What is bitcoin?
In 2009, a whitepaper was published online, in which a peer-to-peer payment system was described that should be able to function in a fully decentralised manner. The author of the whitepaper called himself Satoshi Nakamoto, a pseudonym to which the creator of the whitepaper has since stayed anonymous behind.
What is Bitcoin and how does it work?
- Bitcoin explained
- About blockchain
- What can you do with bitcoin?
- How do you get bitcoin?
- Bitcoin compared to other coins
So what is bitcoin? With the growing number of online transactions and the increasing distrust towards banks after the financial crisis in 2008, the demand for a new digital payment system is on the rise.
This system should be able to exist parallel to the existing financial system, and most importantly, the system needs to be decentralised so it doesn’t have a single point of failure.
Bitcoin is the solution in the quest for a new digital payment method. You could consider bitcoin to be a digital form of cash money: it has a way of exchanging value directly from one person to another, without a third party needed. This is called peer-to-peer.
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The technology behind Bitcoin is called the blockchain technology. This technology makes it possible to transfer value digitally. A blockchain is a chain that contains transaction data chronologically, which can’t be altered afterwards. In Bitcoin, every ten minutes new transactions are collected in a so-called block. That block is then added to the chain, which makes a chain of blocks: the blockchain.
The blockchain is a sort of database. The power of the Bitcoin blockchain is that it's decentralised. This means that there are thousands of computers all over the world who have a copy of the entire bitcoin transaction history. Using those copies, the computers check if new transactions are legitimate. In addition, the system makes it impossible to take the network down. If you wanted to, you would need to destroy all those thousands of copies all over the world.
A computer that stores the entire transaction history is called a node. When a node has validated the legitimacy of the transactions, the miners pick it up. They collect new transactions, put them in a block, and add this block to the chain. Miners are computers as well, but not your everyday computers. They are often specifically designed to mine bitcoins and do nothing else. They mine bitcoins by solving an extremely difficult mathematical puzzle. This takes a lot of computing power, and they are competing with other miners that try to solve the puzzle as well. The computer that solves the puzzle the fastest, and gets to add their block to the chain, receives 12,5 new bitcoins!
What can you do with bitcoin?
Bitcoin was developed as a fast, digital currency. With bitcoin you can transfer value directly with no trusted third party needed. There are already a vast amount of merchants and retailers accepting bitcoin as a payment method across the globe.
Using a bank to transfer money (internationally) often means high commissions, waiting several days before the payment has been processed, and is subject to further delays during weekends and holidays. Should you use bitcoin for a transaction like this, then it would only take a few minutes, and cost considerably less.
Many people believe bitcoin is the currency of the future. There is a fixed amount of bitcoin, so when the demand for bitcoin increases, it creates scarcity. This results in an increase of price and in turn, creates a lot of speculation of the price of bitcoin. Would you like to invest in bitcoin? Only do so with an amount that you can afford to lose, this way you limit the risks.
How do you get bitcoin?
There are four methods of acquiring bitcoin that we are familiar with:
- Purchase bitcoin through a broker or an exchange
- Accept bitcoin as a payment for your goods or services
- Receive (part of) your salary in bitcoin
- Start bitcoin mining
- Purchasing bitcoin
You can send and receive bitcoin without an intermediary. If you wish to exchange euros for bitcoin, then you can make use of a cryptocurrency broker like BTC Direct. You can pay with a bank transfer or a payment card, after which the bitcoin are sent to your wallet.
In the beginning, bitcoin was meant as a payment system. There are currently an abundance of (online) stores where you can use bitcoin to pay for goods or services. Examples of retailers who accept bitcoin are Expedia, where you can book a hotel using bitcoin, and Overstock.
Since June 2018, BTC Direct employees receive part of their salary in bitcoin. The employees choose how much of their salary they want to receive in bitcoin. At the end of the month, BTC Direct purchases the coins at the current rate and sends them to the employees’ digital wallets. You could ask your employer or employee if they’d like such a service as well!
Use the computing power of your computer to solve mathematical puzzles and to secure the network. Approximately every ten minutes, a new block is mined which contains the latest transactions. This block is then added to the blockchain. When that happens, the miner receives a reward of 12,5 bitcoins. The reward for miners will halve every four years and continues to do so until the year 2140; by this point all 21 million bitcoins will be mined.
Until a few years ago a regular laptop would have been sufficient to join the mining network, but you needn’t bother now, since current miners are specially designed machines that cost a lot of money and have a lot of computing power.
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Bitcoin is designed as a digital payment system that enables peer-to-peer payments. The transactions are verified and executed by a decentralised network of computers. This network consists of miners and nodes.
You can obtain bitcoins in several ways: by accepting them as a payment for your goods or services, by mining them, or by receiving them as (part of) your salary. But most people choose to simply buy them from a broker such as BTC Direct.