Fundamentals Of Cryptocurrencies and Bitcoin

Fundamentals Of Cryptocurrencies and Bitcoin

In this post: Fundamentals Of Cryptocurrencies and Bitcoin, you’ll learn:

  • Why bitcoin is the world’s top cryptocurrency (hint: it’s mostly due to “first mover” advantage)
  • How the mysterious Satoshi Nakamoto created bitcoin
  • Why bitcoin is still in its infancy with plenty of room for growth
  • Why cryptography and decentralization are so important for cryptocurrencies
  • Why bitcoin transactions aren’t 100% anonymous
  • How bitcoin wallets can protect your digital money
  • How bitcoins are stored within the public ledger or blockchain
  • Why bitcoin can’t be printed like regular money – it has to be “mined” with a computer

What Are Cryptocurrencies?

The term “cryptocurrency” is short for “cryptographic currency”. It refers to a new type of digital money.

Bitcoin was the world’s first cryptocurrency. Today, there are over 1500+ cryptocurrencies – including well-known tokens like Ethereum and silly ones like Weedcoin.

Cryptocurrencies are similar to regular currencies. They can be used as a medium of exchange or a store of value. You can buy products and services with cryptocurrencies. Or, you can store your wealth in cryptocurrencies.

Why Cryptocurrencies Are Valuable

Why did we need to launch an entirely new wave of currencies? What’s the value behind cryptocurrencies? The value lies in three core principles: Decentralization, Fixed Supply, and Transferability.

Decentralization

Traditional currencies – like the US Dollar – are controlled by institutions like the US Federal Reserve System. Other countries have their own central banks – like the Bank of Canada or the Bank of England. These institutions allow governments and banks to control the supply of currency. They can “print” units of this currency whenever they like.

When a government prints money, that money is called a fiat currency. “Fiat” simply means “by decree”. A piece of paper only has value “by decree” when the US government puts their stamp on it and calls it a $100 bill, for example.

Cryptocurrencies work differently. Cryptocurrencies are not controlled by anyone. They’re not controlled by any specific person, nor are they controlled by a government or bank. Cryptocurrencies like bitcoin are “decentralized” because control is spread across the entire network of bitcoin users.

Fixed Supply

Cryptocurrencies also work differently because their supply is capped. There can only ever be 21 million bitcoins in existence, for example. Meanwhile, traditional fiat currencies like the USD have no fixed supply: the government can print off more US Dollars whenever they like. That’s why we have inflation. The total amount of USD bills in circulation is increasing every year, which means the value of each USD bill in circulation is gradually decreasing. Bitcoin and other cryptocurrencies have a fixed supply that leads to deflation instead of inflation – which is why the value of bitcoin has steadily increased over time.

Transferability

The other unique thing about cryptocurrencies is their transferability. Cryptocurrencies can easily be transferred anywhere in the world without the need to rely on a third party – like a bank. You can send bitcoin anywhere in the world without needing to verify your identity or attach personal information to a transaction.

Most cryptocurrencies also have comparatively low fees. It might cost $50 to transfer $200 with Western Union, for example, but only $0.05 to transfer $2 million in Bitcoin. This is a huge benefit to anyone in the world – whether you’re a millionaire seeking to transfer money securely and cheaply or you’re a migrant worker sending money to friends and family overseas.

Cryptocurrency transfers have another advantage: transfers are irreversible and secure, which means merchants don’t have to worry about the cost of fraud or chargebacks.

Why Bitcoin Is a Big Deal

Bitcoin was introduced online in October 2008. By January 2009, the bitcoin blockchain had released its first bitcoin. So began the age of cryptocurrencies.

Bitcoin was the first to introduce the concept of a distributed ledger – something we know as the blockchain. Today, bitcoin remains the largest and most popular cryptocurrency by market cap. In fact, bitcoin has not been dethroned once since 2009 – despite challengers like Bitcoin Cash (BCH), Ethereum (ETH), and Litecoin (LTC) coming close at various points in history.

Bitcoin grew in popularity for all the reasons listed above: it’s easy to transfer. It’s decentralized and censorship-resistant. And it can be accessed without the need for traditional banks.

In terms of cryptocurrencies, however, bitcoin isn’t the best cryptocurrency in the world today. It’s not the fastest cryptocurrency. In fact, a bitcoin transaction takes about 10 minutes to complete – compared to milliseconds for other cryptocurrencies. Bitcoin is also plagued by relatively high fees – transactions can cost several dollars compared to fractions of a penny on other blockchains.

Bitcoin clearly has drawbacks. Bitcoin, however, remains popular because of its first mover advantage. Bitcoin was the first cryptocurrency to emerge on the scene – and that’s why it remains so popular.

Satoshi Nakamoto: The Mysterious Creator of Bitcoin

Bitcoin, like a good superhero, has an intriguing origin story. You may have heard about Satoshi Nakamoto. Satoshi created bitcoin.

Satoshi isn’t some Japanese computer programmer. Instead, Satoshi Nakamoto is an anonymous individual – or an anonymous group of people – responsible for the creation and early development of bitcoin. Nakamoto first published bitcoin’s research paper online on October 31, 2008. The paper was titled, “Bitcoin: A Peer-to-Peer Electronic Cash System.”

Satoshi continued to develop bitcoin until mid-2010. Satoshi actively communicated with other bitcoin developers while contributing to the bitcoin source code. Then, Satoshi suddenly disappeared. Satoshi handed control of the bitcoin source code repository to another core developer named Gavin Andresen. Satoshi also transferred several domains to various prominent members of the bitcoin community. Then, Satoshi was never heard from again.

The main innovation in Satoshi’s Bitcoin invention was the development of a distributed computation system known as the “proof-of-work algorithm” that conducts global transaction validation every 10 minutes, allowing the network to validate and come to consensus agreement about the state of each transaction.

Bitcoin was the first decentralized digital currency to use the blockchain technology and after its proven record of success and practicality it has gain acceptance among both merchants and consumers.

The Growth of Bitcoin

The bitcoin network launched in January 2009. In the early days, you could “mine” bitcoin with any ordinary computer. You could also purchase bitcoins for a fraction of a penny. The value of the currency grew over the years. Eventually, people recognized the value of a decentralized, global currency. Retailers began accepting bitcoin and software developers started creating bitcoin tools. The value and usability of bitcoin continued to grow.

The day bitcoin hit parity with the USD was a huge deal. Bitcoin users celebrated like they had just won the lottery. Finally, one bitcoin was worth $1 USD. Bitcoin reached parity with the USD in February 2011.

A few short years later, bitcoin hit an all time high of $1400 USD. Then, it crashed back down to $300 or $400 after the Mt. Gox hack. In 2017, bitcoin hit a new all time high of $20,000 before settling back to $10,000.

The exciting news If you are reading this today is that the digital currency have not reach mass adoption yet. Is safe to say we are just scratching the surface for the potential of Bitcoins and cryptocurrency.

With cryptocurrencies transactional value going up everyday, a pre fix market cap and the produce supply of cryptocurrency decreasing over time, the value of Bitcoin should continue on a rising trend. As opposed to fiat currency that usually decreases and loses value over time.

Fundamentals Of Cryptocurrencies and Bitcoin

Bitcoin Transactions Aren’t 100% Anonymous

Many people believe bitcoin transactions are totally anonymous. People will tell you that bitcoin is the preferred payment method for scammers, drug dealers, and denizens of the “dark web”.

This isn’t really true. Bitcoin does have a shady past and it has been used for plenty of illegal transactions, money laundering schemes, and scams.

However, bitcoin is far from anonymous. Yes, it’s a decentralized currency that can be transferred without the need for a third party – like a bank. Yes, you can own bitcoin without disclosing your identity to anyone. But it’s far from anonymous.

Bitcoin is best described as “pseudonymous” and not anonymous. Here’s the reason: anyone can see your bitcoin wallet. Your bitcoin wallet is a public address. Your funds are held on the transparent bitcoin blockchain, and anyone can see those funds by checking the bitcoin blockchain.

Your bitcoin wallet address looks like a string of numbers and letters like x8j324inxcgf89joiadfj8dsj.

Nobody knows your identity specifically from that string of numbers and letters. However, someone can link your bitcoin address to your identity quite easily.

You might post a donation link on your forum post, for example, asking for donations to a bitcoin wallet address. From that point forward, your bitcoin wallet is linked to your username on that forum.

Even if you’re careful about linking your identity to your bitcoin wallet address, anyone can still track your funds. You might collect $100,000 at a bitcoin wallet address linked to your anonymous business, for example. However, an IRS agent can sit and watch that bitcoin address to see where your funds are moved, then tax the final destination of those funds.

Here’s the final reason why bitcoin transactions are rarely anonymous: most cryptocurrency exchanges abide by strict Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements, which means they collect and verify the personal information of all users on their forum. As soon as you transfer any cryptocurrency funds to or from your exchange account, your bitcoin address is linked to your personal identity forever.

How to Safely Store Bitcoin in a Bitcoin Wallet

The term “wallet” has a different meaning in the bitcoin world. A bitcoin wallet is a place where you can store your bitcoins.

Of course, your bitcoins aren’t physical units. They’re just strings of data – including your private keys. A bitcoin wallet will store your private keys, which means only you can access the funds within that wallet.

There are a few different types of bitcoin wallets, including:

  • Mobile apps
  • Physical wallets, including cold storage wallets like Trezor and the Ledger Nano S
  • Paper wallets, which are pieces of paper on which you’ve written or printed your private key or passphrase
  • Other software programs

In any case, your wallet is controlled by you and you alone. There’s no third party bank in charge of your wallet. Your wallet lets you send, receive, and store your bitcoins. If your wallet is compromised – like if you lose your private keys – then it’s likely due to your own fault.

How Bitcoins Are Stored on the Blockchain

All bitcoin transactions are recorded in a public distributed ledger called the blockchain. That blockchain is the center of the bitcoin network. It’s a string of transactions dating all the way back to January 2009 when the bitcoin network first launched. A new “block” of transactions is added to the “chain” every transaction. That means you can look at the blockchain – which is now about 160GB in size – to verify any transaction in the history of bitcoin.

Wallet apps and other software applications will send transactions to the bitcoin network. Once a transaction hits the bitcoin network, it has to be approved by a node. A node is a computer running the bitcoin network software. That computer will perform a complex mathematical operation to solve a cryptographic problem, then receive a reward – in the form of bitcoin – for their work in securing the network.

Each network node verifies and stores its own copy of the blockchain. This is why the blockchain is called a “distributed” ledger. The ledger is “distributed” across a network of millions of nodes – millions of computers – in every corner of the world. If someone tried to change the ledger – say, by falsifying a transaction – it would quickly be overruled by the other nodes on the network.

Bitcoin Mining – Why Bitcoin Has to Be “Mined” By Computers

One of the key differences between bitcoin and fiat currencies is the way it’s created. Fiat currencies like the USD are printed on a daily basis. More US Dollars are constantly entering into the circulating supply.

The bitcoin network also issues new bitcoins on a daily basis – although there’s a fixed supply of bitcoin that will ever be created. There will never be more than 21 million bitcoins in existence. That’s a fixed number.

As of 2018, approximately 17 million BTC have been mined. That means there are just 4 million bitcoins remaining to be mined.

Bitcoins are “mined” by nodes. When a node verifies a bitcoin transaction, it receives a mining reward. In the early days of bitcoin, the mining reward was 50 BTC. That means the network distributed 50 new bitcoins every 10 minutes. The bitcoin code required the block reward to be cut in half over time. The bitcoin block mining reward halves every 210,000 blocks. As of 2018, the block reward sits at 12.5 BTC. In May 2020, that reward will drop to 6.25 BTC per block.

In order to mine bitcoin in 2018, you’ll need a specialized computer. Today, special custom-designed bitcoin miners use immense processing power to solve bitcoin’s increasingly complex cryptographically-secured math problems.

How Buying and Spending Bitcoin Works

You can buy bitcoins online from any cryptocurrency exchange. You can also purchase bitcoins from private sellers in your area or from two-way bitcoin ATMs.

In the early days of bitcoin, the only way to spend your bitcoin was to withdraw your bitcoin into a usable currency like the USD.

Today, however, bitcoin users have more options than ever before. Major retailers now accept bitcoins and other major cryptocurrencies for many transactions. You can buy condos in Dubai using bitcoin, for example. You can buy plane tickets or cars using bitcoin in website like Expedia.com for example.

Many cryptocurrency banking companies now offer bitcoin debit cards. You sign up for the card, send bitcoin to the card, then use that card in the real world. These cards are spendable anywhere VISA and MasterCard are accepted. Spending your bitcoin in the real world is as easy as using an ordinary credit card.

Buying & Spending Bitcoins

There are a variety of specialized currency exchange websites to buy bitcoins and altcoins with funds from a bank account or credit card. Buying Bitcoins is simple, there are a few options for buying coins. The quickest way to get started with bitcoin is to sign up for a bitcoin exchange, where you can quickly buy, store and receive coins. Here’s the basic process you’ll need to follow:

  • Step 1) Open a Bitcoin exchange account.
  • Step 2) Trade a fiat money for Bitcoins or receive coins.
  • Step 3) Transfer your Bitcoins to a secure private Bitcoin wallet.

That’s it! click here to check out the best exchanges in the US and Internationally. Below, we’ll explain more specific instructions – like tips on how to choose a good Bitcoin exchange and what to watch for.

Where To Open a Bitcoin Exchange Account?

There are several major Bitcoin exchanges, and there are several preferred exchanges. Different people have different needs, and multiple exchanges offer different services.

Your country and location also play a role when deciding which exchange to choose. Coinbase is the preferred leading exchange in the US and Europe for example, but if you are in Mexico Bitso is the best option to start

Conclusion

That’s it for today’s lesson. To recap, here’s what we learned:

  • Bitcoin isn’t totally anonymous, and anyone can easily track your bitcoin transactions by checking the publicly-viewable blockchain
  • Bitcoins are stored in a public ledger called the blockchain
  • You can buy, sell, send, and store your bitcoins using a bitcoin wallet
  • You can purchase bitcoins online from any exchange, then spend them in the “real world” using bitcoin debit cards and other purchasing methods
  • Bitcoin isn’t printed like regular money; instead, it’s “mined” by specialized computers that solve complex math problems

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