This brief guide is intended for those who want to know what bitcoin is, how to get it and how it can be useful, but is not eager to delve into the technical details. It explains how the system works, how to use it for profit, and in what cases caution should be exercised. In addition, it lists the resources that will help to store and use digital currency.
Bitcoin (EXANTE Bitcoin) appeared in 2008 – right after the Occupy Wall Street movement accused large banks of misusing borrowers, deceiving customers, interfering with the financial system and exorbitant fees. Bitcoin pioneers dreamed of transferring responsibility for transactions to sellers, eliminating intermediaries, canceling interest rates and making transactions transparent in order to eradicate corruption and limit fees. They created a decentralized system in which everyone could control their funds and understand what is happening to them.
In a relatively short time, Bitcoin gained impressive popularity. It is accepted for payment by companies around the world from such giants as Dell (NYSE DVMT.NYSE), Expedia (NASDAQ EXPE), PayPal (NASDAQ PYPL) and Microsoft (NASDAQ MSFT) to a private clinic in Warsaw and the Burger King franchise in Russia.
Bitcoin advertises sites on the Internet, thematic media publish news about it, major online forums have been discussing cryptocurrency for years and issuing their own coins. The system has its own programming interface (API), price index and exchange rate.
Of course, there are problems with burglars, high volatility and transaction delays. However, in some third world countries, bitcoins can be the most reliable channel for receiving or transferring money.
In simple terms, the word “bitcoin” means either virtual currency or the technology on which it is based. With the currency, you can make transactions – pay for purchases, receive transfers and exchange it for cash. For transactions, a special address, encrypted with a 16-character key, is used. The buyer decodes the code to transfer bitcoins to the specified address.
In other words, a cryptocurrency is a digital exchange that allows you to buy or sell goods and services. The transaction is verified on a peer-to-peer computer network, which is similar to Skype or BitTorrent.
- Irreversibility. After confirmation, the transaction cannot be canceled. Under no circumstances. No one can intervene in the process – neither you, nor your bank, nor the president, nor Satoshi Nakamoto, nor your miner. No one. If you send money, you send it. Point. If you sent your money to a fraudster or a hacker stole it from your computer – no one will help you.
- Anonymity. Neither transactions nor accounts are associated with any real world entities. You get bitcoins at the so-called address, which is a random string of about 30 characters. As a rule, you can follow the flow of transactions, but the address does not have to be at least somehow connected with the real identity of the user.
- Speed and global reach. Transaction information is distributed online almost instantly and is confirmed after a couple of minutes. Since the whole process takes place on the global computer network, your physical location is irrelevant. It makes no difference whether you send bitcoin to your neighbor or someone else on another continent.
- Security. Bitcoin balance is fixed in a public key cryptographic system. Only the owner of the private key can send cryptocurrency to other addresses. Cryptography and the magic of large numbers make this scheme almost invulnerable to hacking.
- Deregulation. You do not need to ask anyone for permission to use cryptocurrency. It is just software that is accessible to everyone. By installing it, you can receive and send Bitcoins or other cryptocurrencies.
If you do not go into the technical details, we can say that Bitcoin is based on an extensive public database called the blockchain, where all confirmed transactions are included in the so-called “blocks”. When a block enters the system, it is verified and becomes part of a peer-to-peer (P2P) network. Thus, each user has information about each transaction, which helps to prevent theft and double spending of funds, in which someone conducts the same transaction twice. This process ensures user confidence in the system.
Desktop, mobile and browser wallets are most common. In addition, a wallet can exist “on paper” and in the form of special equipment. Each type of wallet has its own advantages and disadvantages.
One of the main features of Bitcoin is that it has no physical incarnation. All that you have is a record of transactions between different addresses that are stored in the blockchain system.
Alice wants to use bitcoins to order pizza from Zhenya. She sends him her private “key”, a sequence of letters and numbers in which her transaction data, the amount and the public address of Eugene’s digital wallet are encrypted. Eugene scans the “key” with his smartphone to decode it. At the same time, Alice’s transaction is broadcast to the rest of the network (the so-called “nodes”), and in about ten minutes is confirmed through certain technical processes known as mining. This process allows the wife to figure out whether to allow Alice to complete the transaction.
Mining, or mining, is a process that ensures the security of the Bitcoin system, chronologically adding new transactions (or blocks) to the blockchain. Blocks are added when codes are decrypted, the transaction is completed, and the bitcoins are transmitted or exchanged.
In addition, miners can generate new bitcoins using special software for solving cryptographic problems. This provides a reasonable way to release currency and also motivates users to engage in mining.
The reward for the new block is coordinated by all network participants but is usually 12.5 bitcoins. In addition, a part of the miner’s profit is made up of fees charged to users making transactions. To prevent inflation and maintain control over the system, by 2040 no more than 21 million bitcoins should be in circulation, so the cryptographic tasks used in mining are becoming more difficult.
As in the case of a regular wallet, store only a small amount of bitcoins on a computer, mobile phone, or client for everyday use, other means are best kept at a separate, more secure address — for example, in a stand-alone wallet that is disconnected from the network.
Update your software. For additional security, use the multi-signature feature, which allows a transaction only after several independent confirmations.
Protect your address. Although it is difficult to associate a Bitcoin address with your real identity, Bitcoin remains the most open form of the transaction. All participants on the network see your balance and transaction log. This is one of the reasons why you should change public addresses after each transaction. You can also use several wallets for different purposes so that your overall balance and transaction history will not become the property of those who send money to one of them.
The number of confirmations. As already mentioned, to complete the transaction must receive a certain number of confirmations from the network. The number of confirmations is different for different wallets and for transactions of different volumes.
Local legislation. The government requires the payment of tax on income, sales, wages and capital gains this may apply to transactions with bitcoins. Bitcoin’s legal status varies from country to country — some governments still prohibit its use. In the US, the rules are different for each state. In 2016, the only state whose legislation regulated the use of bitcoins was New York. In Russia, the use of Bitcoin is not yet regulated, the Bank of Russia is still preparing the relevant documents, while its leaders are still considering Bitcoin as a digital product.
In the Bitcoin system, hackers and scammers thrive. Attacks occur at least once a week and become more sophisticated. The complexity of Bitcoin software, its volatility, and slow transactions also discourage many from using the system. For your network to approve a transaction, you will have to wait at least ten minutes. Some Reddit users complain that they have to wait for confirmation for more than an hour.
Pyramids A fraudster asks to transfer money to his wallet, promising to pay an unusually high percentage – up to 1-2% per day. Stay away from companies that directly provide the wallet address for incoming payments, and do not use regular exchanges, such as BitPay or Coinbase.
Miners will convince you that for a fee a huge amount of bitcoins can “mine” for you. Of course, neither the money nor the Bitcoins, you no longer see.
Exchanges will offer you features that are not available in typical Bitcoin wallets, such as PayPal payment processing or a more favorable exchange rate. Needless to say, having received these cards, the fraudsters will simply draw money from your accounts.
Wallets The most popular form of fraud. Wallets scammers look like ordinary online wallets – with one difference, you will not be given your own address, but will offer ready-made, from which your money will flow to scammers.
The best thing about Bitcoin is its decentralization. This means that you can make international transactions without suffering from the difference in exchange rates and not paying additional fees. Bitcoin is free from any interference and manipulation; no central bank can raise interest rates on its own. The system is transparent, so you know what happens to your money. You can start accepting Bitcoins instantly; you do not need to spend money and energy to open a trading account or purchase equipment. Bitcoins cannot be faked, and your client cannot demand a return.