What’s all the hype around Bitcoin?

It's 2021 and if you haven't heard of Bitcoin then you probably live under a rock. Bitcoin was the world's first fully digital currency now known as a crypto currency. It began life as a whitepaper that described a technology called Blockchain that has begun to change the way transactions are conducted. So how exactly did Bitcoin begin? When was the first transaction? How does it work and, if you so desire, how can you buy this now precious digital currency? In the this article, we will explore the following:

1. When did Bitcoin Begin?
2. How does Bitcoin work?
3. How do I buy Bitcoin?

When did Bitcoin begin?

Distant beginnings

Nowadays we think of cryptocurrencies as digital currencies with Bitcoin being the first of those. However, the idea of digital currency had been explored by technocrats interested in finance. Engineer Wei Dai produced a paper in 1998 discussing the virtues of a digital currency that could be used by anonymous people. In that same year, Nick Szabo, a blockchain pioneer, wrote a Bit Gold as a decentralized currency which could negate the need for traditional money and state backed currencies. The major issue that these initial attempts failed to overcome was that of preventing double spending - essentially ensuring that a piece of currency was only spent at one time. However, the spurt of 90's digital cash efforts served as the inspiration for the first cryptocurrency, Bitcoin, that would take a further 11 years to be released.

The birth of Bitcoin

In late 2008, a white paper was released by a person named Satoshi Nakamoto (a pseudonym of an individual that remains anonymous and subject to much mystery to this day). A key difference between Bitcoin and previous failed attempts was leaving a central authority behind making the system a non-trust system. Somewhat similar to a peer-to-peer file sharing network. The big challenge was to ensure that accounts, balances, and transactions could be verified without someone acting as a central entity (think of a bank). This was achieved by the mandating that transactions had to be verified by everyone on the network. But how could this consensus be achieved in a decentralized network? Nakamoto's white paper includes proof of how this consensus could be achieved using blockchain technology and months later he mined the first bitcoin - cryptocurrency was born. A fun fact for you is that the first purchase using bitcoin was 2 pizza's bought for 10,000 bitcoins… I hope those pizzas were worth it.

How does Bitcoin work?

It all starts with the Blockchain

The blockchain is a series of chronologically ordered blocks containing discrete information. On the Bitcoin Blockchain, the information on each block is an encrypted record of the most recent transactions. Each block becomes a permanent and public record that a transaction took place. The blockchain is available to every node (user) on the network, and whenever a new block is added this is distributed across all nodes. In this way, the Blockchain is a public and distributed ledger of all transactions that occur in the Bitcoin network. This means that everyone on the network can verify the balances that someone may hold because all their transactions are available for software to process and verify. The security and order of blocks on the blockchain are upheld by cryptography (hence the general name Cryptocurrency).

How are Bitcoin Transactions Made?

Transactions are made when Bitcoin is tansferred between Bitcoin wallets. This transaction is included and verified in the next block which is added to the blockchain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast to the network and usually begin to be confirmed within 10-20 minutes, through a process called mining.

How do I buy Bitcoin?

Choose An Exchange

Exchanges are just places where cryptocurrency can be bought and sold. If you're looking to get a hold of a certain cryptocurrency, this is your fastest bet. Some popular crypto exchanges are Binance, Coinbase, and Cash App. Generally, we suggest you pick an exchange that allows you to withdraw into your own personal wallet for safekeeping. Exchanges generally charge a few to deposit into them and when you make a trade.

Connect Payment Information

The process of depositing money onto your chosen exchange is similar to setting up a brokerage account on an application such as Robin Hood. You will normally need personal identification like a driving license and/or social insurance number (There are some exchanges that do not require any ID and allow you to remain anonymous in the spirit of Bitcoin's founding). Once your ID is verified you'll be able to connect your payment option to the exchange. There are varying fees to deposit money into an exchange and it typically varies by deposit method (bank transfer, debit, credit, etc).

Place An Order

The exciting part has arrived! It's time to buy some Bitcoin. Most exchanges now offer a variety of order options like a stop-loss, stop-limit etc so pay attention to this when you're choosing your exchange. Once you place your order you'll now be the proud owner of a bunch of numbers in a code that have monetary value - aka Bitcoin. If you think the market is turning in the wrong direction then be sure to cash out!

Consider Storing Outside the Exchange

Though you could store your Bitcoin in the exchange that you're trading on, it's considered best practice to store your Bitcoin in your own personal wallet. This ensures that via your private key, only you have access to the wallet. This adds a layer of protection in the event the exchange you're using is hacked. There are two basic types of wallet, a hot wallet and a cold wallet. Hot wallets are wallets hosted on internet connected devices like the internet or a mobile phone. They are incredibly convenient due to the constant accessibility but they are less secure. A cold wallet is one that is stored offline. This could be something as simple as a paper wallet which some online services provide. A more common cold wallet is a USB flash drive with your wallet coded onto it. The optimal set up for Bitcoin trading is to have an account on an exchange, a hot wallet with the amount of Bitcoin you may want to trade, and a cold wallet with a large holding for long term storage.

Should I invest in Bitcoin?

As with any investment this is a completely personal decision. We recommend doing a considerable amount of research before investing in anything and this is especially true with Bitcoin. There is a plethora of advice on the internet about Bitcoin investing but it's always worth considering the fact that much of this advice is written by Bitcoin aficionados that are biased toward Bitcoin. This article should have given you a basic understanding of the cryptocurrency Bitcoin which will help you understand content written by others. Consider the fundamentals of Bitcoin against the value it currently holds in the market. Think about the forces that may drive up the price and those which may bring it back down.

Rounding Up

Bitcoin was the world's first accepted digital currency that avoided the double spending problem. The true identity of founder Satoshi Nakamoto remains a mystery to this day. Transactions are recorded on blocks which are connected to the blockchain. This blockchain is distributed to all nodes on the network to ensure that transactions can be accurately verified. When somebody wishes to make a transaction it is processed through a mechanism called mining in which nodes on the network ensure both parties can make the transaction. To buy Bitcoin, first select an exchange, then connect your payment details, before finally placing an order. Make sure to carefully plan how to store your Bitcoin to ensure there is a low chance of losing what is yours. Thinking about buying some Bitcoin? Make sure to do thorough research of the driving forces in the market before placing an order!

Sources:

https://bitcoin.org/en/how-it-works

https://www.nerdwallet.com/article/investing/what-is-bitcoin