You’ve probably heard of bitcoin by now, whether you know anything about it or not. An increasingly popular form of digital currency, bitcoin is thought to be one of the first implementations of a concept called cryptocurrency. The idea of using technology to make transactions and trade goods and services without the need for a traditional financial institution is one that has been talked about for many years. However, only in the last few has it become possible to actually buy and sell goods and services without relying on a third party such as a bank. In this article, we’ll be taking a look at what bitcoin is, how it works, and why it has become so popular. We’ll also be highlighting key differences between bitcoin and other cryptocurrencies.
What is Bitcoin?
Bitcoin is a form of digital currency created in 2009. It works on a peer-to-peer system, meaning that instead of being mediated or controlled by a central authority, like fiat money (dollars, euros, etc.), it is managed and exchanged between peers. This exchanged virtual currency is called “Bitcoin.” Unlike fiat money, which is issued by central banks, Bitcoin has no physical manifestation and can be stored and transferred digitally.
How Does Bitcoin Work?
The concept of Bitcoin is based on two key principles:
Decentralization- The idea that no single institution or entity owns or controls Bitcoin. Instead, it is managed and exchanged by its users through a network of computers.
Anonymity- The belief that no one, not even the person holding the Bitcoin wallet, knows who is transacting with it or how much is being exchanged.
Bitcoin uses a public ledger called a “blockchain” to record all transactions. This ledger is distributed to all users through a peer-to-peer network. All transactions are verified and recorded on this public ledger, which acts as a kind of permanent digital record keeping.
How to Store Bitcoin
There are a variety of ways to store your bitcoin, each with its own pros and cons. One option is to set up a digital wallet on a platform such as Coinbase. These wallets are convenient and user-friendly, allowing you to easily store, buy, and sell bitcoin through an app. Your wallet also has a transparent address that you can use to see how much bitcoin you currently own.
You can also store your bitcoin offline on a computer hard drive, mobile device, or printed out piece of paper. This method of storage is considered “cold storage,” as no third party is involved and the risk of losing your bitcoin is very low.
How to Buy Bitcoin
You can trade bitcoin and other cryptocurrencies for US dollars through various online exchanges. By far, the most popular exchange is Coinbase, but there are others such as Kraken and Robinhood that are also gaining popularity. You can buy and sell bitcoin and other cryptocurrencies through a financial institution or a brokerage. These services let you buy bitcoin with a linked bank account or debit/credit card. You can also use a Bitcoin ATM to exchange cash for bitcoin.
Key Differences between Bitcoin and Traditional Currency
There are a number of key differences between bitcoin and traditional currencies. Some of these differences are more significant than others, so let’s take a closer look at them.
Speed and Cost of Transactions- One of the most significant differences between bitcoin and traditional currencies is the speed and cost of transactions. When you make a payment using a credit card, it usually takes 1-3 business days for the transaction to complete. In contrast, bitcoin transactions are almost instant, with an average processing time of 10 minutes. Furthermore, the price of a bitcoin transaction is significantly higher than the price of a fiat currency transaction. The higher price of bitcoin makes it more attractive as a form of payment, compared to fiat. On average, a credit card transaction costs about 1% of the amount transferred, while the price of a bitcoin transaction is closer to 5%.
Transfer of Value- The ability to move money from one country to another is one of the most important functions of any currency. Bitcoin does not have this limitation, as it can be exchanged seamlessly between any two people anywhere in the world.
Security and Traceability- Bitcoin is decentralized, meaning that no one controls or regulates it. This has led to a certain amount of security and traceability issues. For one, we don’t know who is actually “mining” bitcoins or using the computing power to “create” new coins. Furthermore, as no single institution or government controls or regulates Bitcoin, it is not legal tender and is not insured by the government. For example, if you lose your phone with bitcoins on it, there is no way to get them back.
Pros and Cons of Bitcoin
On the one hand, Bitcoin is revolutionary in that it is the first decentralized cryptocurrency. It was the first to use the blockchain distributed ledger technology that now forms the basis for most cryptocurrencies.
On the other hand, it is also reminiscent of the early days of fiat money, when people were excited about the possibility of a new, decentralized currency. This enthusiasm, combined with the lack of any real use case for bitcoin, has caused many people to dub it a “bubble.”
Bitcoin’s current price of $8,700 reflects its volatile nature. It has skyrocketed in the last few months, increasing by well over 1,000%, and plummeted in a very short period of time. While it is important to remember that bitcoin is still a relatively new technology, it is also important to keep in mind that its price is not necessarily a good indicator of its how it will perform in the future.
As the first decentralized cryptocurrency, bitcoin set the precedent for similar currencies that followed it. It also highlighted the need to adapt existing financial infrastructure to accommodate cryptocurrencies.
In its short history, bitcoin has proven to be a highly volatile, speculative investment. While it has a lot of potential, it is important to be aware of the inherent risks and understand the context of bitcoin’s development before investing any meaningful amount of money.
If you’re interested in learning more about how cryptocurrencies work and how they could potentially impact the future of finance, make sure to read our guide on the basics of cryptocurrency.