What is Bitcoin?

Page Summary

Bitcoin is a decentralized digital currency. It is created in 2009 by the anonymous Satoshi Nakamoto. Bitcoin isn’t controlled by any authority and strives to have lower transaction fees than other online payment systems. Bitcoin is a cryptocurrency because it relies on cryptography to work. Bitcoins only exist in computers and there are no physical Bitcoins. Every Bitcoin balance is publically available through a digital ledger. A Bitcoin is divisible into eight decimal places. The smallest unit is called a Satoshi and is 100 millionth of a Bitcoin.

What is Bitcoin?

Bitcoin is not backed by gold, banks, or governments. A Bitcoin just exists in computers and it isn’t a commodity. Bitcoin is no legal tender. It is just a very popular online payment method. There are thousands of other cryptocurrencies apart from Bitcoin. These cryptocurrencies are called altcoins. Traders actively buy and sell these cryptocurrencies. Bitcoin’s ticker symbol is BTC. 

What you should know about Bitcoin

  • Bitcoin is the most known cryptocurrency and was launched in 2009.
  • Bitcoin is created and traded on a digital ledger, called the blockchain.
  • Bitcoin has increased 1500% in value since its inception.
  • There are thousands of other cryptocurrencies, called altcoins.

How does Bitcoin work?

A network of computers forms the Bitcoin network. These computers are called nodes or miners. The goal of these computers is to keep the ledger updated. They do this by storing information on the blockchain. The blockchain is a series of immutable digital transactions and is constantly being updated by the Bitcoin network.

Everyone can see the transactions on the blockchain. For this reason, Bitcoin isn’t as anonymous as most people think it is. It would take someone 51% of all computing power of the Bitcoin network to cheat its system. This is called a 51 attack.

The blockchain contains the ownership data of Bitcoins. Bitcoin owners can view and access their Bitcoin with public and private keys. A Bitcoin key is a series of letters and numbers randomly created via encryption. Public keys are public; they can be seen by anyone and act as Bitcoin deposit addresses. A Bitcoin private key is used to authorize a Bitcoin transaction. They are also called Bitcoin withdrawal addresses. Never give your private keys to somebody else. 

Bitcoin users can view their public and private keys in a Bitcoin wallet. The term Bitcoin wallet is misleading because Bitcoin and other cryptocurrencies aren’t stored in a wallet but on the blockchain. 

Bitcoin uses peer-to-peer technology. This means it is a payment system between individuals and organizations without any third parties involved, also called a decentralized system. 

What is Bitcoin mining?

Bitcoin mining is the usage of computing power to verify Bitcoin transactions. These transactions take place on the blockchain. Bitcoin mining brings new Bitcoin into circulation because Bitcoin miners are rewarded with new Bitcoin every time they discover a block. This block is then added to the blockchain for others to verify. 

Bitcoin mining becomes less rewarding over time because the rewards are being halved every 210,000 blocks. Bitcoin miners need a lot of computing power to mine Bitcoins. This computing power comes from processing units found within central processing units and graphic cards (CPUs and GPUs). 

bitcoin-mining

Who is the inventor of Bitcoin?

It is unclear who invented Bitcoin. Satoshi Nakamoto is the name associated with the release of the Bitcoin white paper. The Bitcoin whitepaper references other peer-to-peer systems like b-money, Reusable Proof of Work, and Hashcash. 

Satoshi Nakamoto can be a single person or a group. Many people have claimed to be Satoshi Nakamoto, but none of these people were able to prove it. There are good reasons why the original inventor(s) of Bitcoin want(s) to stay anonymous. The most obvious one is safety.  

Why do people invest in Bitcoin?

People invest in Bitcoin because they think it will go up in value. They think that Bitcoin or digital currency will replace physical cash at one point. Most people that invest in Bitcoin also oppose banks and don’t want a central authority to be in charge of the monetary system. Bitcoin can be exchanged for national fiat money and other cryptocurrencies. This is the main reason why investors and traders trade Bitcoin. 

In most countries, Bitcoin is taxed as property instead of currency. Bitcoin is thus subject to capital gains tax instead of income tax, which is tax-efficient for most traders and investors. 

What are the risks of investing in Bitcoin?

Bitcoin transactions are irreversible. This means people can be frauded out of their Bitcoins. Another risk of investing in Bitcoin is that its price is very volatile. The price of a Bitcoin can go up or down very fast and cause big gains, but also big losses in short amounts of time. Bitcoins also need to be safely stored in Bitcoin wallets. If these wallets are compromised, the Bitcoins are no longer safe and could be stolen. Bitcoin users can protect themselves against theft by keeping their Bitcoin on computers that aren’t connected to the internet or by using hardware wallets. Storing Bitcoin in this way is called keeping Bitcoin in cold storage.

Most Bitcoin transactions take place on a Bitcoin exchange. If the exchange gets hacked or wants to pull an exit scam, users can lose their Bitcoin. It is important that Bitcoin traders only trade on safe and reliable exchanges.

Disclaimer

eToro is a multi-asset investment platform. The value of your investments may go up or down. Leveraged and speculative product. Not suitable for all investors. You should consider whether you can afford to take the high risk of losing your money. Capital is at risk. Past performance is not an indication of future results. Trading history presented is less than 5 complete years and may not suffice as basis for investment decision. Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk. Crypto assets are unregulated& highly speculative. No consumer protection. Capital at risk.
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