What is Bitcoin?

Bitcoin is the name for a digital unit of value, of which there is a limited supply. Bitcoin is a fully decentralized currency system. There is no central authority to control transactions, no one person or entity to govern which transactions are good or bad, and it all started by a person, or group of people, under the name Satoshi Nakamoto. Mr. Nakamoto introduced the Bitcoin protocol in 2009. He published the whitepapers for a fully decentralized payment system to explain how a digital currency could be created that couldn’t be copied or double-spent. No government, bank, or bad actor can control the system, the supply, seize assets from people that hold their own bitcoins, or create more of them. There can be no one entity to decide who can create accounts and who can not. All the while, Bitcoin maintains anonymity. Names, social security numbers, or IDs are not linked to accounts. This was the first of its kind. A digital way to circumvent banks and governments from controlling a monetary system. This was the introduction of a new frontier for decentralized technology.

The way it works is simple. There is a digital ledger of accounts (wallets) that record transactions, and a network of computers that confirm transactions by Proof-of-Work. Transactions are introduced to the network of computers around the world, put into blocks, and then computational work is performed to verify they are good and valid transactions. The network essentially confirms that each transaction is not a double-spend and that each account has the bitcoin that it is attempting to send. By recording all transactions to a digital ledger, the network can track accounts in order to verify them. A fee, in Bitcoin, is paid to the network for the work they are doing. The fee does two things, it works as an incentive for the network to continue performing the work necessary to confirm transactions, and it reduces network attacks and spam. So we have digital units of value, Bitcoins, we have a network of computers to confirm transactions and maintain a digital ledger, and lastly, it can be exchanged for goods, services, or fiat currencies.

Now that we’ve discussed a simplified explanation of what Bitcoin is, let’s address some other commonly asked questions.

Can Bitcoin be Shut Down?

Bitcoin can’t be shut down due to the nature of the network. Since there is no central authority that can be controlled or influenced, it is nearly impossible for governments to shut down the network. It would take a united, concerted effort worldwide by governments to ban Bitcoin mining, and then all governments would have to figure out a way to effectively enforce that ban. It is not enough for any one, or handful, of governments to ban Bitcoin and then effectively enforce it; because if China and the United States ban and enforce the ban, other countries will maintain the network. Bitcoin miners would move their operations to countries where it is legal to continue operating.

The difficulty in order for Bitcoin to be shut down is astronomically high, and widely accepted as impossible due to its decentralized network. Governments currently can, however, ban or shutdown Bitcoin exchanges. This is what forced Binance, one of the world’s biggest cryptocurrency exchanges to move their operation from China to Japan and several other countries. So you can see how banning an exchange in one, or some, countries isn’t enough. Operations will move. This is all set to change with the development of decentralized cryptocurrency exchanges.

What Makes Bitcoin Valuable?

Bitcoin gets its value the same way as everything else does – because people want them. This is the same reason that gives value to Gold. Gold isn’t necessary for us to live, it doesn’t perform a necessary function for human survival. Both Gold and Bitcoin follow the basic economic rules of supply and demand. The difference between Bitcoin and fiat currencies such as the U.S. Dollar, Euros, Pounds, Ruppies, etc., is that governments or banks can’t create more of them. There will only ever be 21 million Bitcoins created once all of them have been released. While the U.S. Treasury prints more money, no one can print (create) more Bitcoins. Bitcoin’s value all comes down to what the market believes it’s worth, the amount of demand and the amount of supply at any given price. When demand exceeds supply at a given price, the mid-market price increases. As supply exceeds demand, the price decreases.

Why Does the Price of Bitcoin Swing So Much? Why is It So Volatile?

There are millions of people globally buying and selling Bitcoin. As you can imagine, news coverage, both positive and negative, can have a big impact on people’s perception of Bitcoin and the market. If news comes out that a government is going to put harsh regulations on Bitcoin exchanges, it causes fear, uncertainty, and doubt to spread in that region, and depending on how much volume that region accounts for in the Bitcoin market, will ultimately determine it’s overall impact.

Another reason for Bitcoin’s volatility is how young the market is relative to other established markets. The New York Stock Exchange has been in business since March 8th, 1817. Volatility should decrease over time as the market matures and seeks price discovery. Prices can swing based on the sentiment in the market. If there is a loss of confidence, which can be caused by a lot of negative news coverage, it can influence the sentiment in the market and cause people to lose confidence. When people lose confidence, they often sell, thus causing more uncertainty in the market, causing more people to sell. Time will help the Bitcoin market mature and will increase confidence as its price stabilizes.

How Does One Acquire Bitcoins?

The main way to purchase bitcoins is by buying them on an exchange. We’ve outlined the best and easiest way to purchase bitcoins here (you can even use your debit or credit card).

How Difficult is It To Make a Bitcoin Payment?

It is a pretty simple process. Bitcoins are stored in wallet applications, either on an exchange, in a desktop or mobile wallet, or offline in a cold-storage wallet. Exchanges have a button to withdraw funds to a specified wallet address (your own wallet address, or the person who you’re paying). Desktop and mobile wallet applications have similar options: withdraw or send. You enter the amount of bitcoin you’d like to send to another address, enter the address you’d like to send it, and then hit the send button. It’s that simple. The process to send or receive Bitcoins is far less painful than opening a bank account and trying to deposit and withdraw money. Wording, buttons, and processes might look different from exchange to exchange, and from wallet to wallet applications, but it’s essentially the same.

It is important to note that you have to ensure that the address you’re trying to send the Bitcoins to is 100% accurate, and is a wallet address for Bitcoin and not some other cryptocurrency. If the address is off by one character, or you enter a different cryptocurrency’s wallet address, the bitcoins sent will likely be lost forever. Because of this, it’s best practice to send a small test amount before sending large amounts of bitcoins. Once the transaction is confirmed and shows up in the other account, it should be safe to attempt the same transaction but with the remaining amount of bitcoins you would like to send. To make this process easier, exchanges and wallet applications typically include QR codes that can be scanned which read and enter the wallet address for you. Even still, it’s best to first send a test amount to verify it scanned the QR code correctly, and that the wallet address is for Bitcoin.

How Much Does it Cost to Send or Receive Bitcoin Payments?

Currently, there is no fee to receive Bitcoin. There is a transaction fee to send Bitcoin, however, and this fee varies primarily based on the volume of transactions. The average Bitcoin transaction fee has recently ranged anywhere from $2.00 to as much as $55.00. While the fees may be high at times, there is potential for big changes with the potential adoption of the “Lightning Network.” There are some workarounds to this – some exchanges will cover the transaction fee for you, such as GDAX (as of posting this article). If you are buying or selling bitcoin within an exchange, it is common for exchanges to charge trading fees, which vary widely depending on which one you use and are usually significantly cheaper than transaction fees.

What About Bitcoin and Taxes?

If you live in the United States, yes, there are tax laws regarding buying and selling cryptocurrencies and paying taxes on the gain received. We won’t get into the details of the tax laws regarding digital assets, but taxes related to Bitcoin and other digital assets are common. It is wise to research tax laws in your country regarding buying and trading digital assets.

We hope this introductory guide to “What is Bitcoin?” was helpful! Did we miss anything? Let us know in the comments below!