Introduction to Bitcoin
Bitcoin is a digital asset also referred to as a crypto currency. It was the first such currency to gain popularity, having been introduced to the world in 2009 and now being used by millions of people around the world. Despite its rapid growth, Bitcoin and the blockchain technology on which is it based remains a mystery to many people in mainstream society. The purpose of this article is to remove some of the mystery around Bitcoin so regular people can be empowered and encouraged to embrace it as an investment commodity and as a payment form.
Bitcoin was introduced to the world as an alternative to the established banking and financial system primarily in response to the irresponsible actions of big banks that caused the Global Economic Crisis of 2008.
Developed by a lone programmer or a team of unknown programmers under the pseudonym “Satoshi Nakamoto”, Bitcoin was described as a peer to peer payment system that allows people to send value to each other without the need for an intermediary. In other words, it is a way for people to pay each other without needing to use banks.
Bitcoin transactions are conducted over the internet using data encryption, hence the term 'crypto currency', and are recorded on an open 'shared ledger' on thousands of computers around the world, making it highly resistant to attack and fraud because there is no central point that can be exploited.
The computers that store the shared ledger are collectively known as the Bitcoin Network, and have the job of validating each new transaction before it gets added to the ledger as part of a 'block'. A block is formed every ten minutes and can contain details of many transactions. The blocks are encrypted and timestamped, and linked consecutively, forming what is referred to as a blockchain.
No part of the blockchain can be fraudulently altered without first unlocking the surrounding blocks and then trying to convince all the other computers on the network that nothing has been changed, so it is fairly well guarded against hackers and would-be theives.
The open ledger nature of the blockchain also prevents anyone from being able to 'double spend' their bitcoins, which has long been a challenge for people dealing with digital assets.
In order to receive bitcoins, a person must generate a pair of digital 'keys'. These keys are the equivalent of someone's account number and password from a traditional bank. The first key is called the 'Public Key' or 'Wallet Address'. To receive bitcoins it is required to share the person's Public Key with the payer, who would simply send bitcoins to that address. The second key is known as the 'Private Key', and must be kept secret at all times. The Private Key is used to send bitcoin payments, but the key itself is not shared.
Public and Private keys for someone's Bitcoin account are stored in a digital 'wallet' – a small app that runs on a PC or mobile device. The actual bitcoins themselves only exist as a balance in the open ledger, and the wallet acts as an interface to allow the owner to send and receive bitcoins and view their balance.
So bitcoins can be easily sent from one person to another by using wallets and keys, but they can also be converted into traditional currency via the use of 'exchanges'. An exchange is an online marketplace that works in a similar fashion to the stock exchange or a forex market. There are many exchanges, and each one will have a 'buy' and 'sell' price for Bitcoin in relation to US Dollars and perhaps a number of other currencies as well. The price for bitcoin and other crypto currencies can fluctuate greatly, creating an ideal hunting ground for investors and market traders seeking to make a profit from the ever changing rates. This is a high risk method of investment often referred to as 'crypto trading', and has been the making of many new millionaires over the last few years.
There are other ways to invest in bitcoin and crypto currencies however. One of the simplest is to merely buy bitcoins at the current price and just hold it for the long term in the expectation that the price will steadily rise over time. With the price of bitcoin rising by around 1000% in the last year alone it is easy to see why many people see this as a good strategy.
Another method of investment in crypto currencies is a bit more complex than simply buying the coins outright, and is called 'mining'. Mining is a term that actually has nothing to do with shovels and pick axes. It actually refers to the running of computers that are connected to the Bitcoin Network. The 'mining' is really just the validating of new bitcoin transactions and adding them to the blocks that the blockchain is made up of. Each time a new block is created, the owner of the computer that created the block gets paid a reward in the form of new bitcoins! It is a way of generating new coins to increase the circulation as well as incentivising people to buy and run the powerful computers that do the work.
The final method of 'crypto investing' that will be mentioned in this article is the direct investment into new crypto currencies that are in the throes of being launched upon the market in a process known as 'ICO's' or Initial Coin Offerings. ICO's are generally highly speculative, as many new crypto currencies are released each week, many of which fail. Failed ICO's are an extremely effective way for investors to lose money. However, the rewards can also be very exciting if an ICO proves to be successful.
In addition to the investment methods discussed here there are numerous online investment platforms related to Bitcoin and other crypto currencies, some of which are more legitimate than others. Some degree of risk is to be expected with any of them, and people should always proceed with caution and take professional advice before getting involved. Keep in mind that where there is great opportunity, there can also be great risk.
Not all Bitcoin users are interested in the investment side of things, however. As with the traditional banking and financial system, most users just want a convenient way to send and receive payments securely and with the confidence of knowing that their coins are safe at all times.
The benefits of using Bitcoin as a system of payment for these people are many. No intereference by a third party; total control of one's own finances; lower fees; and the ability to quickly send payments to anyone, anywhere in the world.
Bitcoin and the blockchain technology, as well as other crypto currencies, are here to stay. They are the future of finances for people not only in the First World, but also in developing countries. This article has introduced the basic concepts that underpin crypto currencies, discussed digital wallets and the Bitcoin Network, and briefy described some of the ways that people can invest in this exciting category of digital assets. The reader is encouraged to learn more about Bitcoin, seek sound financial advice, and consider the possibilities that blockchain and crypto currencies present as we move into the age of a free and open society.