Originally published on September 18, 2020 and updated on October 11, 2024

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Bitcoin is a decentralized digital currency operating independently of any central authority. Transactions are recorded on a technology called blockchain, which ensures security and transparency. Created by an unknown person or group under the pseudonym of Satoshi Nakamoto, Bitcoin seeks to provide an alternative to conventional financial systems.

Continue reading to explore the cryptocurrency that began it all—its origins, how to purchase and mine it, pros and cons, and the many ways it can be utilized.

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Key takeaways

• Bitcoin is a decentralized digital currency that operates independently of any central authority. It allows users to transact peer-to-peer.
• Bitcoin runs on the blockchain technology. This public ledger records all transactions, ensuring transparency and security.
• Bitcoin’s value is driven by decentralization, transparency, and limited supply. These factors differentiate it from traditional currencies and contribute to its perceived value.
• Bitcoin has potential advantages and risks. Before using Bitcoin, users should carefully consider factors like volatility, security threats, and regulatory risks.
• Bitcoin can be obtained through various methods, such as buying, earning, and mining

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What is Bitcoin (BTC)?

Bitcoin is a cryptocurrency that operates without the control of a central authority, such as a central bank. It enables users to buy, sell, and exchange value directly with each other through a secure and decentralized network.

Bitcoin is often compared to gold, hence the term “digital gold.” Like gold, Bitcoin is scarce. A limited amount of Bitcoin can exist, capped at 21 million coins.

Bitcoin is also the name of the blockchain or decentralized digital ledger that records all transactions ever made in the network.

Who created Bitcoin and why?

Bitcoin was created by an anonymous person or group known as Satoshi Nakamoto. Nakamoto’s identity remains a mystery. Many have claimed to be Bitcoin’s creator, but no one has definitively proved their claim.

The concept of Bitcoin emerged in 2008 during the global financial crisis stemming from the collapse of the US housing market. Many people lost trust in traditional banking systems and sought alternatives. Nakamoto aimed to develop a decentralized currency that operates outside the control of governments and banks.

Key goals of creating Bitcoin included:

• Eliminating intermediaries: Transactions could occur directly between users without banks.
• Enhancing privacy: Users could transact with more anonymity than traditional financial systems provide.
• Encouraging financial freedom: People could retain control over their funds without corporate oversight.

Satoshi Nakamoto’s “Bitcoin: A Peer-to-Peer Electronic Cash System” whitepaper outlined these ideas. The document described how the currency would function, focusing on solving issues related to trust and reliability in financial transactions.

Is Bitcoin divisible?

Bitcoin is divisible, meaning you can own, buy, or sell fractions of it. The smallest unit is called a Satoshi, named after its creator. One satoshi is equivalent to 0.00000001 BTC. 

How does Bitcoin work?

Bitcoin operates through a complex yet fascinating system that involves technology, transparency, and user participation. Understanding its key components helps clarify how transactions occur and how the network functions safely and effectively.

Blockchain

Bitcoin runs on blockchain technology, a public ledger that records all transactions. Each transaction is a block, linked chronologically. Once filled, a block is verified and linked to the previous one, making it nearly impossible to alter information. The public ledger allows transparent transactions while keeping user identities anonymous. This shared system ensures accuracy and trust in the Bitcoin network.

Bitcoin transactions

When a user wants to send Bitcoin, they initiate a transaction. The sender’s Bitcoin wallet creates a request that includes the recipient’s address and the amount being sent.

The transaction is signed with a private key, like a digital fingerprint, which proves that the sender authorized it.

Once created, the transaction is spread throughout the network. If network validators (also called miners) verify it, they will include it in the next block. It takes multiple confirmations to validate a block, ensuring everyone agrees the transaction is legitimate.

Decentralization

Decentralization is Bitcoin’s core principle. Unlike traditional banking systems, Bitcoin’s network is maintained by thousands of computers, called nodes, worldwide. These nodes verify transactions and keep blockchain copies, making Bitcoin resistant to censorship and fraud.

Can Bitcoin transactions be traced?

Contrary to popular belief, Bitcoin transactions are pseudonymous, not anonymous. Due to the blockchain technology that underpins them, Bitcoin transactions are inherently traceable. Each transaction is recorded on a public ledger, meaning anyone can view transaction history.

The transparency of this ledger allows for various tracking methods. Here are some key points:

• Public ledger: Every Bitcoin transaction is stored on a blockchain. This makes it accessible for anyone to verify transactions.
  
• Pseudonymous: While Bitcoin addresses do not directly reveal personal information, they can be associated with users over time. This can lead to identification through patterns and analysis.
  
• Tracking techniques: Several techniques can help trace transactions:
  
  • Blockchain explorers: These tools allow users to view transaction details and track the flow of funds.
  • Data analysis: Companies and researchers use data analysis methods to identify patterns and connections between addresses.

How is Bitcoin mined?

Bitcoin is mined through proof of work, where powerful computers race to be the first to validate a transaction on the Bitcoin network. Here’s how it works:

1. Transaction verification: Bitcoin transactions are grouped into blocks, and miners use their machine’s processing power to guess the correct hash associated with each block. Miners use specialized hardware (like ASICs) to try trillions of combinations per second to find the correct hash.
2. Block reward: The first miner to find the target hash gets to add the block to the blockchain and is rewarded with new Bitcoin, along with transaction fees.
3. Difficulty adjustment: Bitcoin mining gets harder as more miners join the network, with the difficulty adjusted approximately every two weeks to ensure that blocks are added roughly every 10 minutes.

What is Bitcoin used for?

Bitcoin serves several vital functions today. Here are some of the of the uses of Bitcoin.

1. Store of value

Bitcoin is often seen as a digital store of value, similar to gold. Its limited supply of 21 million coins creates demand and the potential for increased value over time. Its secure digital storage makes Bitcoin an attractive option for preserving wealth.

2. Payments

Bitcoin payments are accepted globally for goods and services. Transactions are more private, and fees can be lower than those of traditional bank transactions. Check out this article to see what you can buy with Bitcoin.

3. Investment

Many people view Bitcoin as a viable investment. Since its inception, Bitcoin has shown significant price growth, attracting investors of all kinds.

Investors often buy and hold Bitcoin, hoping its value will increase. Some engage in trading, capitalizing on price fluctuations for profit.

The cryptocurrency market is known for its volatility. While this presents opportunities, it also carries risks. Investors must be cautious and informed when navigating Bitcoin as an investment.

4. Money transfers

Bitcoin facilitates fast and low-cost money transfers globally. Traditional banking systems can impose high fees and lengthy wait times for international payments.

With Bitcoin, individuals can send money across borders instantly—lower transaction fees than banks can make Bitcoin an efficient alternative for money transfers.

This feature is especially beneficial for migrant workers sending remittances to their families. Bitcoin allows them to keep more of their earnings compared to traditional methods.

For more on this, read: Bitcoin Is Your Best Bet to Send Money Overseas–Here’s Why

5. Charitable donations

Bitcoin is increasingly being used for charitable donations. Various nonprofits accept Bitcoin contributions, allowing donors to support causes without the limitations of traditional currencies.

Using Bitcoin for donations can offer tax advantages, as some jurisdictions classify it as property. Donors can deduct the fair market value without owing capital gains taxes.

This method can also enhance transparency, as blockchain technology allows tracking donations. Supporters appreciate knowing their contributions are used effectively and honestly.

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Learn more: Practical Uses of Cryptocurrency in Everyday Life

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What makes Bitcoin valuable?

Bitcoin’s value comes from several key factors differentiating it from traditional currencies. These include the following:

• Limited supply: Bitcoin has a fixed supply of 21 million coins. This scarcity can drive demand and increase its value in the following ways: investor speculation as a store of value and hedging against inflation.
• Transparency: All Bitcoin transactions are publicly recorded on the blockchain, providing transparency and trust.
• Accessibility: Bitcoin can be accessed by anyone with an internet connection, making it widely available.
• Potential for future value: Many believe Bitcoin’s value will increase over time as it becomes more widely adopted and its underlying technology matures.

What are the advantages of Bitcoin?

Bitcoin offers several advantages that attract users and investors, such as:

• Decentralization: Unlike traditional currencies, Bitcoin is not controlled by any government or central bank. This independence allows users to transact freely and reduces the risk of interference.
• Security: Bitcoin transactions are secured through blockchain technology. Each transaction is recorded on a public ledger, making it difficult to alter or counterfeit.
• Lower transaction fees: Compared to banks and money transfer services, Bitcoin typically has lower costs. This can save users money, especially when transferring funds internationally.
• Accessibility: Bitcoin can be accessed by anyone with an internet connection, making it a viable option for people in regions with limited banking services.
• Transparency: All Bitcoin transactions are publicly available on the blockchain. This transparency helps promote trust among users, as they can verify transactions.
• Limited supply: Bitcoin has a capped supply of 21 million coins. This feature protects it from inflation and can increase its value over time.
• Transfer Speed: Bitcoin transactions can be processed quickly, often within minutes. This speed is beneficial for those needing instant transfers or payments.

What are the risks of investing in Bitcoin?

Using Bitcoin has several risks that users should consider.

• Volatility: Bitcoin prices can change rapidly, leading to significant gains or losses for users. Investors should be prepared for these fluctuations.
• Security threats: While the Bitcoin network is secure, individual wallets can be hacked. Users must take precautions to protect their private keys and passwords.
• Regulatory risks: Governments around the world have different views on Bitcoin. Regulations can change, impacting how users buy, sell, or use Bitcoin.
• Irreversible transactions: Once a Bitcoin transaction is made, it cannot be reversed. If users send Bitcoin to the wrong address, they will lose their funds permanently.
• Limited acceptance: Not all businesses accept Bitcoin as payment. This limits how and where users can spend their Bitcoin.
• Lack of consumer protection: Unlike banks, Bitcoin held in crypto exchanges are typically uninsured.. If the crypto exchange goes under, it may be difficult to recover funds.
• Potential for scams: Bitcoin’s pseudonymity has led to scams and fraud. Users should be cautious and do their research before investing or purchasing.

How to get Bitcoin

There are several ways to acquire Bitcoin. These methods include buying, earning, and mining.

• Buying Bitcoin: Most people obtain Bitcoin by purchasing it in exchange. To buy Bitcoin, one typically needs to create an account. This process may require identity verification.
• Earning Bitcoin: Another method of getting Bitcoin is to earn it. Some businesses pay employees in Bitcoin, and freelance platforms also offer payment in Bitcoin for services rendered.
• Mining Bitcoin: Mining is the hardest way to obtain Bitcoin. A Bitcoin miner needs powerful mining rigs to validate transactions on the blockchain. Successful miners are rewarded with new Bitcoin.

Where can I store Bitcoin?

BTC is digital money. It has no physical representation and exists solely through technology. There are no BTC bills to fold or coins to hold inside your physical purses or wallets; instead, it uses a storage device known as a Bitcoin wallet.

A Bitcoin wallet or digital wallet is a unique and secure storage means. It also uses the blockchain, the intelligent technology behind the cryptocurrency network. It is more fascinating because you can do many things with it. Using a mobile Bitcoin wallet, you can also receive BTC from other wallets, send funds or complete payments, and check your balance in real time.

There are many types of cryptocurrency wallets, but most of them fall under two main categories:

• Hot wallets – storage accessible through an Internet connection. These include web and mobile wallets. 
• Cold wallets – physical devices that don’t need Internet access. Examples are hardware wallets, desktop wallets, and paper wallets. 

Some peer-to-peer marketplaces and online exchanges, like Paxful, offer a free Bitcoin wallet after creating an account. 

When completing transactions in banks, you sign with a pen and paper. However, Bitcoin transactions use a digital signature, cryptographic proof that the BTC came from the wallet’s owner. This signature also confirms whether the BTC has been sent to someone else. While everyone can see the signature, no one can figure out your private key. Bitcoin’s complex processes make it hard to compromise, ensuring the security of your funds as long as you have access to your private keys.

What’s the future of Bitcoin?

The future of Bitcoin is bullish, with growing adoption and improved prices. Many investors and experts believe Bitcoin will continue to attract interest as a digital asset. Several factors may influence its trajectory:

• Adoption by institutions: More companies, financial institutions, and governments are exploring Bitcoin as an alternative investment option. Increased acceptance could drive value and stability. 
• Regulatory developments: Governments worldwide are examining regulations. Clear guidelines may improve trust and participation in the market.
• Technological advances: The blockchain technology supporting Bitcoin continues to evolve. Innovations can enhance security and transaction speed.
• Scalability and technology Improvements: Solutions like the Lightning Network aim to improve Bitcoin’s scalability by enabling faster, cheaper transactions.

To buy or not to buy

After all the great stuff we’ve discovered—from what Bitcoins are to how they work—we’re sure you’re itching to experience what other wonders it can bring about. Just a friendly note: This chunk of information is only one page from the many galaxies of the cryptocurrency universe. There are still many things to discover and explore in the crypto space!

Are you ready to take on the adventure? Buy Bitcoin today and let your crypto journey begin!