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What is Bitcoin?
Bitcoin is loved much and at the same time, misunderstood much. In today’s post, Daniel Ongera, an ardent crypto enthusiast, demystifies the digital currency.
Bitcoin is the first and the most popular of the cryptocurrencies. The virtual currency was created in 2009 by an unknown person with the alias “Satoshi Nakamoto”
Bitcoin transactions are done peer to peer. There is no bank involved! It’s a decentralized currency and no government or bank or person controls it.
As a result, bitcoin transactions happen very fast, typically within minutes.
Who Controls The Bitcoin Network?
To understand how bitcoin works, think of Alice, Bob and John forming a network that has no central point (server) with their computers.
For the three computers to communicate and share data in a peer-to-peer version, each of them downloads and installs an open source software(the bitcoin core software) that provides the protocol.
The protocol allows Alice, Bob and John to share a ledger on which they will keep a record of who owns what, when. Since there is no admin to update the ledger, the three must come to a consensus every time the ledger needs to be updated.
The copy of the ledger on Alice’s computer must reflect the same values as the copies on Bob’s and John’s computers.
Which Companies Accept Bitcoin?
Some of the companies that now accept bitcoins as a currency are:
- Virgin Galactic
- Shopify and a couple more.
The lack of a central authority in the bitcoin network however, poses a big problem to many Central Banks and is the primary reason governments are afraid of bitcoin.
However, there are a few countries that are bitcoin friendly such as:
United States: The U.S has the highest number of cryptocurrency users. Bitcoin was officially recognized as legal in California, in June 2014. Silicon Valley, which is the place for digital technology, is home to several major bitcoin exchanges such as Coinbase and Kraken Bitcoin Exchange.
Sweden: The country is home to many bitcoin startups such as Safello Exchange. It is also home to the largest manufacturers of mining equipment, KnCMiner.
The Netherlands: In this country, you will find Arnhem, also called “Bitcoin City” that boasts of over 100 merchants. At Arnhem, you can purchase accommodation, bicycles, dental services and gas with bitcoin.
Japan: In April this year (2017) the Japanese government officially recognized Bitcoin as a legal payment method, giving it the same legal status as the Japanese Yen. The Japanese government has since then focused on supporting the dynamic Bitcoin ecosystem in the country, for traders and users who deal in the currency.
Here in Kenya, the Central Bank of Kenya raised a concern back in 2015, stating, “Virtual currencies are traded in exchange platforms that tend to be unregulated all over the world….The public should therefore desist from transacting in Bitcoin and similar products.”
Will the Kenyan Central Bank’s stand evolve? It remains to be seen.
What Is Bitcoin Mining?
In the traditional monetary systems that we are used to, governments print more money when they need to. However, since bitcoin is a digital currency, it isn’t printed.
In our example, Alice, Bob and John, through their computers, compete to solve a mathematical problem that the protocol in the core software provides, every ten minutes.
The first computer to solve the problem gets the authority to update the ledger for ten minutes and the changes it makes automatically reflect in the copies, in all the computers in the network. In the bitcoin structure, the winning computer receives the new 12.5 bitcoins released every 10 minutes.
In the bitcoin structure, the winning computer receives the new 12.5 bitcoins released every 10 minutes.
In the beginning, you could mine bitcoin using an ordinary desktop. However, the difficulty of solving the mathematical problem has significantly grown and that has made it impossible to calculate with an ordinary computer. Now you have to use special hardware fitted with powerful ASICs.
Now you have to use special hardware fitted with powerful ASICs (Application Specific Integrated Circuits) sort of like a ‘specialized bitcoin generator’
In addition, it isn’t easy for an individual miner to mine. Therefore, many people now bring together their hardware resources to form a mining pool, to increase their chances of getting the reward.
Where To Store Bitcoins
Bitcoin beginners may be interested to know where bitcoins are stored. Bitcoins are stored in a digital wallet. The bitcoin wallet comes in different types but performs the same function. There are web wallets, which you access through a browser on your desktop.
To use this wallet type, you sign up on a website. Examples of wallets you can access on the browser include Coinbase and Blockchain.info.
The other category of wallets is the desktop wallets. These are applications you have to download and install on your desktop.
The desktop wallet is very bulky though because you have to download the entire blockchain (ledger) since the inception of bitcoin, which is close to 119 GB and grows by 3GB every month.
The most popular type of wallets is the mobile wallets. These are applications you download from Google Play or Apple store and install on your smartphone. The most used of these include:
- Blockchain info
All the above are free to use.
If you hold larger amounts of bitcoins and you want more security, you may have to buy a hardware wallet, which is a special device specifically designed for holding bitcoins.
The most used bitcoin hardware wallets include Trezor, Ledger and KeepKey. You will need to order a hardware wallet from either the manufacturer or Amazon.
Hardware wallets are highly secure because they have an extra cryptographic layer and enable you to sign all transactions offline, giving you less exposure to hacking or remote theft.
Lastly, there is the paper wallet, a wallet you generate on the Bitaddress.org website and print on a piece of paper.
Both the public key and the private keys are represented as QR codes or long strings of alphanumeric characters on the paper.
You can share the public key with those who want to send you bitcoins but keep the private keys secret.
Paper wallets are safe because they are offline. However, their physical security is critical. If someone steals a paper wallet from you, they gain full control of your bitcoins. Paper wallets could also be destroyed by such things as fire and flood.
How Can One Get Bitcoins?
If you are a bitcoin beginner, you’re probably wondering how you can get bitcoins. There are several ways through which you can own bitcoins. You can get them from friends or relatives as a gift. Many people around the world receive bitcoins for the first this way.
Often it is a small amount to test how the system works.
However, to significantly get huge amounts, the easiest way is to buy from those who already own them. The online marketplaces where you can buy bitcoins are known as exchanges.
Common ones include Coinbase, Shapeshift, and Bitstamp.
In Kenya, Localbitcoins.com is the most popular because you can buy via Mpesa from individual traders.
The third way you can acquire bitcoins is by selling goods and services and getting paid in the cryptocurrency.
On a site like Coinality or forums like Bitcointalk.org, you might find startups willing to pay freelancers with bitcoin to develop apps, write articles or do other tasks.
Mining is also a way to acquire bitcoins. The easiest way to mine now is to buy mining rigs (equipment) and join a mining pool.
You can also buy mining certificates from mining companies. You need to be careful with this option because there are many entities selling fake mining certificates.
Bitcoin and Criminal Activity
The reason why many believe bitcoin is used, mainly by criminals is because in the early days of bitcoin, it was widely believed that the cryptocurrency was anonymous.
The mainstream media repeated this line so many times that the charge stuck.
Bitcoin is not anonymous but pseudo anonymous. If those in the law enforcement can link one of your transactions to your real life identity, then they can basically track everything you do with your bitcoins on the public ledger (blockchain).
The Silk Road case in the US is one of the cases that have proven this to be true. Ross Ulbricht, a US citizen, ran a darknet website known as Silk Road. In 2013, the FBI tracked him down and seized $28.5 million worth of bitcoins. He is now serving a life sentence in prison.
The perfect currency for crime is cash, because it leaves no record when it changes hands.
Bitcoin is a neutral currency; it can be used for bad and for good. Some criminals use bitcoin to trade illegal goods. Some also use it as a payment method when demanding ransoms such as in the WanaCry ransomware attack case. However, the same happens with fiat currencies like Kenya shillings,
There are unscrupulous people who use bitcoins to facilitate pyramid schemes and other forms of scams. But the fact that the Kenyan shilling is used for similar criminal activities doesn’t erode all the good things it is used for.
There are millions of people around the world who use bitcoin for legal and ethical purposes. Some hold it as an investment, others trade it for profit, and others use it to buy goods and services.
You can buy anything on Amazon using bitcoin through Purse.io and save 15%.
In fact, it is widely believed within the bitcoin community, that the percentage of bitcoins used for criminal activities is smaller than 10%.
How Do You Trade Bitcoin For Profit?
Trading bitcoins is simply the frequent buying and selling of bitcoins. That means buying them at a lower price and then selling them at a higher price to make a profit.
To be successful, however, you need to closely monitor the movement of the bitcoin price and know the factors that influence it.
Apart from trading bitcoins, you can also buy bitcoins and hold them. Then you can sell them at a later date, when they have increased in value. “Much later” varies. It can be after a year, two years or more.
The same principles that apply to trading forex and stocks, also apply to trading bitcoin. That includes following news, knowing how to interpret graphs and investing only what you can afford to lose.
The popular bitcoin trading platforms include:
Other CryptoCurrencies Like Bitcoin (Bitcoin Alternatives)
Bitcoin isn’t the only cryptocurrency. There are currently over 3,000 cryptocurrency in circulation. You could use CoinMarketcap.com to track the best performing.
However, the market capitalization should not be the only thing that guides your decision to invest in a coin. Do your research on the soundness of the technology behind the coin.
The most traded altcoins (alternative coins) include Ethereum, Ripple, Ethereum Classic, and Litecoin.
Awesome Bitcoin Educational Resources
If you desire to stay up to date with the latest happenings in the bitcoin/crypto world, you’ll find the resources below to be extremely helpful:
Free Bitcoin Udemy Course: How I Learned To Stop Worrying and Love Crypto
Bitcoin is a digital currency. If it has piqued your interest, you need to learn as much as you can about it. Start by investing a little money just to get a feel of it.
Daniel Nyairo is a writer for hire in the crypto space and an enthusiast of the blockchain technology. He blogs about freelance writing at www.thecopywiz.com