What is bitcoin? History, features, advantages and disadvantages
Definition of bitcoin
Bitcoin (BTC) is a digital value, which is used and distributed electronically.
Bitcoin is a decentralized P2P network. It is not controlled by an individual institution or person.
Bitcoins cannot be printed and their quantity is very limited - only 21 million bitcoins can be created.
Who created bitcoin?
Bitcoin was first introduced as open-source / open source software by an anonymous developer or group of developers under the pseudonym Satoshi Nakamoto in 2009. There have been many rumors about the true identity of the creators of bitcoin, however, all the people mentioned in those rumors have publicly denied them.
Nakamoto himself once claimed that he was a 37-year-old man living in Japan. However, due to its perfect English and software that is not marked in Japanese, there are well-founded doubts about the truth of this claim.
In mid-2010, Nakamoto moved on to other things, leaving bitcoin in the hands of several prominent members of the BTC community. Satoshi has appointed Gavin Andersen as the lead programmer.
It is estimated that Nakamoto owns about one million bitcoins, which is about 3.6 billion dollars since September 2017.
Who controls bitcoin?
According to Gavin Andersen, the first thing he focused on, after Nakamoto moved away from the project, was further decentralization. Andersen wanted bitcoin to continue its existence autonomously, even if something unexpected happened to it.
For most people, the main advantage of bitcoin is its independence from world governments, banks and corporations. No government can interfere in BTC transactions, impose taxes on them or take people's money. Moreover, the bitcoin movement is extremely transparent - each individual transaction is stored in a mass-distributed public registry called a blockchain.
Essentially, while bitcoin is not controlled as a network, it gives its users complete control over its finances.
How does bitcoin work?
The user only sees the amount of bitcoin on his wallet and the results of the transaction.
Behind the scenes, the bitcoin network participates in a public registry called "blockchain". This register contains each transaction that is processed. Digital transaction records are merged into "blocks".
If someone tries to change only one letter or number in a transaction block, it will also affect each subsequent block. Because the registry is public, an error or attempted fraud can be easily spotted and corrected by anyone.
The user's wallet can confirm the correctness of each transaction. The authenticity of each transaction is protected by digital signatures that correspond to the shipping addresses.
Due to the verification process, and depending on the trading platform, it may take up to a few minutes for BTC transactions to be completed.
The Bitcoin protocol is designed so that each block lasts 10 minutes.
Characteristics of bitcoin
Decentralization
One of Satoshi's main goals in creating bitcoin was the independence of the network from any authority. It is designed so that every person, business, as well as every machine involved in mining and transaction confirmation becomes part of a vast network. Even if some part of the network falls, the money will continue to move.
Anonymity
These days, banks know practically everything about their clients: credit history, addresses, phone numbers, consumer habits, etc. It is different with bitcoin, because the wallet does not have to be tied to any personal information. While some people simply do not want their finances to be monitored or managed by any government, others argue that drug trafficking, terrorism and other illegal and dangerous activities can succeed in this relative anonymity.
Transparency
Anonymity is relative, because every BTC transaction, which has ever been performed, is kept on a blockchain. In theory, if the address of your wallet is publicly used, anyone can say how much money is in it by carefully studying the public register (blockchain). However, tracking a specific bitcoin address and identifying a person is still almost impossible.
Those who wish to remain anonymous can take steps to go unnoticed / "under the radar". There are certain types of wallets that prioritize invisibility / opacity and security, but the simplest security measures would be: using multiple different addresses and not transferring large amounts of money to one wallet.
Speed
The Bitcoin network processes payments almost instantly. It only takes a few minutes for someone on the other side of the world to receive money, while bank transfers take days.
Irreversibility
Once you send a BTC to someone, there is no way to return it unless the recipient wants to send them back to you. This ensures you receive a payment, which means that the person you are trading with cannot deceive you by claiming that he did not receive the money.
What can I buy with bitcoin?
In 2009, when BTC was launched, it was not entirely clear how and where it could be spent. Now you can buy practically everything. For example, large companies such as Microsoft and Dell receive payments in BTC for a range of their products and digital content. You can fly with airlines such as AirBaltic and Air Lithuania, buy theater tickets through the English Theater Tickets Direct, take a few bottles of craft beer from Honest Brew Brewery, etc.
Other options include paying for hotels and buying property, settling bills at various bars and restaurants, joining dating sites, buying gift vouchers, betting at an online casino and making charitable donations. There are also a variety of online markets that trade in everything from illegal substances to high-end, luxury items.
Bitcoin is a relatively new and rather complex payment process. It is natural that consumer options are still limited, but every day more and more companies - from small, local cafes to industrial giants - accept payment in bitcoin.
Due to its constantly changing exchange rate, BTC is becoming a great investment opportunity. Despite being a volatile and not-quite-recognized currency, its value has risen sevenfold over the past year, almost reaching a rate of $ 5,000 for one BTC.
How to get bitcoin?
The easiest way is by shopping. Bitcoins are available through various exchanges, but they can also be bought directly on the market from other people. They can be paid in cash, credit or debit cards or even some other cryptocurrency. First of all, you need a BTC wallet.
There are various options, but the basic ones can be reduced to an online wallet and a wallet software on your computer hardware. None of the options are completely secure, the hardware can be damaged, while the online wallet is prone to hacker attacks. There are also mobile wallets, which are simplified due to the huge storage capacity required to carry the entire block (blockchain). These are dedicated devices called hardware wallets and paper wallets with two QR codes that are not digitally stored anywhere, which makes them immune to standard cyber attacks and hardware errors.
There is, of course, mining. Only a few years ago, anyone with a sufficiently compact computer could mine BTC, but that is no longer the case. The growing popularity of bitcoin, as well as its growing exchange rate, has caused large companies to enter the game armed to the teeth with specific mining devices, so the weight and energy needed to mine the amount of bitcoin worth the effort has skyrocketed. In addition, the amount of bitcoin that can be mined is constantly and drastically declining.
Advantages
Freedom
BTC is designed with freedom in mind. Most importantly, freedom from the government that controls transactions, imposes taxes and disposes of people's money. When it comes to buying things, cryptocurrencies have become a legitimate way of paying in recent years. Considering the existence of numerous ‘deep-web’ markets that only accept bitcoin, you can buy some things easier with bitcoin than with any other currency.
Portability
One of the basic characteristics of money is portability, which means that it can be easily carried and used. Since BTC is completely digital, practically every amount of money can be taken to usb or even stored online.
Cryptocurrencies give people the freedom to send and receive money by simply scanning a QR code or clicking on an online wallet. It does not take much time, there are no high fees and money passes from one person to another without unnecessary intermediaries. Internet access is all you need.
Choose your commission
Another indisputable advantage of the bitcoin network is the possibility of choosing the amount of the transaction fee or even non-payment of commission. The compensation is received by the miner, after a new block is created with a successful hash. Usually the sender pays the full fee, while refusing to charge the recipient can be considered an incomplete payment.
The fees are voluntary in nature and serve as an incentive for miners and as a guarantee that a certain transaction will be included in the creation of a new block. This incentive also functions as a source of income for miners, which often brings them more money than mining, especially when you consider that mining will stop completely in the future, when the bitcoin limit is reached.
Therefore, the cryptocurrency market requires users to choose between costs and waiting times. A higher transaction fee would mean faster processing, while users can save money without a time limit.
No cards
The payment card industry includes debit, credit and prepaid cards, e-wallet, ATM and POS cards and other related businesses. It is made up of all organizations that store, process and transmit cardholder information, there are strict security regulations and most major card brands are part of it.
While the unified rules and regulations are good for large companies, they don't really take into account the needs of each individual. or fraud levels are unacceptably high.
As a result, customers receive lower commissions, the opportunity to expand their markets and lower their administrative costs.
Security and control
Bitcoin users can control their transactions: no one can withdraw money from a valid account without your knowledge and consent, as sometimes happens with other forms of payment, and no one can steal your payment information from merchants.
BTC users can also protect their money with backups and encryption. Their identities and personal information are always protected, because none of them have to be revealed in order for the payment to be made.
Transparent and neutral
Every single transaction, as well as every information related to it, is always available to everyone in the blockchain, it can be checked and used in real time. The BTC protocol is encrypted and therefore no person or organization can control or manipulate it. The network is decentralized so that no one would ever fully control it. That is why BTC will always be neutral, transparent and predictable.
Impossibility of falsification
One of the most popular ways to counterfeit in the digital world is to use the same money twice, making both transactions fraudulent. It's called "double consumption." BTC, like many other cryptocurrencies, uses blockchain technology and several other different consensus mechanisms built into all BTC algorithms to counter this.
Mane
Legal issues
The legal status of bitcoin varies drastically from country to country. In some, its use is encouraged, while in others it is illegal and prohibited.
Much has been said about the appeal of bitcoin to criminals, with some news indicating that its popularity relies entirely on the possibility of spending on illegal items. Indeed, when the infamous internet black market Silk Road closed, bitcoin was instantly reduced in value.
Level of recognition
BTC is recognized and legal in many countries, however, some of the world governments still do not have regulations for it, while others have openly banned it.
Most jobs, whether small or large, are still completely unaware of it. It is almost impossible to leave all other currencies and use BTC exclusively.
Lost password
A password is a unique alphanumeric password required to access a bitcoin wallet. Losing that code essentially means losing your wallet. However, most new wallets have backups and recovery mechanisms, with the user having to adjust them before use.
Instability
The price of bitcoin has had its ups and downs, going through various cycles of drastic ups and downs, which some call “bubbles” and crashes. Throughout its history, BTC has conquered new heights, only to maintain a big drop right after. Its value is unpredictable, changes drastically and quickly, which can cause significant financial damage to an unseen investor.
Continuous development
The future of bitcoin is extremely unclear. Currently, governments and banks are unable to control the BTC, it is almost unregulated. However, the bigger and more popular it becomes, the more governments will try to bring it under control. A regulated BTC would be a completely different type of currency.
That BTC is a pyramid scheme?
Billionaire investor Howard Marx recently stated that digital currencies are nothing but a pyramid scheme. He explained that the current success of digital currencies is based only on the willingness to attribute value to something that actually has no value, beyond what people would pay for it.
Those who invest in a pyramid scheme get a return on their own money or the money of the next investor instead of on the profits made by the individuals running the business. However, when it comes to bitcoin, the profit and its value come from a limited amount of coins. As more people acquire coins, stocks become less frequent, making each coin more valuable. BTC simply has nothing in common with the classic pyramid scheme.
Is BTC a bubble?
Robert Schiller, who received the Nobel Prize in economics, proposed a checklist to help determine if something is a bubble or not. The list includes a sharp rise in property prices, great public excitement, media frenzy, stories of people who have become rich, and a growing interest in dominance among the general public. BTC meets all items.
So, in a way, BTC is a bubble that has burst before. After the infamous closure of Mt.Gox, a Chinese service that managed more than 70% of all bitcoin transactions in the world, bitcoin prices have been falling for a year and a half. It took exactly 3 years to recover. Of course, it is difficult to predict what will happen in the future, so there is a possibility that prices will fall again. However, BTC has recovered earlier and is currently stronger than it has ever been.
The difference between bitcoin and traditional currencies
Decentralization
Every currency in the world, except cryptocurrencies, is managed by some government. Every transaction takes place through a bank, where people are charged a huge fee and it usually takes a long time for the money to reach the recipient.
BTC, on the other hand, is not controlled by anyone. It is a decentralized network built on the cooperation and communication of all the people who participate in it. Therefore, even if some parts of the network are not online, transactions will still take place.
It cannot be falsified.
The BTC is designed as a currency that can withstand attempted counterfeiting. The legitimacy of bitcoin is ensured by blockchain technology, as well as several different defense mechanisms built into each algorithm.
Many other traditional currencies are very prone to counterfeiting and those who control them do almost nothing to change it.
Durability
BTC does not exist in physical form, which means it cannot be damaged. Every single BTC is essentially eternal, unlike paper or coin money.
Once sent, cryptocurrencies cannot be revoked.
If someone makes a mistake and sends the money to the wrong wallet and wants it back, they can't do it. Like many other features of bitcoin, this one is designed to prevent fraud. Unfortunately, when it comes to traditional currencies, most transactions can be canceled, a phone call is all that is needed for that.
Possibility of exchange
While some traditional currencies such as the dollar and the euro are accepted in several countries, most of the world currencies are used within the borders of the countries from which they originate. In contrast, BTC is an online currency, which means that the environment for its authorized operation is global.
How is BTC taxed?
The BTC has yet to be legalized by the authorities, but some tax authorities already recognize its importance and propose certain regulations. These regulations vary considerably from country to country.
For example, the U.S. Internal Revenue Service treats BTC and all other prominent digital currencies as an asset, not as a currency. Every taxpayer who sells goods and services for bitcoins must include the value of the received bitcoins in their annual tax return. Miners are also subject to taxation, but only if the mining turns out to be successful.
According to the European Court of Justice, the BTC is a currency, not an asset. Although not subject to VAT, BTC may be taxed in another way. The UK tax authorities treat BTC as a foreign currency, where each BTC case is considered on the basis of individual facts and circumstances. As of July 2017, the sale of bitcoin is exempt from consumption tax in Japan, where it is officially recognized as a payment method.
BTC is a relatively new currency, the framework of regulations governing it varies from country to country. In many jurisdictions, there are not even specific laws and regulations regarding cryptocurrencies.
Cryptocurrency exchanges
