The Basics of Bitcoin

June 15, 2021
Sarah Gormley

When someone mentions Bitcoin, most people’s first thought is that it’s just something you invest in, or stock you can own. While it can be an investment, it is also a form of currency. Bitcoin was created in 2009 by an anonymous programmer who goes by the code name “Satoshi Nakomoto.” Bitcoin was created with the purpose to act as a form of payment that the government was not involved in at all. Today, it is the world’s largest cryptocurrency

 

How it Works

The idea behind cryptocurrency is to make transactions faster and more effective. Bitcoin in particular is a computer file that is stored in a ‘digital wallet’ app on smartphones and computers. This cryptocurrency can be used to purchase goods, exchanged with other users, and even traded for other currencies. For protection, it uses blockchain technology. The blockchain keeps track of all confirmed bitcoin transactions that have ever been made. This is the sole location of Bitcoin transactions. 

The two ways to get Bitcoin are buying and mining. Buying is the less complicated way to get bitcoin. This involves purchasing bitcoin from someone else. Mining on the other hand is a bit harder to understand. It is the process of making a new bitcoin by solving a computational puzzle. The purpose of this is to help maintain the ledge of transactions that Bitcoin is based on. 

Each user is given their own Bitcoin address, which you can share with friends to make and receive payments. When a transaction occurs, a bitcoin is transferred from one wallet to another. To be sure that the money goes where you want it to, Bitcoin wallets have a private key to sign transactions. This prevents the money from going to another wallet or the amount being altered in the process. 

Many places take bitcoin as payment, most of these being online. If a business does accept Bitcoin as payment there will be a button that says “Pay with Bitcoin.” You will then give the website your Bitcoin wallet information — typically a QR code on your smartphone — and confirm it. Once this is done your payment will be processed. 

 

When considering whether to use or invest in a technology such as Bitcoin, it is important to look into the advantages and disadvantages. 

Advantages

  • Quick process: money is sent instantly
  • Decentralized: Bitcoin is not based in any currency and does not have a central bank
  • No need to convert to a different currency: you can send money to someone who uses a different form of paper money than you do without the added fee of converting your money
  • No attachment fees

Disadvantages 

  • Volatility: the price of bitcoin is never constant
  • Black market activity: lack of centralization makes Bitcoin the perfect currency for illegal activity
  • Hacking: lack of centralization and this being a virtual forum both increase the risk of theft
  • Several retailers have not accepted Bitcoin as a form of payment
  • Wallets can be lost

 

References:

Fiorillo, Steve. “How to Use Bitcoin for Purchases.” TheStreet, TheStreet, 18 Apr. 2018, www.thestreet.com/investing/what-can-you-buy-with-bitcoin-14556706.

Gazi, Farhan. “Pros And Cons Of Bitcoin Investments.” IMoney Malaysia, 18 Dec. 2020, www.imoney.my/articles/should-invest-bitcoin.