Bitcoin 101

The most significant hurdle before entering the world of cryptocurrencies is understanding the fundamentals in a field that is still very new. If you want to make the best investment, then you need to have a solid understanding of where Bitcoin came from, what it is, and where it is going. 

These are the 9 essentials everyone should know about Bitcoin.

The Solution to a Problem

Bitcoin (BTC) was the solution to the double spending problem inherent in any form of digital currency. If a digital currency is going to have value, it has to illustrate scarcity. This is tough to do when computers let you duplicate mostly anything with a few simple clicks.

Gold, silver, diamonds, even money—these all have value because their number is limited. In and of themselves, they are nothing more than metals, stones, or pieces of paper. But because they are limited, complicated and expensive to mine or create, their number is limited. This scarcity increases their value. 

This cryptocurrency showed the world through the use of blockchain technology and mining that it could achieve scarcity as a digital currency.

Bitcoin’s Origins are Mysterious

Satoshi Nakamoto’s origin is a legend at this point in the crypto community. He published the white paper for Bitcoin in 2008 titled, “Bitcoin: A Peer to Peer Electronic Cash System.”  Then he disappeared, leaving his nearly 1,000,000 coins unmoved since. Some believe he may even be a collection of people, others that the NSA already knows who he is but hasn’t brought him in for questioning because he hasn’t violated any current laws. Either way, he remains a legendary figure in the community.

What Is Bitcoin?

Bitcoin is the first cryptocurrency ever created. It’s a way of purchasing something using a digital currency. That purchasing power allows it to store wealth in the same way gold stores wealth. It is also semi-fungible, or partially untraceable. While public keys remain anonymous, it is possible to trace a coin’s usage back through the blockchain to see where it originated. With enough investigating, law enforcement can decode a coin’s transaction history. And using a copy of the ledger, investigators only need to wait for someone to exchange their BTC for fiat currency before apprehending them.

Where Can You Get Bitcoin?

There are a few ways to acquire bitcoin. The first is to buy it. This can be done through an exchange or directly from someone else through a marketplace. Purchasing through an exchange is the easiest way to acquire it. Signing up to CoinBase, for example, allows you to deposit money in exchange for a certain amount of Bitcoin. 

There’s also the option of mining Bitcoin. Mining is another misnomer in the cryptocurrency community. When you mine, you volunteer your computer to support Bitcoin’s blockchain network. The amount of processing power and time your mining rig uses, the greater chance you have to earn coins. What you’re doing when you’re mining is solving a complex algorithm that takes your computer time and resources to figure out. When the computer solves the problem, it processes the transaction and creates another block in the chain, moving the transaction along while earning a reward, BTC, for doing so.

The last way to get Bitcoins is to exchange goods or services. In short, if someone wants to pay you to do something or for something, they can do so using Bitcoin. They would only need your coin wallet’s public address to send you BTC. 

What Can You Buy with Bitcoin?

There is a story about a man who bought a pizza using 10,000 Bitcoin back when the coin was still relatively new. 10,000 BTC would be worth $90,000,000 today (at the time of this writing). You can buy goods and services with cryptocurrency, as long as the retailer accepts it as a method of payment. 

The transaction times and fees for Bitcoin purchases make it less enticing for use in smaller purchases. However, there’s no limit to what you can buy with BTC. Houses, cars, etc. have all been purchased with the crypto.

More commonly though, it is used to invest in initial coin offerings (ICOs). An ICO is a way a new company raises funding. Company’s run a token sale, allowing investors to purchase holdings or tokens in the company by trading Bitcoin for that company’s token. The hope is that when the new token or coin takes off, the investor will gain far more on the return. 

What Makes Bitcoin So Attractive to Investors?

At the beginning of 2017, Bitcoin was worth less than a $1000. A year later, its value was worth over $13,000. Why the massive jump and why the continued interest BTC? Bitcoin stores value. BTC is the backbone of the crypto community in the same way gold was the backbone to fiat currency. And it is trusted by the crypto community, making it a much safer investment than newer ICOs.

Outside of investing, there are ideological values many have with supporting BTC. These people value a future free of the limitations of centralized currencies. They know that investing in Bitcoin will help bring about a transition to decentralized currencies with more democratized wealth.

What’s up with the Negative News About Bitcoin?

Prominent, famous investors have plenty of negative comments about cryptocurrencies, specifically Bitcoin. Bill Gates and Warren Buffet don’t hide their disdain. There are a few reasons for this. Many people see the anonymity of cryptocurrencies as a means of inspiring illegal activities. They see BTC as nothing more than something used to get away with buying drugs and hiring hitmen.

They fail to see that these things already happen with fiat currency. They fail to see that people have always been skeptical of technological innovations. They fail to see the benefits in a decentralized, digital currency. Perhaps of greater note is the reality that fiat currency is the foundation for these people’s fortunes, and it remains uncertain what a transition away from that would mean to their wealth.

What Are Some of Bitcoin’s Short Comings?

The technology is not perfect. Rarely is any tech actually without flaws. Bitcoin currently deals with scalability issues. It’s a design flaw that comes from the blockchain tech. Transactions have to be approved and stored over the entire network to prevent double spending. The more transactions that occur on the network, the more time it takes to processes and the higher the fees. Transaction times can vary from minutes to hours. And while that is a lot longer than the time it takes to swipe a VISA at a Starbucks to buy a latte, it is much faster than the time it takes for a bank to approve certain transactions like a car purchase or an international wire.

What Is the Future of Bitcoin?

The last thing to understand about Bitcoin is that its future looks promising. Currently, solutions to scalability issues are under development. The lightning network promises faster processing times. And while the market is volatile, there is still excellent investment potential there. Many major companies from IBM to J.P. Morgan are employing blockchain development teams, further inspiring interest in future tech while simultaneously solidifying the value of its origins. 

Bitcoin has been and will continue to be the foundation for cryptocurrencies and the motivation behind developing other blockchains.

About the Author

Daren is a cryptocurrency investor, miner, and blockchain developer. He researches the latest trends and technology in decentralized products and services.