What is Bitcoin? The Ultimate and Simple Guide for Crypto Beginners

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As a crypto investor, you must have heard of Bitcoins. But when we deep dive, do you know exactly what Bitcoin is and how it works? Why does Bitcoin have value? Is there any hidden risk in investing in Bitcoin as the hottest crypto currency project?

I think we’d all agree that anyone looking to buy a cryptocurrency should really know what it is. In the following article below, everything about Bitcoin will simply be explained for you.

What is Bitcoin?

Bitcoin is the cryptocurrency launched in 2009, a digital asset that uses cryptography to control its creation and management. It provides users with the ability to send and receive digital money without any intermediaries like financial institutions.

Unlike the fiat currencies such as USD, there is not any centralized institution like a bank or government controlling Bitcoin, which means no government issues it and no banks and institutions to manage accounts and verify transactions.

Instead, the financial system in Bitcoin is run by thousands of computers distributed around the world. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. Anyone can participate in the ecosystem of Bitcoin.

The birth of Bitcoin

In 2008, a paper authored by Satoshi Nakamoto titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was posted. The paper introduced the basic concept of Bitcoin as a decentralized peer-to-peer digital currency. In the next year, Satoshi Nakamoto mined the first block and received 50 bitcoins as a block reward.

At the time, the value of Bitcoin was typically negotiated on the Bitcoin forum.The first retail transaction in the real world was paid on May 22, 2010, by exchanging 10,000 Bitcoins for two pizzas in a pizza restaurant in Florida, marking May 22 as the Bitcoin Pizza Day for crypto-fans.

The price of a Bitcoin reached an all-time high in February 2021, as values exceeded over 65,000 USD.

How Bitcoin works?

Unlike fiat currencies like USD that are issued by the government, banks manage the accounts and verify transactions.

Instead, Bitcoin is a system of decentralized verification based on math and cryptography.

The details of a transaction are public and open to anyone.

In a Bitcoin transaction, if Sender A sends a Bitcoin to Receiver B, the transaction details including the sender, receiver and the amount of coins will be recorded on a particular database called “blockchain”.

Blockchain is a chain of blocks that contains all the transaction information. Each block contains the hash of the previous block which acts as a fingerprint of a block that is unique and unrepeatable. It prevents the data from being changed by anyone and helps secure transparency and safety.

There isn’t a centralized bank or institution to process transfers. Those who record the transaction details and store them in the chain, will receive Bitcoins as a reward. This mechanism is called mining. It is through this process that new blocks of transactions are recorded on the blockchain.

Where does the value of Bitcoin come from?

Nature of Money

Bitcoin was originally designed as a medium of exchange. More businesses have started accepting Bitcoin as a payment and a unit of account.

As you can see, Bitcoin plays part of the function of money. Unlike fiat currencies, Bitcoin is decentralized and secure. Some investors view Bitcoin as a store of value as it’s scarce and difficult to produce.

Since the total number of Bitcoins is 21 million which cannot be changed by anyone, just like the amount of gold and silver. They believe that Bitcoin’s value will continue to appreciate over time.

The advantages and disadvantages of Bitcoin

We have mentioned part of the advantages of Bitcoins above, let’s deep dive into it…and don’t ignore the risk of it.

Pros

You can enjoy an open and more transparent financial system. Bitcoin is not regulated, created or distributed by any government or central bank. No one has the authority to freeze, charge, or demand your coins. The government can't seize them under any conditions. You can take part in the financial markets and make transactions anywhere, any time, with no intermediaries whatsoever.

The privacy of Bitcoin transactions is secured. Bitcoins enable buyers to complete transactions without disclosing any confidential financial information to the seller which means your identity can be hidden.

The security of Bitcoin transactions is ensured. Every cryptocurrency transaction is recorded on the blockchain. This transaction history of Bitcoins can be traced to stop people from spending coins they do not own, making copies or undoing transactions.

Cons

On the other hand, Bitcoin has a high volatility which means you may have a potential for great losses. The cryptocurrency market thrives on speculation. While the price of a Bitcoin can spike too high, it can also crash to terrifying lows just as quickly. Prices are driven by the supply of coins from miners, the demand by purchasers, different sources of news and the regulations which means uncertainty. So if you’re looking to make stable returns, this might not be your choice.

A crypto newbie may face security risks. Bitcoin is not completely free from security issues. As a crypto owner, you could lose the private key that lets you access your coins. And then there’s hacking, phishing, and all the other attempts to gain control of your Bitcoin assets.

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