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What is Bitcoin

Cryptocurrencies and related technological innovations have been a global trend for many years. Among them, the most popular and in-demand is Bitcoin. Bitcoin is the first cryptocurrency, with which the history of the entire industry began. Today we will try to explain to you in as much detail as possible what Bitcoin is all about and what opportunities it offers for ordinary crypto investors.

What is Bitcoin?

Bitcoin is the first and maybe the only cryptocurrency, which is an independent payment system that does not rely on the involvement of banks, regulators, or other payment partners to make transactions. The appearance of Bitcoin has sparked a genuine revolution in finance. Traditional means of payment in the form of fiat money (issued by the government) had many drawbacks. One of them is high dependence on the state and banks, which means a lack of confidentiality.

The Bitcoin system ensures anonymity of each sender and receiver of funds, as no personal information is required for wallet registration. You don’t have to provide your payment details, last name or year of birth. The process of registering a crypto wallet (a special program for bitcoin usage) is very simple: you download it, and the system assigns you a random wallet address consisting of a series of numbers and symbols (for example: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa).

All transactions from this wallet address and to this address are available for viewing by other users in a special open ledger called blockchain, which makes Bitcoin a transparent system. If a user wants to make their transfer history public (i.e. deanonymize themselves), all they need to do is reveal their wallet address. If you do not publicly disclose the wallet address, it is practically impossible to guess that a particular wallet belongs to a particular person.

Complete decentralization is the basis of this innovative Bitcoin technology. The project does not have its own CEO or other management personnel like PayPal or other crypto projects. For this reason, Bitcoin is called the freest modern monetary system. It is possible to restrict access to the Internet for coin holders, close token exchange and transfer services, and try to manipulate the exchange rate, but as long as the Internet exists, it will be impossible to completely destroy Bitcoin. This independence and high demand among investors gives it a reputation as the most reliable modern means of payment.

Former Google CEO Eric Schmidt stated: “Bitcoin is a remarkable cryptographic achievement, and the ability to create something which is not duplicable in the digital world has enormous value”.

 BTC in the cryptocurrency market 

The digital coin of the Bitcoin system is BTC. Today it is, without a doubt, the leader of the cryptocurrency market. For over a decade, Bitcoin has been ranked number one by market capitalization. As of January 10, 2023, people, funds, corporations, states have already invested about $334 billion into bitcoin. There are currently 19.257 million BTC in circulation with a maximum possible of 21 000 000 BTC.

Capitalization is the amount of funds invested in the coin. The capitalization of bitcoin is $334 billion. This means that exactly this amount would have to be spent right now to buy all the coins at today's rate.

Bitcoin, like all other projects in the conditions of the crypto winter, is now experiencing a short-term depreciation. The decline began on November 10, 2021 after hitting an all-time high of more than $65,000. The subsequent decline, as in the previous bearish cycle, is determined by important negative events inside the industry. What constituted negative events are as follows: a ban on mining in China in September 2021, as well as the Terra (LUNA) scandal in May 2022. Early November, after the crash of the FTX crypto exchange, Bitcoin hit a new low of $15,647 and is trading at $15 000 to $17 000 as of January 10, 2023. 

A crypto winter is a period of general decline in the market. 
A bearish cycle/bearish trend is a period of a steady decline in the exchange rate of a particular asset, as opposed to a bullish trend, when the price is actively growing.

You can do far more than just buy and transfer whole BTC tokens. The minimum unit for transfer is 1 hundred millionth coin (0.00000001 BTC or $0.00017 as of January 10, 2023), named Satoshi (SATS) after bitcoin founder Satoshi Nakamoto Satoshi. This name was proposed on November 15, 2010 by one of the main developers of Bitcoin with the "Ribak" pseudonym and quickly spread among the members of the community.

Bitcoin vs USD chart on CoinMarketCap.

Not only millionaires are the most famous holders of BTC today. Even against the backdrop of a bearish trend in 2022, there are reports of big deals. So, on June 29, 2022, American company MicroStrategy Incorporated purchased 480 BTC, and on June 30, 2022, the government of El Salvador completed a deal that included a purchase of 80 BTC for $1.52 million.

The depreciation does not mean that the crypto winter for Bitcoin will last forever. We recently made an article for you, in which we discussed in detail what factors the price of a Bitcoin depends on and under what conditions a new growth cycle can be expected.

The history of the emergence of Bitcoin

The history of the development of Bitcoin is shrouded in mysteries and myths. The ideological inspirer and main developer at the initial stage was a man under the pseudonym Satoshi Nakamoto, whose identity has not yet been established. On October 31, 2008, he organized a mailing list to the participants of the metzdowd.com crypto forum, which included a so-called “white paper” of Bitcoin. It detailed the concept of a new technology for a decentralized monetary system. According to Nakamoto’s idea, in the future Bitcoin will become an analogue of traditional assets, in particular gold (and Bitcoin really began to be referred to as “digital gold” later on).

Nakamoto officially launched the Bitcoin platform on January 3, 2009. On January 8, the software was released to the network and available for download. Users could start mining using the software. 

On January 16 he wrote in his mailing list: “It might make sense just to get some [bitcoins] in case it catches on. If enough people think the same way, that becomes a self fulfilling prophecy. Once it gets bootstrapped, there are so many applications if you could effortlessly pay a few cents to a website as easily as dropping coins in a vending machine”.

On April 26, 2011, Satoshi Nakamoto stopped going online, and the support of the project fell into the hands of the community. Today, every developer has the right to take the initiative to improve the Bitcoin network. After public discussion, it can be submitted to a Bitcoin Improvement Proposal (or BIP) document. If all the members agree, they will upgrade the network together. That’s where the dreamocracy came true!

Bitcoin gained popularity in the period of 2011-2013 after the price of one coin exceeded the rate of $1 and than $100. As the number of users grew, there were more attempts to improve the network. This resulted in the creation of numerous forks. Forks are other crypto projects that copy the Bitcoin program code with improvements. Among them, one of the most popular was Bitcoin Cash, which was activated on November 15, 2018. 

How does Bitcoin work

Bitcoin is an open-source payment system that can be accessed by any user. Bitcoin's main feature that makes it different from traditional payment systems is its decentralization, which makes it independent of regulation by states and individuals.

As mentioned above, data on transfers and balances are stored in the network's blockchain. All transactions are grouped into blocks, which are built in the form of a chain. Each new block containing new transaction data carries a record of the previous block, which ensures its consistency and connectivity with each other. All transactions are recorded in a public ledger, a list that looks like a ledger but is available on the Internet, where anyone can track all coin transfers made.

The Bitcoin network consists of nodes, which are computers connected to the network with a special software installed. All processes in the blockchain are based on a special algorithm called Proof-of-Work (PoW) consensus. Simply put, the algorithm helps establish that a certain amount of work was done (calculations were performed) for both the production of the cryptocurrency and its transfer from wallet to wallet, which means that these bitcoins did not appear out of thin air. Falsifying calculations and making changes to blocks (for example, by attributing an additional bitcoin to yourself) is impossible as all the devices in the network have all the data, so the system simply does not accept the upload of data about fake transactions.

An alternative to PoW is the Proof-of-Stake algorithm. The right to confirm transactions is given to users who have a certain amount of project tokens in their account.

Proof of work is the computing power of PCs’ processors spent on calculating a hash that is a mathematical operation during mining aimed to convert a large amount of information into a concise, unique set of characters.

What is Bitcoin mining

Mining is the process of creating new tokens on the Bitcoin network. The users involved in it are called miners, and they form the issue  (the release of new BTC coins onto the market).

The mining process itself uses the proof-of-work mechanism based on complex cryptology (the science of encryption). Put simply, the mechanics are as follows:

🕸️ when creating a new block with transactions, the network without human participation sets a random value consisting of a certain number of characters;

🧑‍💻 network users who want to make a transaction describe it (they set the number of bitcoins to send, the recipient address) and click on the “send” button in the crypto wallet of their choice;

🧳 that info is sent to a special temporary transaction storage, the so-called mempool (memory pool);

🎯 miners must sum up transactions from the mempool using complex mathematical calculations and hash the received data into a value that will be as similar as possible to what the network originally created. The miner who gets the first block with a hash value as close as possible to the value originally set by the network receives a reward in the form of bitcoins.

The catch is that miners can randomly include transactions in a block. And they first select the transactions that offer the highest commission for them (crypto wallets allow users to increase/decrease the amount of commission for the prospector or set the optimal size themselves). For example, you can specify a small commission for miners, but then the transaction will most likely remain stuck in the mempool until its expiration date has passed and it is removed from the transaction store. However, sometimes miners can’t find the hash value for a while and then they can try to include your transaction in a block to find a similar hash value, but the probability is extremely low: there will always be a large number of transactions with a higher commission in the mempool.

The miners' race is to use the computing power of the devices to shuffle different transactions in different order in the shortest possible time to find the coveted hash value. Purely theoretically, even a very weak computer can find the number by chance (or you can even do it manually on a regular piece of paper). Still, the more powerful the computer, the more likely it is to "assemble" the block and get the reward as quickly as possible.

What if someone has more than 50% of the capacity of the entire network? Will this miner then be able to constantly find all the blocks and collect all the rewards? Yes. This is called a 51% attack. If someone launches this attack, Bitcoin will face big problems: some transactions will not be accepted by the network, and the attacker can re-spend the same coins, split the blockchain into parallel chains, etc. Decentralization of data processing helps avoid this, and so far this has not happened with Bitcoin. Let’s hope it does not come to that.

How to start mining bitcoin

Independent mining requires you to install and run special software on your computer. After that, a computer with a permanent connection to the network acts as a node and generates transaction blocks, receiving a reward in the form of BTC.

Every few years, after new 210 000 blocks are added, there is a halving, that is a doubling of the reward. This makes mining more difficult: after each halving, 2 times more energy is needed to mine a new block. This mechanism was put in place so that the issuance of new coins is gradual and bitcoins do not lose value. The third halving took place in 2020, and now miners are rewarded with 6.25 BTC per 1 block.

 It is assumed that the difficulty of mining will increase, so that eventually miners will mine bitcoin not with coins, but with the minimum units in Satoshi. However, mining will be completed only by 2140, when the last token from the entire emission of 21 million BTC is mined. 

Due to the halving of the Bitcoin network as well as the enormous demand for computing power, solo mining became unprofitable as early as 2012. It was replaced by mining pools, mining farms and cloud mining, in which entire complexes storing expensive equipment are used for mining.

🌊 Mining pools unite several miners in order to increase the chances of getting their BTC. The resulting profit is divided equally or according to the percentage of invested capacities. 

🧑‍🌾 Mining farms offer to invest your own money so it will be used to maintain the equipment. Profit is accrued from each mined coin according to the size of the contribution.

☁️ Cloud mining allows you to rent mining farm equipment and receive income from it. Popular platforms are ECOS, Binance Cloud Mining, Summit Mining, NiceHash. Often, cloud mining companies do not guarantee profit, as the calculations are based on the total number of bitcoins mined. 

❗Please note that there are many fraudulent projects on the web today that position themselves as cloud mining platforms, so you should be extra careful here. The more benefits you are promised, the more likely you are to be scammed.

Problematic aspects of Bitcoin 

The Bitcoin system is not without weaknesses. First of all, it is associated with low scalability indicators, i.e. the characteristics of network flexibility expressed in the speed of transfers and the amount of commissions for transactions. Today, Bitcoin is capable of transferring about 7 transactions per second, while modern (but less reliable) projects offer speeds of up to 160,000 transactions per second. Also transfer fees remain high. For example, in April 2021, during a period of short-term BTC depreciation, the average fee was up to $60 per transfer. 

Bitcoin is also often criticized for its use for illegal purposes. One high-profile case back in 2011 involved BTC being integrated into Silk Road, an online service for the sale of illegal goods. Stolen goods, weapons, and drugs were offered to purchase for Bitcoin. The site was closed in 2013 after the arrest of its owner. Even now, data keeps surfacing on the use of the Bitcoin network by drug dealers and terrorist organizations.

However, it should be understood that Bitcoin was conceived primarily as a means of payment, and, like any other money, it can be used in very different situations. The trend of illegal use of BTC is constantly decreasing, and according to the statement of the representative of the US Drug Enforcement Administration (DEA), by 2018 only 10% of transactions in bitcoin were connected with criminal activity. This is significantly less than in 2013 when this figure reached 90%.

How to store Bitcoin

Special digital wallets are used to store BTC. They are developed by independent companies around the world for the bitcoin network. Depending on the level of security, they are divided into custodial and non-custodial.

Non-custodial wallets are more secure because all passwords are stored only by the user. Custodial wallets, on the other hand, mean relying on third party access (these types of wallets are used by cryptocurrency exchanges, so the reputation of the exchange is one of the most important considerations when choosing one).

Crypto wallets are also divided into hot and cold wallets. 

♨️ Hot wallets have a constant connection to the internet. They are ready to make transactions at any time.

🧊Cold wallets provide confidential passwords storage without access to the network. To quote the most widely known cold wallets, there is secure hardware like Tresor and Ledger devices (note: you can buy them only from official sites, otherwise you might download reprogrammed wallets, from where funds will quickly flow away in an unknown direction on the first use). In the case of cold wallets, you can find out about transfers to the wallet address on blockchain explorer services or by installing a transaction tracking application, for example, by the Cryptocurrency Alert portal.

Among the non-custodial wallets for Bitcoin, the following are popular:

🔸 Trust Wallet is a multi-crypto wallet that synchronizes with Binance DEX exchange. It allows you to store and immediately exchange the most popular cryptocurrencies and earn on staking (receiving interest for storing coins). Trust wallet has an app for iOS and Android, as well as a browser extension.

🔸 BlueWallet is a simple and convenient BTC wallet. Its architecture allows you to simultaneously manage multiple bitcoin wallets, including Bread and Electrum, as well as remotely view cold storage balances. It also allows you to buy bitcoins with currencies from over 30 countries around the world, including USD, EUR, CNY. There is an app for iOS and Android and software for MacOS.

🔸 BitPay is a wallet using which you can store and exchange BTC, some other cryptocurrencies and popular stablecoins, as well as manage funds on synchronized storages. An extra feature that sets it apart from the rest is the ability to connect a BitPay card, which will automatically convert funds for contactless payment. Today, the BitPay app is available on Android and iOS, Windows, MacOS, and Linux. Funds can be managed from a computer by installing a special extension in a web browser.

🔸 Atomic Wallet is a multi-currency crypto wallet with support for over 1400 tokens, including BTC coins, as well as DeFi ecosystem cryptocurrencies Ethereum, Avalanche and Solana. It is possible to purchase tokens directly in the wallet application. Users can also send coins to staking pools of 14 crypto projects and receive income ranging from 0.63% to 7% per annum. Today, the platform offers downloading the application for MacOS and Windows, iOS and Android.

We have prepared for you instructions on how to create a wallet for Bitcoin storage. Use it when you register the one, if you do not want to miss anything!

How to get Bitcoin

There are 4 main ways to get BTC:

👛 Purchase it on trusted crypto exchanges. This is the fastest and most reliable way to get BTC coins. You can buy bitcoins at the best price using the itez service. It allows you to buy BTC for fiat money (dollars, euros, kronos, pounds, won, lira and 30+ other currencies) with a regular bank card.

⛏️ Mining. We already mentioned above that solo mining today no longer pays for itself, and creating your own farm will require a lot of money. According to this report, the cost of mining one bitcoin per day at the beginning of July 2022 was $13,000. You also need to take into account that the profit will depend on the values ​​of the current coin rate. Therefore, for a regular user, the most optimal method is investing in other people's mining farms, including your farm in a mining pool or using cloud mining. The value of profit depends on the number of bitcoins mined in the billing period.

🤝 Purchasing bitcoin on P2P exchangers. Users can exchange and buy cryptocurrency using peer to peer trading platforms. On such platforms, one person sells cryptocurrency to another person. The advantage is the absence of intermediaries and, as a result, additional commissions for transactions (as a rule, the commission is included in the sale rate, and the platform receives money from the cryptocurrency seller). However, in this case, the maximum purchase amount of BTC may be limited by the balance of the selected seller. There are other difficulties, which you can read about here.

🔁 Exchange of another cryptocurrency for bitcoin on CEX or DEX bridges. CEX exchanges are centralized: they are regulated by an organization that performs intermediary functions between bidders. On such sites, you can exchange BTC for other cryptocurrencies immediately after registering an account.
On DEXes, there are no intermediaries. This role is performed by smart contracts (automated computer algorithms) that do not require human involvement. To exchange cryptocurrencies on such exchanges, you need to synchronize your bitcoin wallet with the exchange and wait for the seller.

How to use Bitcoin

Since the bandwidth of the Bitcoin network does not meet modern transaction speed requirements and transfer fees are high compared to other payment systems, Bitcoin is not used for small purchases, even where that is allowed. Today, cryptocurrency is mainly used for large transactions, such as buying cars or real estate. However, in thousands of services around the world, you can still pay for inexpensive goods and services with BTC:

🔹 Amazon is the largest American marketplace. Since July 2021, information has been surfacing about Amazon's plans to introduce the possibility of retailing goods with BTC, but representatives of Amazon themselves are denying it. Be that as it may, bitcoin is not directly and actively used in this online store to purchase gift cards, with which you can pay for purchases.

🔹 eBay is an online auction site and a globally popular online marketplace. Service representatives also deny the idea of introducing Bitcoin payments in the near future, however, users make purchases with bitcoin using BitPay cards, which are topped up using BTC.

🔹 FastTech is the largest supplier of gadgets and electronics. This online store offers the opportunity to purchase goods in BTC and in more than 30 cryptocurrencies. Users can select the “pay with cryptocurrency” option in the list of payment methods, and start a wallet transfer by scanning the QR code or inserting a FastTech digital account address into the recipient field.

🔹 Alternative Airlines is a world-famous airline booking portal. The introduction of payment in BTC began in November 2019. In total, Alternative Airlines cooperates with 600 airlines today, which allows you to plan a route to anywhere in the world. You can buy tickets for the largest American airlines using Bitcoin, such as Southwest Airlines, Delta Air Lines, United Airlines. Payment involves a transfer from your own bitcoin wallet. 

Today, a significant part of BTC trading volumes is used for speculative purposes. The main reason is a chance to quickly earn using exchange rate fluctuations. However, some token holders use Bitcoin for long-term investment. No wonder Bitcoin is called “digital gold”: with a limited number of coins, as in the case of gold, an increase in demand leads to an increase in price. If such a forecast begins to come true, it will be the long-term investors who will receive the greatest profit.

Conclusion 

As the main digital asset on the crypto market, Bitcoin attracts the most attention among both crypto investors and ordinary people. Its reliability is ensured by the fact that it has the highest capitalization among other cryptocurrencies. This determines the high liquidity of BTC: it can be quickly exchanged for many goods or services. Over time, it will become even more widespread and, perhaps, if problems with network scalability, high volatility and slow transaction speed are resolved, it will even be accepted as one of the payment methods along with fiat currency. 

On “The B Word”, Elon Musk said: “I think it makes sense to support something that improves the quality of the information with which we conduct the economy. <...> Bitcoin is a candidate for that, it does some things well and obviously it's evolving”.

History shows that Bitcoin has repeatedly delivered profits of 100% and even 1000% for its investors. As the digital coin industry and the decentralized financial ecosystem (DeFi) continue to develop, it will gain even more recognition from both the crypto community and the world's largest corporations. And the crypto winter period is the best time to invest: that's when we can expect either everything or nothing.

This article is not an investment recommendation. The financial and other transactions mentioned in the article are not a guide to action. Itez is not responsible for possible risks. The user should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about conducting any operations with cryptocurrency and / or tokens.

Maria Kachura
Maria Kachura

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