to download. You can also use hot wallets to store any cryptocurrency that exists.
The downside to hot wallets is that they’re not as secure for storing large amounts of bitcoin. That doesn’t mean they’re unsafe, but there’s a higher chance of them being targeted by hackers.
Cold wallets
For security cold wallets are far better. They are designed to protect your private keys from virus, phishing and malware. They’re also easy to connect to your computer as an external device if you need to use them.
A disadvantage to using a cold wallet is that they only store certain types of cryptocurrency, but bitcoin is fine being a popular cryptocurrency. It also costs money to buy the hardware, but it can be worth the money.
Is bitcoin a good investment?
Many people were sceptical when bitcoin first started that it would ever take off, but since 2010 the price of bitcoin has taken off and reached its highest value in 2021 i.e
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