Bitcoin (BTC) is an electronic user payment system similar to digital wallets and bank accounts. The main unit of payment on the network is bitcoin. Digital coins, unlike traditional money, are not tied to any country’s economy or central bank. All the actions of issuing new money, processing payments and creating accounts are done by users.
The first developments of the system appeared in 2008 from creator Satoshi Nakato and developer Hela Finney, and the official launch of the system took place on January 3, 2009. Bitcoin became a protest against traditional money and the binding of finances to one country. The idea of independent money was supported by a narrow community, but as the number of users and the value of BTC USD grew, the system began to gain popularity.
To fully understand bitcoin, it is necessary to understand how the system works, how wallets are created, and how transactions are processed on the network.
A little excursion into the system:
- Wallets are the equivalent of a bank or electronic account where money is stored. They are registered with the help of special programs or websites. When creating a wallet, the user receives a public key (account number) and a private key (password to manage funds).
- Transactions are necessary to transfer bitcoins between user wallets. All transactions go into a common pool, which is processed by other members of the system. But you have to pay a fee for confirming the transaction.
- Miners, those who “mine” bitcoins, are the backbone of the security and performance of the system. They use computing power to keep the network running in exchange for the rewards they receive. All of the mining of new blocks and transaction processing falls on the shoulders of the miners.
- Blockchain is a sequential chain of blocks into which transaction information is recorded. The essence of the technology is that the data is stored on multiple independent servers and in case of problems or failures, the network will remain operational.
Bitcoin: pros and cons
The popularity of the first cryptocurrency is due to the peculiarities of the technical implementation of the system, as well as a number of advantages:
- No central authority. All new coin issuance and transaction processing is done by network members.
- Level of security and protection. The proof-of-work algorithm is used to mine new blocks, which requires a lot of computing power. Given the amount of hardware in the bitcoin network, an attack is virtually impossible.
- Payments without restrictions. The system is not tied to any country or state, which allows you to make international payments almost instantly with minimal fees.
- Low commissions. Users have to pay a fee for processing transactions, and the amount is set independently. The higher the commission, the faster the speed of transaction confirmation.
- The ability to issue coins independently. Availability of mining equipment allows you to mine new coins.
Although bitcoin has a huge number of advantages, including the ability to earn money and the high attractiveness of investments, the cryptocurrency has a number of disadvantages:
- Rate volatility. The value of the cryptocurrency changes every day, and it is impossible to predict the direction of the movement.
- The possibility of losing money. All risks associated with the safety of funds fall on users’ shoulders. In case of loss of a private key or personal data phishing it is impossible to change information or cancel transactions.
- Non-trading risks. Because bitcoin’s global distribution is low, users are limited in their choice of wallets, certified exchange platforms, and exchanges. There is a possibility of fraud by third parties.
How bitcoin differs from other electronic money and currencies
Bitcoin differs significantly from other electronic systems. Conventional digital wallets have the following features:
- Fiat funds – all platforms conduct transactions with the usual money, including rubles, dollars and euros, which can be withdrawn to a bank account.
- Identity verification – to increase transaction limits, users need to undergo identity verification by uploading documents.
- Central control body – all transactions are processed by the system, and in case of errors or fraud one can contact the support service.
In the case of BTC, things are different. Key differences between bitcoin and digital money:
- the value of coins is set by the market without reference to resources or instructions from central authorities;
- There are no limits on the amount of money in the wallet, the size or number of transactions; there is no need to confirm identity to create an account;
- all transactions are processed by other users and transactions are irreversible; in case of mistakes or misprints there is no way to get the money back.
The difference of bitcoin from other digital currencies is that BTC is the first cryptocurrency. The other payment systems are its derivatives based on the original source code. Such currencies include Ethereum, Bitcoin Cash, Litecoin and others.
What are the dangers of buying and storing bitcoin
Despite the large number of success stories of investing in bitcoin, study all possible risks before buying the asset. The main factors include:
- Price instability. The value of bitcoin fluctuates daily and can fluctuate 10-15% up or down. This kind of volatility provides opportunities to make money, but it can also lead to losing money.
- Regulatory uncertainty. Many governments are unable to develop a legal concept for the status of digital money, a taxation system, and ways to declare assets. Bitcoin is a new class of financial instrument that is encouraged in some states and banned in others.
- The legitimacy of income is an issue. Since the state does not pass bitcoin laws, banks are free to interpret cryptocurrency revenues in different ways. Some companies have no problem processing transactions, while others require proof that the money is legal.
- Lack of regulation. In the case of brokers or investments in traditional assets, everything is extremely transparent. A person chooses a direction for investments and applies to an intermediary, which works in accordance with the law. The legality of most exchanges and exchangers is under question.
How to buy bitcoin
To buy bitcoin, you need to create a wallet and understand how it works. The main thing is to keep your private key safe and not to pass it on to third parties, because it gives you access to the management of your funds.
The main options for buying bitcoin:
- Exchange platforms. There are a large number of sites on the Internet that allow you to buy or sell bitcoin for a small fee. Bank accounts, popular online banking and electronic wallets are used for transactions. Choose an exchanger with the help of reputable sites that collect reviews about the sites, exchange rates and allow you to look for the best offers.
- Exchanges. Investors can immediately register at an exchange site, get verified and fund the account with a card. After that, it will be possible to buy bitcoin. It can be stored both on the exchange and in a personal wallet.
- LocalBitcoins service. An intermediary platform between users, which acts as a guarantor and protects the interests of buyers and sellers.
- Direct transactions. Investors can independently find bitcoin holders on thematic forums or sites, and then agree to buy BTC. It is recommended to use a guarantor for more reliability.