Bitcoin was invented as a peer-to-peer system for online payments that does not require a trusted central authority. Since its inception in 2008, Bitcoin has grown into a technology, a currency, an investment vehicle, and a community of users. In this guide we hope to explain what Bitcoin is and how it works as well as describe how you can use it to improve your life in Nigeria. This is a Complete Guide to Understanding What is Bitcoin.
What is Bitcoin?
Since anything digital can be copied over and over again, the hard part about implementing a digital payment system is making sure that nobody spends the same money more than once. Traditionally, this is done by having a trusted central authority (like PayPal) that verifies all of the transactions.
The core innovation that makes Bitcoin special is that it uses consensus in a massive peer-to-peer network to verify transactions. This results in a system where payments are non-reversible, accounts cannot be frozen, and transaction fees are much lower. It’s worth to notice that Bitcoin (with the capital letter B) is used to call the peer-to-peer payment system and bitcoin (lowercase letter b) is used to call the digital currency used within that system.
It is a rare occurrence when something that exists only in the virtual world, with no counterpart in physical form, catches hold of the imagination of the entire world, with the only exception possibly being Westeros, and all the parties competing for the Iron Throne!
This was true till an anonymous software developer came along, calling himself (or a team) Satoshi Nakamoto. In 2009, Nakamoto launched a virtual currency, called Bitcoin, which could only be held in electronic form but could be used in exactly the same way as the traditional currency in your wallet.
What this essentially means is that Bitcoin isn’t printed on paper like the US dollar or euro or even the Indian rupee. It is part of something called a blockchain and exists only in the virtual space in encrypted form, which is why it is called a cryptocurrency.
However, what differentiates this digital currency from the traditional currencies is that there is no central bank or country that governs it, which is why it is called a decentralized currency. This is also one of the key drivers of the popularity of Bitcoin. Being decentralized, its value/price is not affected by the economic volatility of a single nation or geo-political tensions in any one part of the world.
This makes Bitcoin much more stable than any other market-linked investment option across the globe.
Where do bitcoins come from?
Some users put their computers to work verifying transactions in the peer-to-peer network mentioned above. These users are rewarded with new bitcoins proportional to the amount of computing power they donate to the network.
Who controls Bitcoin?
As we mentioned above, there is no central person or central authority in charge of Bitcoin. Various programmers donate their time developing the open source Bitcoin software. The individual miners then choose whether to install the new version of the software or stick to the old one, essentially “voting” with their processing power. It is in the miners’ best interest to only accept changes that are good for the Bitcoin currency in the long run. These checks and balances make it difficult for anyone to manipulate Bitcoin.
How to get started with Bitcoin
The best way to learn about Bitcoin is to get some and experiment. Instantgold is the easiest Nigerian exchange where you can your hand on Bitcoin. Buy some bitcoins with a small amount of money, store it in your digital wallet, spend it. Then you will understand the most important invention of humankind after the Internet.
Choosing the Right Bitcoin Exchange Platform
Choosing the right platform is among the first, most important decisions to make in buying and selling Bitcoin.
- Country of Registration: The laws that govern the exchange would depend upon where it is located. These regulations can vary from country to country. Choosing a platform based in your home country, in this case India, is recommended.
- Payment Modes: Check whether the platform allows your preferred mode of payment, like net banking, wire transfer, credit card, cash and so on.
- Fees: Compare fees being charged by different platforms. Apart from transaction fee, find out of any other charges.
- Order book volume: An order book is a list of buy and sell orders on offer on the platform. A higher volume indicates higher liquidity, meaning that more people are using the exchange to buy and sell Bitcoin. This means you’ll find a seller or buyer faster when you’re trying to buy or sell at a particular price-point.
- Transparency: Find out whether the exchange clearly mention its fee and charges and whether it publishes its audit information.
- Speed of Deposits: This includes how quickly your wallet gets debited with Bitcoin after you make a purchase as well as how fast your bank account gets debited when you sell the digital currency.
- Anonymity: If this is critical to you, the only option is to choose a person-to-person exchange and trade in cash. Other platforms will require you to complete KYC formalities.
- Security: Check whether the exchange uses secure logins and two-factor authentication.
Top Cryptocurrencies Other Than Bitcoin
Bitcoin is by far the most traded digital currency, with its market capitalization touching a record high of ~$94 billion on October 18, 2017. The trading symbol of this virtual currency is BTC. A breakaway from Bitcoin created a separate cryptocurrency called Bitcoin Cash, which has a market cap of ~$11 billion and trades under the symbol BCC.
Ether holds the second position in the list of the most highly traded cryptocurrencies. It was created by Ethereum, a platform launched in 2015 to build and run smart contracts without any interference from a third party. In 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC).
Launched in 2012, Ripple is a real-time worldwide gross settlement network. Ripple works on a peer-controlled consensus ledger and does not require any mining, unlike Bitcoin and other altcoins. Ripple trades under the symbol XRP and has a market cap just shy of $10 billion.
Litecoin was introduced in 2011 and is based on a decentralized and open-source worldwide payment network. Litecoin trades under the symbol LTC and has a market cap of almost $3 billion.
Dash, NEM, NEO, Monero and Tron are the others in the top cryptocurrency list. There are more than five thousand different cryptocurrencies trading across the globe.
Is Bitcoin Legal in Nigeria?
The Government of Nigeria has come a long way in its acceptance of Bitcoin and is actively considering ways in which this virtual currency can be regulated. The legalization process is highly complex and challenging. This is not only because Bitcoin is an unprecedented currency, but also because it requires a deeper understanding of the blockchain technology, the dynamics of this unique market and the implications on individuals and the economy. Thus, Central Bank of Nigeria, the Finance Ministry, IT experts and the SEC need to be included.
As I wrote before in my previous post about Cryptocurrency in Nigeria, The announcement of the Central Bank of Nigeria declaring Cryptocurrency as a form of payment to be illegal transactions prevents clients from utilizing their financial institution accounts to trade Digital currencies, essentially banning the country’s banks and microfinance establishments from utilizing Blockchain Technology as a medium of exchange; a move that has hindered the growth of Blockchain technology adoption in Nigeria.
This made it unclear for the Bitcoin Community to commerce in Cryptocurrencies despite the fact Digital Currencies are not fully outlawed; meaning all Nigeria citizens are still entitled to invest in Bitcoin. But, Nigerian Banks and Other financial Institutions as well as capital market operators are prohibited from investing in cryptocurrencies or carrying on business as a virtual currency exchange.
Benefits of Owning Bitcoins
The cryptocurrency that started out at a value of US$0.06 in July 2010 touched a whopping US$19,800 on the Asian exchanges on December 10, 2017. In fact, Bitcoin has seen an amazing bull run in 2017, rallying more than 700% through the first eight months of the year. As of October 18, 2017, Bitcoin was valued at US$5301.01. Most experts believe that this upward trend is likely to continue in the foreseeable future, with CNBC going so far as to state that the digital currency could be worth $100,000 in the next 10 years!
But don’t just base your decision regarding whether or not you should trade Bitcoins on just this because this isn’t where the benefits of owning Bitcoin end.
This is possibly the biggest advantage of trading Bitcoins. This digital currency is actually safer than using credit or debit cards, as well as wire transfers, given the multiple layers of security built into the trading, purchase and storage of Bitcoins. With the virtual wallet that contains your stash of cryptocurrency constantly changing addresses to secure your privacy, it also increases safety because cyber criminals are unable to link transactions to your wallet or access your confidential and private financial information.
- Total Control:
For now, there are no regulations to govern the exchange of this digital currency. At the same time, since transactions cannot be traced to a single person, party or even government, access to information on whether or not you own Bitcoin and how many you might own is unavailable. What this means is that no government can tax you for any gains you make or seize your asset. You have complete control over what you want to do with the currency.
- Low Fees:
The transaction fees for cryptocurrency is very low. It is far less than the fee you would need to pay for the use of traditional payment methods, such as online banking, wire transfers and credit/debit payments. What’s even better is that this transfer fee is not linked to the amount of Bitcoins being transferred. So, you need to pay a fee for just one transaction, even if you are transacting lakhs of rupees worth of Bitcoins.
- Portfolio Diversification:
The only driver of Bitcoin price is the law of demand and supply, making the digital currency a great way to diversify your portfolio and hedge against economic volatility and geo-political tensions, which are only too common these days.
Lastly, and maybe most importantly, a big advantage is the anonymity Bitcoin affords, given that it cannot be traced back to the user.
What is a Bitcoin Wallet?
People today are all too familiar with digital wallets and a Bitcoin wallet is not very different. It is essentially software that allows you to store this digital currency electronically. You get a private key, which is a confidential number, similar to the PIN for your debit/ATM card. The Bitcoin wallet helps you send and receive the cryptocurrency, while letting you know the balance in your account. You can either have this wallet on the internet or install it on your computer or mobile phone. If you are planning to invest in or trade Bitcoins, you will need a wallet.
Types of Bitcoin Wallets
- Web Wallet:
This type of Bitcoin wallet allows you to receive, send and store the digital currency via a web browser. They are usually hosted by a service provider, who is responsible for managing it and ensuring security. This is possibly the most convenient form of wallet, especially if you are a beginner.
- Desktop Wallets:
You can also choose to install the wallet onto your desktop computer or laptop. It gives you complete control over the wallet, although the total responsibility of ensuring security falls on you. This option needs the private key to be stored on your hard drive. The problem is that if the file is somehow corrupted, you have no backup and your stash of digital currency could be lost forever. So, if you choose this option, make sure you have a very strong password and trustworthy backup.
- Mobile Wallets:
Similar to the desktop version, this one needs to be installed on your smartphone. The advantages is that you can access your wallet on the move, while it is easy to use and navigate, and can scan QR codes easily. These wallets don’t usually store the entire cope of the blockchain and therefore are a “light” version.
- Hardware Wallets:
This is a type of device that is created with the specific purpose of storing Bitcoins. The key benefit this offers is that you are relatively safer from malicious cyber-attacks.
Apart from these, you can also opt for a paper wallet or a brain wallet. The former is a representation of bitcoins in physical form, such as metal or paper. Similar to printed currency, a paper wallet is liable to be more easily lost or damaged. A brain wallet, on the other hand, is created through a passphrase. However, if you lose this passphrase, your Bitcoins would be lost forever. So, if you really trust your memory, opt for this one.
What moves bitcoin’s price?
How to Keep Your Bitcoins Safe
When you create a Bitcoin address, you will receive two keys, a public one and a private one. Similar to a bank account, the public key is used by others to send Bitcoins to your account, while the private key is a secret password that only you have knowledge of and can use to send the currency to other Bitcoin addresses. So, keeping the private key safe and confidential is a key only way to keep your wallet safe.
There are different ways in which to secure the private key. The most basic way is to encrypt the Bitcoin wallet through a password. However, this still open to hacking and malicious attacks, which is why some people prefer to keep the access completely offline, while others choose to hold the private key through an unconnected database, to protect themselves from online threats.
You could also choose to protect your digital currency through the use of multi-signature addresses. This allows multiple parties to gain access to a part of the address or hold one of several keys, all of which would be needed to access a single Bitcoin address. So, each time any one of the users wants to use the wallet, all signatories would need to approve the transaction.
Apart from this, there are some other things you can do to secure your investment:
- Ensure that you secure your wallet with a very strong password.
You could opt for software such as Roboform or 1password to generate and store passwords. This ensures that the same password is used only one time and then changed.
- Most web-based wallets offer you the option of 2-factor authentication, which ensures that when you log into your wallet, you need an addition step, after entering the password, to verify your identity as the registered user. This could be in the form of a text message sent to your registered mobile number, similar to the one-time passwords banks send for online transactions.
- Make sure you have backup that protects your wallets against human error or computer failure. With backup, if your computer crashes or your smartphone is stolen, you can recover your wallet.
- If you have a large number of Bitcoins stored, you can use cold storage to secure them. This means that your wallet is available in physical form, rather than being stored online or on your computer. Cold storage could be in the form of paper wallets or even flash drives.