Bitcoin was the first decentralised cryptocurrency, released as open-source software in 2009 and entirely powered by its users. It was created by the developer or the group of developers only known as Satoshi Nakamoto, whose identity has been the source of much speculation, and rapidly grew into a widely-used cryptocurrency. This page will provide an overview of the nature of cryptocurrencies, as well as the various uses of Bitcoin.
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About Bitcoin and cryptocurrencies
Cryptocurrencies are digital currencies that use encryption methods in order to regulate transactions and function independently from central authorities such as banks. As opposed to regular currencies, there are no physical Bitcoins: the entire currency exists solely within a publicly available ledger, or blockchain.
The blockchain system stores its sensitive information, in this case the transactions performed using Bitcoin, across a network of computers rather than in one specific place, which means that the information can be protected and verified by many users at once. In this way, fraud can easily be detected and users’ investments are therefore kept secure.
Buying and mining Bitcoin
Bitcoin is not the only cryptocurrency in use, but it was the first and rapidly became popular upon its inception. Bitcoin can be purchased through exchange from other currencies (most frequently USD), but it can also be mined; in this context, users are rewarded with a certain number of Bitcoin when they contribute processing power to verify and maintain the blockchain.
In this way, new Bitcoins are generated, but the system is designed in such a way that the total number of Bitcoin will never exceed 21 million. To achieve this, the amount of Bitcoin received per successful mining attempt is gradually reduced over time; it was halved in 2017 to 12.5 BTC per block, from 25 BTC previously.
Uses and dangers of Bitcoin
Bitcoin can be used for different purposes; it is often associated with criminal activity, because Bitcoin is decentralised and wallets are fully anonymous, but can also be used for a number of legal ends. It can be used to transfer money internationally without the fees associated with banking or more traditional payment methods, but it can also be spent on goods or services in online as well as brick-and-mortar stores. By 2015, more than 100,000 businesses worldwide accepted Bitcoin as a valid means of payment.
While some are concerned the price of Bitcoin has risen so precipitously as to amount to an “economic bubble”, which is likely to collapse sooner rather than later and thus leave people without a return on their investments, the currency has nonetheless gained popularity with a wider audience recently. Reasons include the speed of transactions, the anonymity associated with Bitcoin wallets, the complete transparency and security guaranteed by the verified blockchain, and the fact that it remains the largest currency system that is entirely user-run.
Before considering buying Bitcoin, users must acquire a Bitcoin wallet. Such a wallet is basically a program or application that generates and maintains the user’s Bitcoin address, which he will use to conduct transactions, and as such it is the basic tool for any Bitcoin investor. Once the user has selected and installed a wallet, he must choose an exchange, which is a website through which to exchange traditional currency for Bitcoin.
Selecting an exchange
A wide range of exchanges exist, and users must bear in mind a number of factors when selecting one: these include the exchange’s reputation and security level, the countries it can be accessed from, the currencies it will exchange for Bitcoin, and the payment methods (credit card, bank transfer, PayPal…) accepted.
Users must equally consider the fees each exchange charges per transaction, since these can vary sharply from exchange to exchange. Additionally, some exchanges will offer special options, such as the ability to automatically purchase a particular amount of Bitcoin on a particular day each month.
Different types of exchanges
Exchanges come in two different formats: trading platforms and brokers. A trading platform tends to be cheaper, but takes more time: here, the system automatically connects each buyer with a seller who is selling a number of Bitcoins at an acceptable price for the buyer. This means orders might not be able to be fulfilled immediately, since the system needs to locate a matching seller for each transaction.
Brokers, on the other hand, tend to charge larger fees than trading platforms, but allow users to buy coins directly from them at a fixed price. This means Bitcoin will always be available when a user is ready for a transaction.
Once a user has selected an exchange – whether trading platform or broker – that sells Bitcoins at a price acceptable to him, he will then register on this exchange. This requires the submission of some personal information to the system, which will vary depending on the jurisdiction involved. At this point, the user can start purchasing Bitcoin, or a fraction of Bitcoin; The currency can be subdivided up to eight decimals, so it is possible to buy half a Bitcoin, one tenth of a Bitcoin, and so forth.
Regardless of the purchased funds, these are initially stored within the user’s account on the exchange system. Afterwards, it is crucial to transfer these coins from the exchange system to the user’s wallet’s address, so the coins can no longer be touched if something were to happen to the exchange. This transfer may also incur a fee, but from this point onward, the Bitcoin are entirely owned and controlled by the use and, protected by whatever security systems are operative on the wallet.
Due to the nature of cryptocurrency, transactions using Bitcoin can take slightly longer to process than transactions carried out using traditional currency. This is because each transaction needs to be recorded and verified on the Bitcoin blockchain, which could take up to a couple of hours per trade.
Although most people acquire Bitcoin through purchasing it via exchanges, there is a second way to acquire Bitcoin, which is mining. Bitcoin miners are users who essentially put some of their processing power at the disposal of the network in order to help process and secure the transactions of the blockchain; they aid in resolving complex mathematical problems that assist in maintaining the network’s security, and in return, they can gain compensation in the form of Bitcoin. The greater the computing power a user contributes with, the better his chance to acquire substantial amounts of Bitcoin.
Mining: process and rewards
Each transaction that occurs within the blockchain is gathered together with a vast number of other transactions in a block, which is then linked to the previous block to form a chain. Users will use their processing power to unlock each block and verify it through running a so-called cryptographic hashing function on a block header; the speed at which one mines Bitcoin is therefore measured in hashes per second. Essentially, a user’s processing power will try millions of “keys” in rapid succession so as to find the right one to unlock the block and verify it.
To create a valid block in this way, a user must find a key or hash that falls below a particular difficulty target; this is a number that expresses the mining difficulty of the current block in comparison to the difficulty in mining the very first block in the blockchain. It is used primarily as a measure of regulation and is adjusted every two weeks, to ensure one block is verified every ten minutes. The user who manages to unlock and verify the block receives a reward of 12.5 BTC per block, reduced in 2017 from 25 BTC previously.
How to start mining Bitcoin
In order to start mining, a user will require a Bitcoin wallet to store the mined Bitcoin, but also other specific mining software, available for free and open-sourced. Once this software is installed, it will start mining for Bitcoin and run in the background of the user’s computer, trying out different hashes to unlock a block. The speed of this process will depend on the user’s bandwidth and processing speed, and the processing power required to mine Bitcoin in a profitable way (i. e. where the profit made is greater than the electricity and bandwidth costs incurred) has increased sharply over time.
Initially, Bitcoin mining could be performed using regular PCs (CPU), and later through the use of graphic cards (GPU), but in later years, Bitcoin miners have moved on to using Application Specific Integrated Circuit (ASIC) chips. Such chips have only one function, in this case to mine Bitcoin, and because of this, they can work much faster and require less processing power than CPU or GPU.
Since this evolution has sharply driven up the price of solo mining, many users choose to gather in mining pools, where each user puts his computing power at the disposal of the pool, which jointly mines for Bitcoin and then allows each contributor to share in the profits. In this way, users can reap smaller, but more consistent and cheaper rewards than through solo mining.
Price and value of Bitcoins
Throughout its history, Bitcoin has gone through a number of extreme changes in terms of price, which users must bear in mind when considering investing in the currency. This page will highlight a number of key features of Bitcoin prices.
In 2014, academic Mark Williams (Boston University) identified a number of key risks in terms of the use of and investment in Bitcoin, and identified the price volatility as one of the major factors.
In this context, he noted especially that annual year-to-year volatility between 2010 and 2014 had consistently been over 100%; this volatility was seven times greater than that of gold and eighteen times greater than that of the US dollar. Even day-to-day price movement can exceed 10 per cent, which is far greater than the price fluctuation experienced by most traditional currencies.
Evolution of Bitcoin value
The first time Bitcoin was assigned a value was on May 22nd 2010, when BitcoinTalk user laszlo paid another user 10,000 BTC to order a pizza worth $25, which set the value of BTC at this time at approximately $0.0025. Nevertheless, Over the eight years of Bitcoin use, its price has been impacted sharply by specific events.
This includes the increased acceptance of Bitcoin as legal currency by websites such as WordPress (in November 2012), financial institutions such as the People’s Bank of China (November 2013) or national governments such as that of Japan, which recognised the Bitcoin as legal tender in April 2017. It also includes world events such as the European debt crisis, the Cypriot financial crisis, and the election of Donald Trump as US president, which meant a slump in the financial markets and increased investments in resources perceived as more secure than traditional currencies, such as gold or Bitcoin.
The overall trend in terms of price has been a positive one; whereas one BTC was worth approximately $0.0025 USD in May 2010, it was worth between $340 and $530 in April 2014 and approximately $5,000 by September 2017. During the year 2017 alone, the currency underwent a very rapid rise in value and almost quintupled in price between January and September.
Negative price fluctuations
Nonetheless, it has undergone a number of negative price fluctuations as well, most notably as the result of persistent rumours about Bitcoin as an economic bubble. An economic bubble is a situation in which the price of a particular product or service sharply exceeds its intrinsic value, often due to the excessive optimism of initial investors and their belief in transformative technology. This then causes the price to rise until it inevitably collapses and leaves investors facing a loss of funds.
Such rumours lead investors to sell their Bitcoin at lower prices in order to recoup some of their expected future losses, which in turn leads to a devaluation of the currency itself. This happened for the first time in late 2013, when persistent rumours of a Bitcoin bubble caused the currency to crash from $1,200 down to approximately $600 within a month. In 2017, similar rumours, alongside remarks on a potential Bitcoin bubble by JP Morgan CEO Jamie Dimon, caused more price fluctuations. However, it remains unclear whether Bitcoin will prove to be a case of an economic bubble collapsing, or whether prices will keep rising as the currency stabilises further.
A Bitcoin wallet does not actually store a user’s Bitcoin the way a physical wallet stores traditional currency. Instead, it is essentially a software program that keeps track of a user’s Bitcoin; the wallet serves to transfer a secret code to the system, which then gives a user access to his Bitcoin balance. Because the wallet mainly exists to transmit a code to the Bitcoin blockchain, it can take a number of different forms, such as a desktop application, a mobile application, a web application or a hardware device.
Desktop and mobile wallets
A desktop wallet is an application installed on a desktop computer and provides complete control over the wallet, but requires some work to install or maintain; the user has complete control, but also complete responsibility for the security of his Bitcoin. Users can create a Bitcoin address to manage their Bitcoin transactions and store a private key to access this address.
A mobile wallet is an application installed on, for example, a smartphone, allowing users to use their Bitcoin on the go. Such applications can also use the phone’s near-field communication (NFC) capability to allow a user to perform contactless payment in particular stores that may accept Bitcoin.
In terms of desktop and mobile wallets, there is an additional distinction between full clients and lightweight clients. Full clients verify transactions using a full copy of the Bitcoin blockchain, whereas lightweight clients can verify transactions within downloading a copy the entire blockchain. This means users must be able to trust the server such a lightweight client uses, but it also means that a device requires much less processing power or storage space in order to use such a client. For this reason, most mobile wallets use lightweight clients, whereas desktop wallets can use full or lightweight clients.
Much like a mobile wallet, a web wallet can also be accessed from anywhere; here, one does not even need a particular device to access his Bitcoin. It also requires less setup, since a web wallet is hosted and maintained by a provider. At the same time, because of this third-party hosting, this means the user must trust the provider to maintain high-level protection for his funds.
Finally, hardware wallets are specific, small devices a user can purchase for the express purpose of managing his Bitcoin transactions. In this way, the user’s credentials are stored offline, which makes them harder to steal, thus providing additional security.