The simplest definition of a cryptocurrency is that it is a digital or virtual currency or asset. It is secured by cryptography, thus the name cryptocurrency, and it is near impossible for it to be counterfeited or double-spent.
Cryptocurrencies are, for the greater part, decentralized networks that are based on blockchain technology.
A Quick Overview of what is Bitcoin:
✔️ The history and development of Bitcoin
✔️ Bitcoin’s growth through the years
✔️ What makes Bitcoin so valuable?
How are new Bitcoins created and generated?
How is Bitcoin exchanged or traded?
What is a Crypto or Bitcoin Wallet?
What are the different types of Bitcoin wallets available?
Is it better to pay in Bitcoin than other methods of payment?
Blockchain technology is a decentralized ledger that is distributed with the purpose of recording the provenance of a digital currency or an asset. The Distributed Ledger Technology, or DLT, makes the history of a digital currency unalterable and transparent.
Cryptocurrencies are neither issued nor controlled by any government or entity, thus making it impossible to interfere with it or for it to be manipulated.
The History and Development of Bitcoin
Bitcoin has been around for more than a decade and was officially mentioned in a paper titled Bitcoin: A peer-to-peer Electronic Cash System by Satoshi Nakamoto, who posted the paper to a cryptography mailing list.
The official Bitcoin project was soon after registered in an open-source-projects community resource called SourceForge.net.
Bitcoin came into existence in 2009 when the first open source Bitcoin client was released, and the first Bitcoins were released. The first Bitcoins were mined by Satoshi Nakamoto from the first block of bitcoins ever.
This block was known as the genesis block and had a reward of 50 bitcoins. Hal Finney, a programmer, was one of the first supporters, adopters, and contributors to Bitcoin along with being one of the first receivers thereof after downloading the software on the first day.
Later, Nakamoto provided the reins to Bitcoin to a developer, Gavin Andresen, who subsequently became the lead developer at the Bitcoin Foundation. The foundation is the closest thing to an official public face that Bitcoin has, and ever will have.
Bitcoin’s Growth Through the Years
- By 2011 more cryptocurrencies begin to emerge and they were based on the same open-source code of Bitcoin. WikiLeaks was one of the first who had begun to accept donations in Bitcoins, with others following in these footsteps in years to come.
- Bitcoin features in The Goodwife in 2012 and the Bitcoin Foundation saw its launch later the same year.
- During 2012, BitPay reported that over 1,000 merchants had begun accepting Bitcoin.
- By 2013, there were around US$1 million worth of Bitcoins sold by Coinbase. During the same year, The Internet Archive started receiving Bitcoin donations followed by several developments in both cryptocurrency and Bitcoin in the same year.
- By 2014 Bitcoin was more readily accepted as a payment method.
- The network rate of Bitcoin exceeded 1 exahash per day at the beginning of 2016, and by March, the Cabinet of Japan recognized virtual currencies such as Bitcoin as possessing the same function as real money, or fiat currency.
- A substantial number of businesses had begun accepting Bitcoin by 2017 with increases in the transaction rate of BitPay. Bitcoin had gained substantial legitimacy by this time by both lawmakers and legacy financial companies.
- 2017 onwards saw an increase in trading volumes and by 2019, there are around 5,457 Bitcoins ATMs worldwide in the United States, Canada, the UK, Spain, South Africa, and other jurisdictions.
What makes Bitcoin so valuable?
One of the key factors which determine the value of Bitcoin is that it was the first cryptocurrency that was created in addition to the fact that it is the first recognized currency over which no person, organization, or authority has controlled.
It can be bought, sold, and received, but no one can be told what to do with it or how it should be spent or invested.
Bitcoins are free from dictatorship, oppression, and hyperinflation. It serves a purpose as a safe haven for individuals who live, and who have lived, under these circumstances.
There is a limited supply of Bitcoin, which is another factor that makes it so valuable. There are only 21 million Bitcoins and there will never be more created than this.
In addition, there is complete transparency surrounding the knowledge of how many there are, the rate at which they are released and when the last Bitcoin will be created or released.
Bitcoin possesses a substantial amount of leverage over fiat currencies as they can be controlled by central banks and governments who have control over conventional monetary systems.
Monetary systems are controlled and manipulated as there is a certain supply of money and it is backed by the word of governments. This is only one of many controversial issues surrounding fiat currencies that cannot be applied to Bitcoin.
Bitcoin presents a unique design and it is poised to have an impact on the lives of people despite the unstable economies where monetary systems are greatly manipulated by key players such as banks and governments, amidst others.
Although fiat currency cannot simply fall away, it is impossible to ignore the fact that digital currency is being accepted and used more often. Monetary systems are, however, still important and they have been used for ages.
Monetary systems are still, for the greater part, considered the most stable grounds for exchange and trade. Fiat currencies are heavily affected by inflation whereas Bitcoin is not. In this, and other instances, Bitcoin is the strongest contender.
Why is Bitcoin exchanged?
Bitcoin is an efficient way to make profit. There is a lot of stigma that exists around how profit can be made from trading something that technically does not exist as it cannot be seen, touched, or physically handled.
There is also a lot of belief that the only way that profit can be made when trading currencies is when major currency pairs are traded, but this is slowly changing as more brokers and traders start embracing cross pairs between crypto and fiat currencies.
Successful traders do not only focus on one currency pair through which to make profit and a lot of traders have started trading cross pairs. Cross pairs often provide a higher level of market volatility and this is increasing as more of it is being traded in the markets.
The presence and onset of high volatility is but one reason why traders consider moving from fiat currency trading to trading cryptocurrencies or focussing more on cross pairs. Some of the main reasons surrounding this include:
- The market movements are easy to understand as the focus is not merely on major trends. Buying and selling Bitcoin is an easy way to make profits once traders have learned more about trading in theory and by practicing trading.
- The price on Bitcoin is less susceptible to high impact news and traders are not forced to spend as much time doing fundamental analysis.
- Bitcoin trading does not involve leverage as high as with other instruments and this significantly reduces the risk of losses.
- There is a global market for Bitcoin as it is not centralized or based in one economy of a country as is the case with fiat currencies.
- The Cryptocurrency Market is open 24/7 unlike traditional markets such as Forex or Stocks and there is no official exchange. Instead, there are a variety of exchanges around the globe without fixed closing and/or opening times.
- The Bitcoin market is volatile and features quick bursts of up and down price movements in a short amount of time. This provides traders with ample opportunity to harness the volatility with strategies that accommodate the conditions.
How are new Bitcoins created and generated?
All Bitcoin transactions are processed by miners. Miners secure the Bitcoin network and provide a level of security against attacks as these would render the network vulnerable and it would inevitably become useless.
For their efforts, security, and processing services, miners are rewarded with both Bitcoins and a certain amount of transaction fees, which varies between brokers and exchanges.
Every time a miner successfully solves the proof of work algorithm of Bitcoin, the miner would have mined a block. The miner, or mining pool, is rewarded a block through what is commonly referred to as a ‘block reward’.
The reward is made up of a set number of Bitcoins agreed upon by the network. It should be noted that the Bitcoins which make up the block reward are all new Bitcoins.
There are 50 Bitcoins per block and the blocks halve at every 210,000 blocks. Every block up until this point rewards miners with 50 Bitcoins and as soon as it is halved, for instance when block 210,001 is mined, the reward would only be 25 Bitcoins.
The process involved with mining Bitcoin presents some level of difficulty to ensure that blocks are only found on an average of 10 minutes. When considering that blocks halve with every 210,000 blocks mined, it means that blocks halve every four years.
There are therefore new Bitcoins generated every 10 minutes when a block is mined. This can be publically verified by making use of a block explorer and provides some insight into the level of transparency there is in Bitcoin trading.
With the block reward halving a set amount of times, the blocks will become so small in time that new Bitcoins cannot be created.
How is Bitcoin exchanged or traded?
Bitcoin can be bought, sold, or exchanged and traded in a variety of ways, including:
- Trading Bitcoin – there are numerous brokers who make Bitcoin a part of their offering as a tradable financial instrument such as CFDs.
- Bitcoin or cryptocurrency exchanges – such as Coinbase, Binance, Kraken, and others. Each exchange works in a different manner and some are either decentralized or centralized.
- Peer-to-peer – sites such as LocalBitcoins allows for the buying and selling of Bitcoin directly between two participants with little to no intervention from the facilitator.
- Bitcoin ATM – these are quite popular in major cities around the world and offers the opportunity for Bitcoin to be bought and sold.
What is a Crypto or Bitcoin Wallet?
As an actual wallet is used to store cash and bank cards, a Crypto wallet is used to store cryptocurrencies. It is a software program, due to the digital nature of cryptocurrencies, in which Bitcoin can be stored.
Cryptocurrencies cannot be stored anywhere as they carry significant monetary value. They require safe storage which has a private key or secret number. These keys are designated for every individual who has a balance in a Bitcoin wallet.
The key or number corresponds with the Bitcoin wallet address. Bitcoin wallets work for the sending and the receiving of Bitcoin in addition to providing ownership of the Bitcoin it contains to the user.
Bitcoin wallets are not confirmed to only one given platform and it is possible for a wallet to be accessed from a desktop, mobile device, a web browser, and even other hardware.
To exchange Bitcoins, it is necessary for traders to be in possession of a Bitcoin wallet. Due to the digital nature of Bitcoin, they cannot be stored physically. Instead the wallet stores relevant information such as private keys to Bitcoin addresses.
What are the different types of Bitcoin wallets available?
Desktop Wallets
These wallets are created with the purpose of it being downloadable onto, and used by, personal computers and laptops. These wallets can be accessed even when a trader is not connected to the internet.
Desktop Wallets can be downloaded onto laptops and desktops that run the following operating systems:
- Ubuntu
- MacOS, and
- Microsoft Windows.
One of the most popular and most used Bitcoin wallets on the market at the moment is Armory. It has vast and advanced safety features and ease of use.
Mobile Wallets
With the advent of technology and the move towards a more digitally portable trading industry along with trades being executed on mobile devices, it is only fair that Bitcoin wallets can be accessed on mobile devices.
Mobile Bitcoin wallets can be downloaded onto most smartphone devices. They offer a lot more convenient access to the wallet and provide ease of access whether the trader is connected to the internet or not.
Two of the most popular wallets developed for mobile devices is Blockchain and Mycelium. Both can be downloaded for use on Android and iOS devices. Users of Blackberry mobile devices can make use of a Bitcoin app which can be downloaded and installed.
With mobile devices and the corresponding Bitcoin wallets, users can easily make use of QR codes which allows them to make instant payments from their Bitcoin wallets, much like banking apps allow.
Cold Wallets and Hot Wallets
A Cold Bitcoin wallet refers to one which is not connected to the internet and thus offline. This type of wallet is considered the most secure between the two types as it provides added protection from hackers.
A Hot wallet is an online wallet and connected to the internet. This poses a security threat as they are mostly targeted by hackers.
Traders are advised to keep both types of wallets. A cold wallet is recommended for the storing of larger sums of Bitcoin whereas the hot wallet is merely used when transacting, trading, or making everyday purchases in Bitcoin.
Online Web Wallets
These types of wallets are connected to the internet, as the name suggests. They are accessed through cloud services by third parties and grant traders with access to their Bitcoin wallet.
Developers and providers of such wallets include Circle and Coinbase.
Physical Wallets
Due to the nature of Bitcoin, this may seem to contradict however these wallets, also known as paper wallets, are generated by Blockchain.info and Bitaddress.org and feature a physical copy of the Bitcoin address and private keys which can be printed and stored safely.
Hardware Wallets
These are small devices that store the user’s Bitcoin and can be used for sending and receiving Bitcoin through online transactions. One such device is Trezor, which is becoming an increasingly popular portable physical crypt.
Bitcoin Clients
These are the original wallets that were used by the founders of Bitcoin. The computers that have these wallets installed are being sold in the community and provide online trading clients with access to all transactions executed through the Blockchain.
Is it better to pay in Bitcoin than other methods of payment?
One of the greatest features of Bitcoin is that it can be used as a method of payment, and its uses as such are increasing as merchants accept payment in Bitcoin.
It is imperative to consider how Bitcoin weighs up when compared to other payment methods seeing that it is increasing in popularity and being more widely accepted.
When compared to other payment methods, Bitcoin has the following benefits and advantages:
- Transactions between Bitcoin wallets are not linked to an individual bank account – which provides a little more anonymity and security.
- Bitcoin can be used by anyone and in a lot of cases, account verification is not necessary. There are infrequent identity checks and proof of residence is not mandatory. This, however, differs between brokers and exchanges.
- There is no central authority which directs how Bitcoin can or cannot be spent.
- The Bitcoin account cannot be seized or closed. The user is the only one who maintains control over it.
- User privacy is more enhanced when using Bitcoin thus identity theft is reduced.
- Bitcoin transfers are processed quickly unlike some payment methods, such as bank transfers, which may take several days to clear.
- Bitcoin has no international boundaries, it can be sent or received anywhere in the world.
- There is unlimited access and users have full control of their funds at any given time, from anywhere in the world.
- Some payment methods often involved high transaction fees in addition to monthly and annual overdraft or over-limit fees.
- There is hardly any maximum or minimum involved with transactions although some exchanges impose maximum exchange limits based on certain conditions.
- Purchases can be made anonymously as the user’s name is not tied to the transaction, and
- Transactions cannot be reversed once made which aids merchants and frees them from worries concerning chargebacks on credit cards.
How is Bitcoin bought, sold, and traded or exchanged?
Through a Cryptocurrency Exchange Platform
Considering that there is no singular or official exchange through which Bitcoin can be traded, sold, or bought, there are numerous cryptocurrency exchange platforms that facilitate such transactions.
The process involved with choosing a Cryptocurrency Exchange Platform is one that requires thorough research and traders and investors need to consider a few vital factors such as:
- Both the liquidity and the market depth of the exchange. There needs to be an adequate amount of both to ensure that orders can be filled. It also decreases the chances of a quick dip in the market that may result in losses.
- Trading or transaction fees are charged by the exchange for its services. Fees should be low as it allows the trader to exit despite how small the movements are which will cover the fee and allow traders to make a small profit.
- The location of the exchange and whether it allows fiat deposits or withdrawals. This allows traders to deposit and/or withdraw in their own currency.
- Regulation and trust – the crypto market is, for the greater part, unregulated but this does not mean that they cannot be trusted. Traders must investigate the history of the exchange and the current security measures that they have in place.
Brokers
Bitcoin is offered by numerous brokers as a CFD instrument and the process in choosing a broker may be tedious as there are a great number of brokers in the industry.
It is imperative for traders to look at several factors when considering trading through a broker such as regulation, fees, spreads, commissions, funding options, education, and more.
When using a broker to facilitate the trade in Bitcoin, traders need to ensure that they keep the following in mind:
- The amount and variety of Cryptocurrency pairs offered
- Accessible and reliable payment methods are offered
- The quality and usability of the trading platforms offered, and
- The level and quality of customer support offered.
Conclusion
In understanding what Bitcoin is in addition to how it can be bought, sold, traded, and/or exchanged, traders will understand why it has become such an important, popular, and valuable financial instrument.
The future surrounding cryptocurrencies is still uncertain, but it is clear that cryptocurrencies are increasing in popularity although it will never be able to replace fiat currencies.
Instead there is a type of symbiosis expected between the two along with close correlation.
It is easy for beginners to start trading Bitcoin, provided that traders have consulted adequate amounts of education to learn about the theory behind Bitcoin. In addition, beginners must make use of demo accounts to practice trading and to build on their skills.
Bitcoin is the most popular cryptocurrency and it is uncertain whether any of the various other cryptocurrencies will be able to overthrow it. Amidst other cryptos, Bitcoin is still the most popular which is more widely accepted as an alternative method of payment.
Although there is still a lot of stigma and controversy surrounding cryptocurrencies, they have established their place in a digitized age where there is as much reliance on them as a currency as there is on conventional currencies and monetary systems.
Frequently Asked Questions
Is Bitcoin legal in South Africa?
Yes, Bitcoin is legal in South Africa.
Can you lose money on Bitcoin?
Cryptocurrency can be volatile and offer huge opportunities to make, but also to lose money.
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