Bitcoin (BTC) is the cryptocurrency that gave birth to the phenomenon of digital currencies. BTC is the oldest, most famous and largest cryptocurrency.
Thereby, BTC digital currency contains elements from computer science, Sociology and Economics. Understanding the construct of Bitcoin holistically requires both time and a willingness to learn.
This article will show you the most important basics about Bitcoin and explain all the features and topics that beginners and advanced users should know.
Table of Contents
Just what is Bitcoin (BTC)? – Definition and explanation
Before we look at a common Bitcoin definition, we will first dedicate ourselves to the history of Bitcoin’s origin and its meaning.
Bitcoin is the oldest cryptocurrency
The foundation for Bitcoin is the publication of the Bitcoin whitepaper “Bitcoin: a peer-to-peer electronic cash system” by Satoshi Nakamoto, still an anonymous developer, back in 2008.
Although Bitcoin is technically complex, its fundamental concept is easy to understand.
So what is the goal of Bitcoin?
The goal of Bitcoin is to create a decentralized, autonomous, digital payment system that is accessible to everyone and fully independent of centralized institutions.
That means that you can use Bitcoin as a means of payment just like normal money. In addition, it is possible to transfer your Bitcoins or keep them in a Bitcoin wallet (the digital equivalent of a wallet).
Because Bitcoin is based on a blockchain, the main difference between Bitcoin and the Euro or US dollar is its decentralization. As a result, bitcoin is not issued by a central authority, for example, the Deutsche Bundesbank, compared to our currencies, which we call fiat money.
Before going into more detail on “how does Bitcoin work”, a concluding definition of Bitcoin that can be derived from the whitepaper:
Bitcoin is a digital currency that works in a decentralized manner. You can use it to transfer value as well as store value.
Understanding Bitcoin: BTC’s top features
What is remarkable about Bitcoin is its consistency. Since its inception by Satoshi Nakamoto, there have only been a few fundamental technical changes to the protocol, even though it is publicly available. Anyone can submit technical improvement proposals, known as Bitcoin Improvement Proposals (BIP).
For you to understand the cryptocurrency Bitcoin, we have summarized the three most important features:
The Bitcoin Blockchain: the basis for the cryptocurrency BTC
The foundation of the cryptocurrency Bitcoin is the decentralized database, the blockchain. The term blockchain can be considered as a chained list. Technically, blockchain belongs to the so-called distributed ledger technologies (DLT).
This is a distributed database whose content is replicated and distributed across a worldwide network of computers (nodes). Like a chained list, new blocks are always appended to the end of the blockchain.
Thus, the Bitcoin database is not centrally managed. The blockchain is maintained by thousands of participants in the Bitcoin network. This secures the Bitcoin network against failure and protects it from manipulation.
Yet is Bitcoin secure? To make changes on the blockchain, an attacker with malicious intent would have to use more than 51 percent of the computing power at any one time. This attack is known as the 51 percent attack. This is an almost unfeasible proposition since it would cost hundreds of millions of dollars, require an enormous infrastructure, and be noticed by honest network participants after a few minutes. Thus, the attack would be nullified.
Bitcoin nodes explanation: how the concept works
Bitcoin Nodes are essential for the network to function. They are the nodes in the worldwide network of the Bitcoin blockchain. They store the copy of the blockchain and ensure that new Bitcoin transactions are processed properly.
The worldwide distribution of Bitcoin nodes shows that nodes are primarily present in Europe and North America.
Proof-of-Work Bitcoin Consensus Mechanism
Bitcoin works with the proof-of-work algorithm. Proof-of-Work stands for proof of work. It means that miners receive a reward for a completed job. Opposite of the proof-of-work method is proof-of-stake.
The Proof-of-Work process is important to Bitcoin for the Bitcoin mining process explained in the following section.
So what is bitcoin mining?
Bitcoin mining relies on the proof-of-work procedure just introduced to generate new coins. To do this, Miners solve mathematically complex tasks with the help of special mining hardware to find a new block.
MINING is an essential process because it contributes to the entire network’s security and ensures its stability and functioning. Miners also receive a reward for this in the form of bitcoin. The amount of bitcoins a miner receives depends on the current block.
Bitcoin has a fixed block time of ten minutes. That means that a new block is created every ten minutes. For a block to continue to be created only every ten minutes, even as the number of miners increases, the bitcoin Difficulty increases. This specifies the complexity of the tasks to be solved.
Although Bitcoin mining is energy-intensive, many BTC miners now rely on renewable energy, as revealed by a report from the Bitcoin Mining Council back in July 2021.
What is bitcoin halving?
The Bitcoin halving is a regularly occurring important event. It refers to the reduction of the reward for the miners by half.
In Bitcoin mining, Miners receive a reward per block in the cryptocurrency BTC. In the beginning, this was 50 BTC per block. In 2012, it was just 25, before halving to 12.5 in 2016.
About every four years, every 210,000 blocks to be exact, Bitcoin halving halves the reward for miners. As a result, miners have received only 6.25 BTC per block since the last halving in 2020. The next halving is expected to take place on April 5, 2024.
What is the maximum number of Bitcoins?
There is a cap on the maximum number of BTC at 21 million. As of November 2021, around 18.7 million BTC are already in circulation, which took less than 13 years. The reduction in the reward per block means that mining is only lucrative in the long term, even if the cryptocurrency’s price continues to rise. Maximum circulation is expected to be reached in 2140.
So, you see: the supply of BTC increases much slower relative to demand from now on.
How to keep your BTC safe and secure
If you buy BTC from a broker, the transfer to your wallet is not always possible. A bitcoin wallet is a kind of digital wallet in which you can store your bitcoins. Therefore, with some crypto brokers, you cannot have to worry about Bitcoin storage.
However, should you have decided to buy via a crypto exchange, it is of essential importance that you store your cryptocurrencies safely. After all, not even the biggest exchange is 100 percent safe from a hack. Since exchanges are usually not regulated yet, there is no deposit protection for your deposits either.
A hardware wallet is the best way to store your Bitcoins. Here you have control over your Bitcoins through the private key. So even if someone steals your hardware wallet, the private key protects your BTC.
Bitcoin Price: This is how the BTC price is developing
Looking at the price trend so far, we can see a gigantic growth in Bitcoin. BTC has been the best performing asset in the last decade.
In the beginning, bitcoin had no value. Ultimately, the value is determined by the principle of supply and demand. However, bitcoin quickly increased in value, with more and more people believing in the technology.
In 2013, the first big hype around cryptocurrency occurred. During the rally, the price of BTC reached over 1,000 US dollars for the first time, only to subsequently lose around 70 percent of its value again. Only in 2016, after the halving, things went up again for the bitcoin price.
Thus, by the end of 2017, the BTC almost reached 20,000 U.S. dollars before eventually dropping as low as 3,800 U.S. dollars within the next few years. Soon after the Corona pandemic, bitcoin started the next rally and reached a bitcoin price of up to 66,900 US dollars by 2021.
At this point, BTC’s market capitalization of over one trillion US dollars rivals tech giants Amazon and Co – Facebook (recently Meta) already left BTC behind. Volatility, though, accompanies Bitcoin to this day.
Bitcoin Forecast: Does BTC has a Future?
Many people wonder if BTC will continue to increase in value in the future or suffer a crash from which the first of all cryptocurrencies will not recover.
At the moment, many analysts believe in a future of cryptocurrencies, with blockchain and especially with Bitcoin. As a store of value, bitcoin seems to be gaining acceptance alongside gold, which has been popular for generations.
Naturally, we can’t say with one hundred percent certainty which direction Bitcoin will take in the future. But the fact is that adoption has picked up tremendously in recent years. Businesses like Tesla or MicroStrategy have invested billions in BTC.
Mutual funds are getting into Bitcoin, and Bitcoin ETFs are also a popular investment product. Meanwhile, Bitcoin continues to adapt technically. The taproot upgrade will also open the door for smart contracts in bitcoin.
We estimate a potential development of the BTC price at our Bitcoin price forecast of 2022. In doing so, we incorporate fundamental and technical data to consider all possible indicators for the bitcoin price. The Bitcoin Stock to Flow model from analyst PlanB is especially popular for a forecast.
Buying Bitcoin: This is how you can invest in BTC
While in the early days, it took a lot of effort to buy Bitcoin, things have fortunately improved these days significantly. More and more ways to invest in Bitcoin are available. For instance, you can use a Bitcoin ATM to buy BTC. You can find them almost exclusively in North America, though, as an evaluation by Finbold shows.
Therefore, here we present the two most popular ways to buy Bitcoin: Crypto exchanges and crypto brokers.
Method 1: Buy BTC from a broker
If you decide to buy Bitcoin from a crypto broker, you usually deal with regulated trading platforms. Among the best-known brokers on the market is undoubtedly eToro – especially if you want to buy Bitcoin with PayPal.
A broker is especially suitable for investing in cryptocurrencies as a beginner. Crypto brokers take care of your custody and therefore allow for an easy and uncomplicated purchase.
Moreover, this option is very safe, as brokers usually have the necessary licenses, and your invested capital is protected.
Method 2: Buying Bitcoin on a crypto exchange
There are some differences between crypto exchanges and crypto brokers. An aspect here is the selection, which is greater with crypto exchanges. On the one hand, there are many unregulated crypto exchanges on the market that undergo simple listing processes.
Among the most well-known and reputable crypto exchanges are Coinbase, Binance and Kraken. Although all three exchanges have proven themselves internationally, they have not yet completed the regulatory processes in all active countries.
What this means for you is that there is no deposit insurance. Therefore, before buying from a crypto exchange, think about the safekeeping of your Bitcoins. As described above, it is best to opt for a hardware wallet in this case.
Conclusion: a cryptocurrency with a future
It’s no coincidence that despite thousands of new cryptocurrencies, bitcoin is still in first place among all cryptos by a wide margin. In 2021, this oldest and largest cryptocurrency still accounted for more than 40 percent of the total crypto market. The Bitcoin dominance continues unabated.
Having already seen thousands of other cryptocurrencies enter the market with thoroughly promising technical enhancements, bitcoin seems impossible even within the crypto scene. Bitcoin is too big, according to evaluations done by some banks.
Even Ethereum, the second-biggest cryptocurrency, hasn’t managed to become dangerous to the mother of cryptocurrencies in recent years. That blockchain technology has made inroads into the industry ensures that some – not all – cryptocurrencies will continue to have a raison d’être in the future.
Yes, better cryptocurrencies exist than Bitcoin. From a purely technical point of view, numerous altcoins have found technically better solutions in terms of properties such as transaction speed or anonymity.
In return, bitcoin has significantly more nodes and is also unmatched in terms of standing. Especially Bitcoin, which was the first decentralized payment system to emerge and is suitable as a possible means of payment (especially through the Lightning network) and serves as a store of value, will surely prevail in the digital currencies sector.
Frequently asked questions about Bitcoin
This section provides answers to the most important questions about Bitcoin.
So what is Bitcoin?
Bitcoin is the first-ever cryptocurrency and can be used as a means of payment, just like fiat money. Bitcoin network is set up in a decentralized manner, whereas transactions are carried out pseudo-anonymously.
Who Invented Bitcoin?
Satoshi Nakamoto is considered to be the inventor of Bitcoin. However, this is just a pseudonym since the true identity of Bitcoin is still unknown to this day.
How can I buy Bitcoin?
You can purchase Bitcoin on crypto exchanges like Binance or crypto brokers.
What is the best way to store Bitcoin?
To store Bitcoin as securely as possible, it is recommended that you opt for a hardware wallet.
Will Bitcoin price continue to rise?
According to many institutional investors, bitcoin has a great growth potential anyway. The limited number of coins means that Bitcoin could continue to rise even driven by inflation.
