What is Bitcoin

Bitcoin is a consensus network that enables a new payment system and is a completely new digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. Nobody owns the Bitcoin network much like no one owns the technology behind email. Bitcoin is controlled by all Bitcoin users around the world. It can be seen as the most prominent triple entry bookkeeping system in existence.

From a user perspective, Bitcoin is pretty much like cash for the Internet. Bitcoin payments are easier to make than debit or credit card purchases, and can be received without a merchant account. Payments are made from a wallet application, either on your computer or smartphone, by entering the recipient’s address, the payment amount, and pressing send. To make it easier to enter a recipient’s address, many wallets can obtain the address by scanning a QR code or touching two phones together with NFC technology.

History

Bitcoin is the first implementation of a concept called “crypto currency”, which was first described in 1998 by Wei Dai on the cypherpunks mailing list, suggesting the idea of a new form of money that uses cryptography to control its creation and transactions, rather than a central authority. In 2008, an anonymous internet user going by the name of Satoshi Nakamoto posted a paper describing a new peer-to-peer electronic payment system known as Bitcoin: A Peer-to-Peer Electronic Cash System which outlines the fundamental concepts that Bitcoin is built upon. He remained active in the Bitcoin community until mid-2010 when he gave the mantle of lead developer to Gavin Andresen and faded from public communication. In January 2009, the first block was mined and the Bitcoin client was released to the public thus creating the Bitcoin network.

In 2010, the first transactions were brokered on bitcointalk.org and one user famously purchased about $25 worth of pizza for 10,000 bitcoins. The awareness of Bitcoin as well as the value of bitcoins slowly increased.

Blockchain

The blockchain is a public ledger of every Bitcoin transaction that is distributed on every machine connected to the Bitcoin network. The blockchain will exist forever and is impossible to edit so long as the Bitcoin network survives. The balance of each Bitcoin address can be verified by analyzing the blockchain.

About every ten minutes a new block is created through the mining process. The miners confirm all valid transactions since the previous block, and the new block is permanently added to the blockchain.

Mining

Mining is the term used for running a series of calculations on a computer to verify the transactions that take place in the Bitcoin network. About every ten minutes, a new block of transaction data is created and the miners who created the block are awarded a few bitcoins. This serves the Bitcoin network both as a system to verify transactions and as a system for fairly distributing new bitcoins.

Although it used to be profitable to mine bitcoins with your standard personal computer, the cost of the electricity necessary to do so is now greater than the value of the bitcoins you could mine. Profitable mining now requires specialized hardware that can perform more computations with greater power efficiency.

Some things You Need To Know

If you are about to explore Bitcoin, there are a few things you should know. Bitcoin is a decentralized currency which does not fall in the jurisdiction of any country and is controlled by all Bitcoin users around the world. Bitcoin lets you exchange money in a different way from that usually done through banks. As such, you should take time to inform yourself before using Bitcoin for any serious transaction. Bitcoin should be treated with the same care as your regular wallet, or even more in some cases!

Securing your wallet

Like in real life, your wallet must be secured. Bitcoin makes it possible to transfer value anywhere in a very easy way and it allows you to be in control of your money. Such great features also come with great security concerns. At the same time, Bitcoin can provide very high levels of security if used correctly. Always remember that it is your responsibility to adopt good practices in order to protect your money. Read more about securing your wallet.

Bitcoin price is volatile

The price of a bitcoin can unpredictably increase or decrease over a short period of time due to its young economy, novel nature, and sometimes illiquid markets. Consequently, keeping your savings with Bitcoin is not recommended at this point. Bitcoin should be seen like a high risk asset, and you should never store money that you cannot afford to lose with Bitcoin. If you receive payments with Bitcoin, many service providers can convert them to your local currency.

Bitcoin payments are irreversible

Any transaction issued with Bitcoin cannot be reversed; they can only be refunded by the person receiving the funds. That means you should take care to do business with people and organizations you know and trust, or who have an established reputation. For their part, businesses need to keep control of the payment requests they are displaying to their customers. Bitcoin can detect typos and usually won’t let you send money to an invalid address by mistake. Additional services might exist in the future to provide more choice and protection for the consumer.

Bitcoin is not anonymous

Some effort is required to protect your privacy with Bitcoin. All Bitcoin transactions are stored publicly and permanently on the network, which means anyone can see the balance and transactions of any Bitcoin address. However, the identity of the user behind an address remains unknown until information is revealed during a purchase or in other circumstances. This is one reason why Bitcoin addresses should only be used once. Always remember that it is your responsibility to adopt good practices in order to protect your privacy. Read more about protecting your privacy.

Unconfirmed transactions aren’t secure

Transactions don’t start out as irreversible. Instead, they get a confirmation score that indicates how hard it is to reverse them (see table). Each confirmation takes between a few seconds and 90 minutes, with 10 minutes being the average. If the transaction pays too low a fee or is otherwise atypical, getting the first confirmation can take much longer.
 

Confirm­ations Lightweight wallets Bitcoin Core
0 Only safe if you trust the person paying you
1 Somewhat reliable Mostly reliable
3 Mostly reliable
6 Minimum recommendation for high-value bitcoin transfers
30 Recommendation during emergencies to allow human intervention

 

Bitcoin is still experimental

Bitcoin is an experimental new currency that is in active development. Each improvement makes Bitcoin more appealing but also reveals new challenges as Bitcoin adoption grows. During these growing pains you might encounter increased fees, slower confirmations, or even more severe issues. Be prepared for problems and consult a technical expert before making any major investments, but keep in mind that nobody can predict Bitcoin’s future.

Government taxes and regulations

Bitcoin is not an official currency. That said, most jurisdictions still require you to pay income, sales, payroll, and capital gains taxes on anything that has value, including bitcoins. It is your responsibility to ensure that you adhere to tax and other legal or regulatory mandates issued by your government and/or local municipalities.

How to Use Your Bitcoin Wallet

Sending bitcoin

Sending bitcoin is as easy as copying and pasting someone else’s address, choosing an amount, and clicking send. This may seem backwards to people used to supplying credit card information to purchase things online, but this method allows the sender to be in complete control of the payment process. Transactions are also irreversible. Essentially, sending a bitcoin is a lot like sending an email. You put in someone else’s address and there’s no going back after you hit send.

Don’t worry if it takes a few minutes for the recipient to see the payment that you have made.  Depending on the network and on the wallet applications the two parties are using, it can take up to ten minutes for the first confirmation of the transaction. Some services require six confirmations (which can take about an hour) before they recognize the transaction.

Receiving bitcoin

To receive bitcoin, choose a receiving address from your wallet, provide it to the other party and wait for them to send payment. As mentioned above, it can take around ten minutes for the transaction to be confirmed by the Bitcoin network, and it is standard to consider transactions that have been confirmed six times to be fully confirmed.