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In this guide, we’ll take a close look at Bitcoin: what it is, how to use it, and what it means.
| Icon | Symbol | Initial release date | Algorithm type | Max. supply |
|---|---|---|---|---|
 |
BTC, XBT | 3 January 2009 | SHA-256 | 21 million BTC |
Bitcoin started as a paper authored by Bitcoin’s creator Satoshi Nakamoto, titled: “A Peer-to-Peer Electronic Cash System” (2008). In it, Satoshi – whose real identity remains unknown at the time of writing in October 2017 – details a system for decentralizing the financial sector, with the aim of giving power back to the people via an entirely digital transaction system (which would later become known as the blockchain). In January 2009, the first block was mined by Satoshi for 50 Bitcoin. While still directly involved in the development of Bitcoin, Satoshi is rumored to have mined nearly 1 million Bitcoin, an amount that would, just 8 years later, be worth upwards of US$5.8 billion.
Before getting started on using Bitcoin, it’s important to understand how the technology works and the reasoning behind it. This will not only save you a few headaches in the long run, but it will give you a greater appreciation of what’s going on behind the scenes.
Satoshi’s vision for Bitcoin began from a very simple concept: we don’t need a centralized agency controlling our money (i.e. the central bank). To accomplish this, Bitcoin needs to be maintained by the people using the cryptocurrency and it does so by using a public ledger, more commonly known as the blockchain. Understanding the blockchain will help you understand the finer points of the currency.
Imagine three people: Alma, Ben and Carding. They often have to pay money to each other, but to avoid having to make a payment every time they need to, they decide to start keeping a ledger of money owed. At the end of the month, they work out who is owed what and pay them. To avoid having to trust each other with this ledger, they bring in Dante, a third party who’s been entrusted with maintaining the ledger’s integrity. The ledger might look something like this:
| Alma > Ben | US$10 |
| Ben > Carding | US$25 |
| Ben > Alma | US$15 |
| Carding > Alma | US$55 |
| Carding > Ben | US$12 |
Every transaction made with Bitcoin is stored in a digital ledger just like that one. Each line signals a sending address, a receiving address and an amount of Bitcoin (BTC at the time of writing, but read our later comment about XBT). There is also some additional security information which ensures that the addresses are correct. Each set of transactions is stored on a “block,” like a page in a ledger. Once a block is filled with transactions it can be mined by miners (we’ll talk about those in a later section, too) and is then attached to the previous block to form a chain of such pages or “blocks”: a blockchain.
To instill some sense of anonymity in the blockchain, Bitcoin does not hold the personal information of either sender or receiver in blockchain transactions. Instead, each user gets a public address (a.k.a. wallet address) and these addresses are stored for the transaction instead.
Once a transaction is added to a block, and a block is added to the blockchain, it is said to be immutable: it can neither be edited nor deleted. To understand why, let’s next take a look at decentralization.
The problem with this ledger system is readily apparent when we introduce some malice into the system. If Dante were to cut a deal with, say Carding, and put in a new transaction showing Alma and Ben owing Carding money, Alma and Ben are now in the difficult situation. They either have to pay the owed money, trusting Dante, or refute the idea of the ledger altogether.
| Alma > Ben | US$10 |
| Ben > Carding | US$25 |
| Ben > Alma | US$15 |
| Carding > Alma | US$55 |
| Carding > Ben | US$12 |
| Alma > Carding | US$100 |
| Ben > Carding | US$100 |
To solve this problem, all three participants in our experiment now decide to keep a copy of the ledger. If someone were to tamper with their copy of the ledger, we would simply have to compare it with the others and pick the most commonly consistent ledgers to use.
This is the second important solution provided by the blockchain. This consistency check is built into the blockchain technology – albeit with a little more complexity. Whenever you log into your copy of the ledger, you’ll see a copy of every single transaction made with Bitcoin since its inception and you will become part of this verification process. This democratization of the verification process lies at the heart of Bitcoin and the blockchain process.
| Alma | Carding | Ben | |||
| Alma > Ben | US$10 | Alma > Ben | US$10 | Alma > Ben | US$10 |
| Ben > Carding | US$25 | Ben > Carding | US$25 | Ben > Carding | US$25 |
| Ben > Alma | US$15 | Ben > Alma | US$15 | Ben > Alma | US$15 |
| Carding > Alma | US$55 | Carding > Alma | US$55 | Carding > Alma | US$55 |
| Carding > Ben | US$12 | Carding > Ben | US$12 | Carding > Ben | US$12 |
| Carding > Alma | US$85 | Alma > Carding | US$100 | Carding > Alma | US$85 |
| Ben > Carding | US$100 |
Unless you can convince more than 50% of Bitcoin users to remove a transaction for you, then that transaction is essentially set in stone.
Check out our full guide to the blockchain.
The key problem to be solved next is the idea of transaction verification. While there is no central authority that can decide whether a transaction is legitimate or fraudulent, there still needed to be a system for figuring this out. Bitcoin provides this solution via the act of mining. Miners, who are computer experts rather than people who work with pick-axes, do the complex work of mining.
Using powerful processors called ASICs (Application-Specific Integrated Circuits) miners receive a block of transactions and solve a computationally-difficult mathematical puzzle on that block. The details of this puzzle are beyond the scope of this beginner’s guide but suffice it to say that, once solved, this puzzle guarantees that the transactions on the block are valid and can be considered verified.
Once mined, the miner solving the puzzle attaches the block to the blockchain, and receives a small amount of Bitcoin for the work. Mining today is highly competitive, and miners have to use the latest Application Specific Integrated Circuits (ASICs) on the market, otherwise the cost of energy consumption to solve the puzzle outweighs the rewards.
Bitcoin is one of the (if not the) most widely accepted cryptocurrencies on the market at the time of writing in October 2017. From online merchants to brick-and-mortar shops, many service providers have started accepting Bitcoin along with fiat currency (i.e. regular currencies such as PHP, USD, and EUR).
You can use Bitcoin to purchase various products and services such as:
Apart from these big-name companies, lots of smaller merchants and service providers accept Bitcoin.
Bitcoin’s been shooting for the moon since its inception but in 2016-2017, it saw explosive growth. From US$997.69/BTC in 01 January, 2017…
…Bitcoin grew six-fold to US$6,013.23/BTC in less than 11 months.
Buying cryptocurrencies, even something as established as Bitcoin, does not come without its risks as we saw in the third quarter of 2017, after China’s refusal to accept Bitcoin caused the currency’s value to take a hit. But many market experts expect Bitcoin to recover and regain its previous upwards momentum.
When reading about Bitcoin, you will sometimes see it referred to as BTC and other times as XBT. So which one should you use? Well, at the time of writing in October 2017, the Bitcoin community has not yet reached an official consensus.
Originally, Bitcoin’s currency code was BTC but as it grew and gained widespread acceptance, the International Standards Organization (ISO) gave the currency a new code, “XBT”, with the “X” representing the fact that Bitcoin is not tied to a specific government (as per the ISO 4217 standard).
Many users of Bitcoin still refer to the currency as BTC though, and this is not likely to change soon, even as use of XBT gains traction amongst bankers and financial advisors.
Track the live BTC/PHP exchange rate and view historical charts.
Bitcoin, like other crypto coins, is extremely volatile and the value of the currency remains unpredictable. News and seemingly unrelated events affect its price greatly, sometimes positively, sometimes negatively. However, if you’d like to take the plunge and invest in Bitcoin here are two ways to do that:
The fastest way to grow your wallet – Bitcoin or otherwise – is to start getting paid with Bitcoin. If you have an online shop, add a “pay with Bitcoin” button to your shopping cart. As an online service provider, you might consider asking your clients whether they’d like to use Bitcoin for payment. However, if you have a brick-and-mortar shop, you could print out your Bitcoin wallet’s address QR code and stick it next to the checkout so people will be able to scan it and send you Bitcoin instantly. And if you’re an employee, why not ask your employers if they’d be interested in paying your salary in Bitcoin instead of fiat?
You can also buy Bitcoin and hope that your wallet grows on its own. For example, if you had bought $10,000 worth of BTC on 26 July 2017 (3.92129183 BTC) and sold it three months later on 21 October 2017, you would have more than doubled your holdings.
When it comes to purchasing Bitcoin, keep in mind that past performance is not always an indicator of future performance, and with cryptocurrencies still in their infancy, large dips in value do occur.
Sending and receiving Bitcoin is a simple process as long as you’ve set up two things:
Bitcoin is not without its pitfalls, and many of those come from its perceived growth and wide acceptance.
Because Bitcoin is one of the most traded cryptocurrencies, it has attracted its fair share of scammers and phishing websites, most in the form of exchanges. Before giving your money to an online exchange, make sure that they:
Even though Bitcoin paved the way for all the other altcoins available on the market, some coins are doing different things. At the time of writing, Ethereum is implementing innovative features built on the blockchain, including smart contracts and decentralized apps.
Bitcoin has been around since 2009 but its future remains promising, with important changes coming its way.
In 2017, the Bitcoin community’s main concern was how to better improve performance and transaction times. As more and more users flock to Bitcoin, these have suffered, causing the system to take too long to verify transactions – sometimes up to 10 minutes – while other altcoins do it in under a minute.
This software upgrade has been a long time coming, and should see Bitcoin return to lightning speed transaction verification times and even cheaper transaction fees.
Every day, more and more merchants are joining the Bitcoin community. You will need to decide if this will result in Bitcoin’s value continuing to increase. With wider acceptance, there may also come some regulation from governments around the world, but this might not be the killing blow that many Bitcoin users fear. Regulation would provide some peace of mind to businesses and organizations that are still afraid of getting their feet wet.
