what is bitcoin? who uses it and how does it work? if these are questions that come to mind when you hear about bitcoin, you are not alone. read on to understand the basics.
Ask a random person on the street “What is Bitcoin?” and you are likely to get an answer along the line of “I don’t know” or “It’s some virtual money thing”. Both are fair answers as a majority of the population still doesn’t understand or use this new type of currency. This post is designed to give you a brief introduction to Bitcoin and explain some of the basics in an easy to understand manner. If you are a Bitcoin aficionado, this article will probably be over simplified. For the rest of us, let’s get started!
What is Bitcoin?
According to Bitcoin.org, Bitcoin is “a consensus network that enables a new payment system and a completely digital money”. Let’s break this down into something the majority of us will understand. Bitcoin is classified as a cryptocurrency, or a digital currency operating independently of a central bank, and was created in 2009 by an unknown person who uses the alias Satoshi Nakamoto. While Bitcoin is relatively new, the idea of a cryptocurrency dates back to 1998 and is attributed to an individual named Wei Dan, who described the idea of a new currency that uses cryptography to control transactions as opposed to a central authority. Bitcoins can be used by anyone to make purchases that are mostly, though not 100%, anonymous. This is one of the most appealing factors and greatest risks of the currency. You can purchase Bitcoin from an exchange or engage in a process called mining, which we review later in the post.
Bitcoin owners store their currency in a special wallet such as Simple Bitcoin Wallet or Bitcoin Wallet. Similar to your physical money, you need to be very careful with your virtual money. Be sure to secure your wallet by using encryption, making regular backups and only keep a small amount of Bitcoin in your wallet at any given time while storing the rest somewhere safer.
Who Controls Bitcoin?
Bitcoin is not controlled or owned by any one government or organization. This means that, unlike the United States Dollar or Euro, no country or government controls the price, quantity or individual use of the currency. So who does control it? You can control Bitcoin, so can I and so can anyone else who uses it. The Bitcoin protocol and software is open-source, meaning anyone can edit and make contributions. Developers around the world are allowed to make changes. However, any changes that are made are only successful if they are adopted by the other developers and users. This means that no one developer controls Bitcoin. The population of users decides what changes are acceptable based on if they use the new features or not.
I Want Some!
If at this point you are ready to get your hands on some Bitcoin you have four options:
- Receive Bitcoin as payment for goods/services that you provide.
- Purchase Bitcoins on an exchange (Coinbase and Cex.io are easy to use)
- Have an awesome friend that is willing to exchange Bitcoin with you.
- Mining (discussed below)
Bitcoin User Stats
Bitcoin is still a relatively niche currency in terms of global use and acceptance. In July 2016, Bitcoin.com released some data describing the demographics of the typical visitor to a Bitcoin only website. The results show that males dominate the user base, with men making up 86.9% of all users. It’s also a young person’s currency with 53.5% of the sample consisting of 18-34 year old individuals. Finally, the Americas and Europe are the leading geographic areas for users, claiming 75.7% of all users.
How is Bitcoin Mined?
“Mining” is the term used when people use special hardware and software to solve complex mathematical algorithms and are rewarded with Bitcoin for their efforts. Mining is essentially a verification process used to validate Bitcoin transactions and is measured in hashes per second. The more computational power you are able to lend, the faster you will hash and the more Bitcoins you will be awarded.
To begin mining, you are going to need to purchase the correct hardware. Your Dell or Apple laptop won’t be able to help you here. You will want to obtain hardware that is custom built for mining so that you get the best results. Using inferior hardware will likely yield little results while demanding a large amount of electricity. You can search on Amazon for mining hardware such as the Avalon6 or AntMiner S7 or S9.
There is also the option to mine using the cloud, however, this carries significant risk since you are only buying a contract and won’t control the physical hardware. If you decide to conduct mining via the cloud, do your research before selecting a service provider. Numerous scams have been reported in the past.
In addition to hardware, you will also need the correct software. While the hardware can be very expensive, the software is free! The most popular software options are CGminer and BFGminer. Before selecting your software you will also need to get your Bitcoin wallet so you can receive the reward for all your hard work!
With your hardware, software and wallet in place it’s time to get mining! You can choose to go at it solo, however, it will probably take a lot of work for little reward. The best option would be to join a mining pool, which is a group of users that work together and share any rewards. When it comes to mining, the idea that none of us is as strong as all of us rings true.
Is Bitcoin Investing Right for Me?
If you look at the historical price of Bitcoin you will see that there is wide fluctuation. In April
2013 you could buy a Bitcoin for $86; by November the price was $1,084. While this would present a great return on your investment if you bought in April, I cannot recommend that you create a portfolio centered entirely around Bitcoin. As with any investment, you should be prepared to lose any capital that you put at risk.
If you do decide to invest, you have a few options.
- Mining, discussed above, can be costly and takes time to earn any Bitcoin. If you are planning on mining solo, your electricity costs could very well eliminate any reward you receive.
- Trading with the objective of buying low and selling high. As with any investment, timing is extremely difficult and a low level of liquidity may mean you can’t sell when you want or need to.
- The buy and hold strategy is useful if you think the price will continue to rise. Your opinion should be based on your own detailed research.
Deciding to invest in Bitcoin is a personal decision with no universal right or wrong answer. Be sure to do your research before making any commitments. It is also advisable to be wary of scams. You may find some companies that are willing to invest your Bitcoins for you and promise amazing returns. Use extreme caution with anyone making you these types of promises, they may be nothing more than a scam to separate you from your money.
That concludes our intro to Bitcoin. Has anyone engaged in trading or mining Bitcoin before? What is your experience?
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