Introduction To Bitcoin and Cryptocurrency
Introduction To Bitcoin and Cryptocurrency
Cryptocurrencies are a growing asset class that shares some characteristics with traditional currencies except they are purely digital, and creation and ownership verification is based on cryptography. Bitcoin, often abbreviated by the ticker symbol BTC, was the first example of what we now call a cryptocurrency.
How It Started;
The first mention of the product called bitcoin was in August 2008 when two programmers using the names Satoshi Nakamoto and Martti Malmi registered a new domain, bitcoin.org. In October of the same year, Nakamoto released a document, called a white paper, entitled “Bitcoin: A Peer-to-Peer Electronic Cash System.” In the preceding months, Nakamoto and a group of volunteer researchers had proposed different versions of the concept in forums and email threads. It was in 2008 that it all came together.
Bitcoins aren’t printed, like dollars or euros – they’re produced by computers all around the world using free software and held electronically in programs called wallets. The smallest unit of a bitcoin is called a satoshi. It is one hundred millionth of a bitcoin (0.00000001). This enables microtransactions that traditional electronic money cannot perform.
Generally the term “bitcoin” has two possible interpretations. There’s bitcoin the token, which refers to the keys to a unit of the digital currency that users own and trade.
A bitcoin token is held in a bitcoin wallet that is identified by a string of numbers and letters such as “1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa.” When someone wants to send you bitcoin, that person will send it to your particular, public wallet address, and you will access it via your private keys.
Then there’s Bitcoin the protocol, a distributed ledger that maintains the balances of all token trading. These ledgers are massive files stored on thousands of computers around the world. The network records each transaction onto these ledgers and then propagates them to all of the other ledgers on the network. Once all of the networks agree that they have recorded all of the correct information – including additional data added to a transaction that allows the network to store data immutably – the network permanently confirms the transaction.
Bitcoin can be used to pay for things electronically, if both parties are willing. In that sense it’s like conventional dollars, euros or yen, which can also be traded digitally using ledgers owned by centralized banks. Unlike payment services such as PayPal or credit cards, however, once you send a bitcoin, the transaction is irreversible – it cannot be called back.
That said, bitcoin does not depend on a centralized system of banking. Because each node on the network is owned by a private entity, the entire network is responsible for maintaining the accuracy of the ledger. When you send a bitcoin – or a fraction of a bitcoin – to another person, the entire network takes part.
This process is called decentralization, one of the Bitcoin network’s most important characteristics. No single institution controls the bitcoin network. The protocol is maintained by a group of volunteer coders, and run by an open network of dedicated computers around the world.
Since there is no central validator in this network, users do not need to identify themselves when sending bitcoin to others. When a sender initiates a transaction, the protocol checks all previous transactions to confirm the sender has the necessary bitcoin as well as the authority to send them. Put another way, bitcoin users theoretically operate in semi-anonymity and the network is self-policing, ensuring that bad actors cannot be rewarded.
Bitcoin is also pseudo-anonymous. In practice, each user is identified by the address of his or her wallet, which can be used to track transactions. Law enforcement has also developed methods to identify users if necessary. Most exchanges are required by law to perform identity checks on their customers before they are allowed to buy or sell bitcoin. This means an exchange-assigned wallet address is most likely connected to a particular user. However, cryptocurrency wallets are not limited to exchanges or other online services, and a wallet generated by an anonymous user on a single computer is fairly difficult to trace. Further, every transaction on the network is fully transparent, a fact that concerns some privacy advocates. Ultimately, tracing a bitcoin transaction to a specific person is difficult but not impossible, and any statements describing the “anonymity” of bitcoin are inaccurate.
Bitcoin can be bought on exchanges or directly from other people via marketplaces. You can purchase bitcoin in a variety of ways, using anything from hard cash to credit and debit cards to wire transfers, or even other cryptocurrencies, depending on who you are buying them from and where you live.
The first step is to set up a wallet to store your bitcoin – you will need one, whether you’re buying bitcoin online or with cash. This could be an online wallet (either part of an exchange platform, or via an independent provider), a desktop wallet, a mobile wallet or an offline one (such as a hardware device or a paper wallet).
The most important part of any wallet is keeping your keys and/or passwords safe. If you lose them, you lose access to the bitcoin stored there.
NOTE: Never invest more than you can afford to lose – cryptocurrencies are volatile and their prices could go down as well as up.