What is a bitcoin and how does it work

If there’s one crypto that’s the queen, it’s Bitcoin. Without a doubt, to understand the world of crypto-currencies you have to understand the Blockchain technology very well and without a doubt have a clear idea of what exactly a crypto-currency is.

A crypto-currency is simply a line of computer code that is given a monetary value.

It is a form of digital public money, it is accessible to anyone. It is created by complicated mathematical calculations that are supervised by millions of users known as miners.

Crypto-currencies are generally decentralized, which is what makes them so popular. Most crypto-currencies have a limited market, a finite number of units, which will determine their value in the future.

Bitcoin is the first crypto currency, which opened the door to the rest. No one knows for sure who created it. The White Paper was first published on October 31, 2008 and was first mined on January 3, 2009. The White Paper was a 9-page pdf, signed by Satoshi Nakamoto, a pseudonym. Those 9 pages have changed the world as we know it.

Since the birth of Bitcoin, several coins have appeared, especially since the summer of 2017. As I write these lines, according to the reference page coinmarketcap.com there are 2,140 coins, all but Bitcoin are known as Altcoins (or Shitcoins).

The Bitcoin can be saved offline on your computer hardware or even on a sheet of paper. That process called cold storage is the safest there is. It can also be stored online, which is hot storage and you run the risk of being robbed if you don’t take the right security measures.

Virtually self-contained

However, if you lose access to the hardware that contains your bitcoins, your money is lost forever. It’s estimated that about 15 million BTC has been lost since its inception.

Bitcoin is designed to be virtually completely self-contained and autonomous, eliminating any intermediaries such as banks or governments.

Once you’ve purchased a Bitcoin, it behaves just like a gold coin, with a value based on the supply and demand for that item. You can buy bitcoins to trade goods online, or you can buy them as an investment and then sell them for a higher value.

Once you have a wallet installed on your computer or smartphone, a Bitcoin address will be generated, you can create as many as you need. You will provide this address to your friends, customers, suppliers, etc. so they can pay you and they will give you yours to pay them. It works very much like an email, so to enjoy anonymity you should only use one address per transaction.

A Bitcoin uses an unbreakable cryptographic public key. Each coin contains the public key of its owner. When you transfer your coin to someone, the coin adds the recipient’s public key to its code. The sender signs the coin with his private key to complete the transaction.

The issuer cannot transfer the new coin again as the network keeps a public record collectively in which absolutely all transactions are verified.

How a Bitcoin is generated, mining

A Bitcoin is generated by mining which is the process of performing mathematical calculations using computers to confirm Bitcoin blockchain transactions and thus increase security parameters.

As a reward, miners can charge fees for the transactions they confirm, in addition to receiving Bitcoins with the creation of each block.

To give you an idea, every ten minutes or so, mining computers collect hundreds and hundreds of pending Bitcoin transactions and turn them into a mathematical problem.

When a miner finds the solution, he announces it on the web. That’s when the rest of the community checks to see if the miner has solved the problem correctly. When consensus is reached, the block is cryptographically added to the Blockchain and the miners move on to the next block.

Every ten minutes or so, the mining computers collect hundreds and hundreds of pending Bitcoin transactions and turn them into a mathematical problem.

The miner who finds the solution gets 12.5 bitcoins as a reward, but before receiving it another 99 blocks have to be added to the Blockchain.

Forcing mathematical problems to add blocks to the chain provides a very high level of security because, to spend the same coin twice, by counterfeiting a Bitcoin, thieves would have to control more than half of the network. That would be incredibly expensive and such an attack could not change what had been added previously.

The entire mining network is now 13,000 times more powerful combined than the world’s 500 largest supercomputers

What is a wallet and how is it generated

If you’re determined to get into the world of Bitcoin, it’s imperative that you get a wallet.

A Bitcoin Wallet is the closest thing to a bank account. With it, you can store your Bitcoins, make Bitcoin transactions and receive them very easily. But that’s not the only reason to do it.

Many people start by getting their first Bitcoin through an Exchange, it’s actually the easiest thing to do (which isn’t recommended) and they make the mistake of storing their coins on the Exchange itself.

We can’t forget that an Exchange isn’t a bank, it’s simply an exchange house, and no matter how much security it offers, in the end you’re storing your money in a highly vulnerable place.

You don’t have to be afraid of cyber attacks, you have to be afraid that the Exchange itself will close down and if that happens, my friend, you are lost.

Don’t forget that all bitcoin offers is to be able to make transactions or store value without intermediaries, that’s why storing your crypto currencies in an exchange is like wanting to be independent from your parents’ house by putting a latch on the door.

When choosing an appropriate wallet for our needs it is important to know how to differentiate between online (hot) and offline (cold).

Hot Wallets, Cold Wallets

A Hot Wallet is not recommended for storing large amounts of Bitcoins as it’s a wallet that’s always connected to the network, so it’s vulnerable.

However, saving small amounts of coins online is not a bad idea, since a hacker will not waste time and resources to steal small amounts.

As we move forward, there are more and more security measures in a hot wallet, Google authentication, double signature, sms… etc.

If what you want is security and invulnerability online, the best thing is to opt for a Cold Wallet. As it is not connected to the Internet all the time, it is practically impossible to hack.

Not everything is a wonder eye, because if you lost a Wallet Offline you would lose all your bitcoins irretrievably, it is estimated that since its creation there are billions of dollars lost out there, so be careful where you keep it.

THE BITCOIN AND THE CRYPT COINS

What are the advantages and disadvantages of Bitcoin

In order to understand something like Bitcoin, it’s necessary to be aware of some of its many advantages and disadvantages:

 

Private and anonymous

All transactions made with Bitcoin are anonymous and private (as long as you use a new address with each transaction and you use an address you’ve never identified with). ) At a bank, you can easily track who owns an account. This identification process is not possible with Bitcoin.

A person in a Bitcoin transaction can know the sending and receiving addresses of the coins, but knowing who that address belongs to is virtually impossible.

There are quite a few nuances to this statement, because although satoshis can’t really be marked, anyone can access the blockchain and see who an address has interacted with, so while it offers greater privacy than a bank, it’s not 100% anonymous.

Freedom to pay

Using bitcoin as a payment currency gives you access to unprecedented financial freedom. You can send your bitcoins to anyone regardless of where they are and on whatever day. As there are no intermediaries to carry out the transactions, there are no holidays, strikes or limits.

Personally this is one of the advantages that will determine the future of traditional banking, it’s crazy that we have to wait 2-3 days to receive an international transfer and that’s if you don’t do it on a Friday.

Minimal or no commissions

The costs of a transaction at Bitcoins are very low, and there are even times when the cost is free.

The cost of a transaction depends on the immediacy required. If you want your transaction to be immediate, you’ll probably have to pay a fee, which is still light years away from any well-known banking fees.

It is important that you take into account that the miners will always charge you a fee, which may vary depending on the saturation of the network. We are currently working to make the network viable with more affordable fees.

More security for trade and eCommerce

As you’ve read above or in the basic guide to understanding Blockchain technology, transactions at Bitcoin are not only safe, but irreversible and contain no personal customer data.

This fact protects providers from losses caused by various frauds and protects the consumer from any fraudulent charges to their account since everything is recorded and everything is immutable.

Speed

Compared to traditional methods, Bitcoin transactions are very fast. To give you an idea, a payment takes as long as an email to reach your account. However, it can take up to 10 minutes to process, and you should be aware that certain confirmations must be given before a payment is added to the Blockchain.

It is possible to process a transaction instantly, but you run the risk of accepting an unconfirmed transaction in the Blockchain.

There are credit card companies or digital wallet companies that provide instant services, but they usually charge high fees for providing that service.

It is important to distinguish that this cost is not linked to the Bitcoin itself, it is linked to the Exchange, or Wallet on duty.

It is immutable by any government

Traditional money has always been held in gold reserves, but I can guarantee you that if you go with all your savings to the central reserve you will not get that gold that claims to hold your portfolio.

Since the gold standard was abandoned, our money is no longer guaranteed by any reserves, but it is the central banks themselves who set its value, that is what we call fiat money.

In the same way, any government writes down on a little piece of paper an alleged value of, for example, 50 euros. But what happens if in a crisis a government demonetizes the notes and they say they have no value? Consumers lose all their purchasing power and that currency loses international credibility.

As Bitcoin is decentralized, it can never be changed by politics, no government has control over it. The maximum relationship that a government can have with bitcoins is to ban them, but even if something like that exists, your bitcoins will have value somewhere else so you can always exchange them for Fiat.

Forget about your credit card details being stolen

As you know, most online purchases today are made through credit or debit cards. To make the purchase effective you have to put absolutely all the data of your card. That is why it is so common for cards to be stolen and duplicated every day.

Bitcoin transactions don’t require you to reveal any secret information. A public address and a private key are used to make a transaction effective. The public one can logically be seen by everyone since it’s your Bitcoin address.

When you send bitcoins, the transaction signature is a combination of your address and your private key. That creates a certificate that proves you’re the person who sent the money. Obviously, if you reveal your private key to someone, the security will be compromised.

No inflation

Maybe the reason people talk about Bitcoin as the money of the future is this. A government can print as many coins as it wants. It is common practice during an economic depression to print more paper money and force it into the economy.

The value of the currency decreases as people get more coins. Printing more money creates inflation and commodity prices increase. This is because the supply of the product is maintained and the demand increases.

In the case of Bitcoin, there is only a possibility of extracting 21 million units, as explained in Satoshi’s White Paper, and that is something that, except for a total consensus of the network, will never change.

If a large group of miners think that it’s good to mine more Bitcoins, there’s bound to be a hard fork like the one that was produced to bring out Bitcoin Cash.

You can generate your own Bitcoins

Bitcoin mining allows you to generate your own money, and that money will have the same value as the money you can acquire on an exchange. Note that the cost of generating this money is very high, and it’s said that in the US, a Bitcoin farm generates a coin at a cost of $3,500.

It’s not the norm right now, but if you want it and you can afford a very high electricity bill, you can leave your computer on and let the mining software work on its own.

Acceptance of its use

Bitcoin without the community is like a football game without a ball, it is simply unsustainable. It is true that more and more companies accept bitcoins as payment methods. But the list of people who know about this technology is still very small.

If from all the people who know or have heard of bitcoin we get a list of people who operate or have ever operated with it, the list is even smaller.

As we move forward the acceptance rate will grow and this inconvenience will be a distant bad memory, or at least that’s what we intend in Memejunkies.com.

Satoshi Nakamoto himself ended his study by saying that in a few years millions of people will use Bitcoin, or none at all.

Volatility

If you’ve come this far, you’ve probably witnessed the high volatility of Bitcoin. That’s an advantage for high-risk investors, it’s their greatest strength. But for the conservative investor it’s a real headache.

Volatility isn’t just an investor’s problem, it’s also a trading problem. Imagine you buy a motorbike for 0.5 Bitcoins and anything happens and you want to return it a week later.

It’s possible that the price of the Bitcoin has gone up or down by 20%, in which case there’s no consensus on whether you should get your 0.5 Bitcoins back, regardless of how much they’re worth, or something proportional.

Although it’s true that you can have that problem buying in any currency other than your own, I remember buying records in New York with the dollar at 1.05 and today it’s about 1.20 I imagine that in Rough Trade they would give me back the same dollars for what I bought the record, no more and no less.

 

It continues to develop

Bitcoin is still in a beta phase in many of its features, making it an asset still in development.

This is a disadvantage that will logically disappear over time. But it’s good to note that today new tools, features and services are being developed to make Bitcoin more and more secure and above all more accessible to the masses.

 

Fear of governments

A government cannot take away your bitcoins, but it can prohibit it in your country, that would force to close the access to online wallets and companies of the sector, those bitcoins would be frozen and the access to them would be difficult.

This is an unlikely but possible scenario, especially if the banking sector is not capable of accepting change and presses governments to exterminate the technology that will undoubtedly dethrone them or help them grow to unimaginable limits.

Deflation

We have already understood that we don’t have to worry about inflation, but my friend, we do have to take into account deflation since the high profitability that Bitcoin has generated has made investors come to stay.

That means that the use of bitcoin as a currency is limited to people who use it for totally speculative purposes. That can make the price go up as the market supply of Bitcoins will be short.

But as soon as investors want to make a profit, they will make the supply increase disproportionately, causing prices to fall and rise.

No margin for error

If you are unlucky enough to lose your wallet, or simply have it stolen, think of it as a pen drive. It’s impossible to recover the bitcoins on it, they’ll just be lost forever.

Unless you have saved the seed or the private key of your wallet, which in this case you can restore it in another device or computer

If the same thing happened to your card, you would call the bank, cancel it and ask for a new one. In the case of Bitcoin, it’s impossible, since it’s decentralized and no one is responsible for it.

Money laundering, black money, terrorism and drug trafficking

In my opinion this is one of the minor disadvantages of Bitcoin because before the appearance of the criminals used the dollar as a currency, financed themselves with it and laundered it in the same way, so for the undersigned this disadvantage lies in any known form of money.

There’s a lot of talk that anonymous transactions governing Bitcoin are very attractive to someone who may be a criminal. That makes Bitcoin favor those criminal acts, but hey, I don’t see Pablo Escobar burning physical wallets to warm up his family, maybe wads of dollars do. What things, huh?

Environmentalism

That’s his biggest drawback. Bitcoin fever has made his mining increasingly difficult. In the beginning, any computer was capable of mining bitcoin, it was a relatively simple process, but the high demand has made it consume more and more resources to generate them.

To make it clearer, 160 Bitcoin transactions consume the same amount of energy as an American home in a year. This environmental cost will be completely reduced once the 21 million Bitcoins are undermined, but until then it would be good if the developers would look for some solution to limit energy consumption, for the good of all.

Although we would like to add that the consumption of the Bitcoin network is much lower than that of the VISA or Mastercard network, it is also lower than the cost of bank servers, or the light consumed by supermarket refrigerators.

Much of the energy used to mine Bitcoin is green, so while high consumption may be a problem, it is by no means the most serious ecological problem we face today.

WHAT IS A BITCOIN

Differences between Bitcoins and other crypto currencies

Actually, until we do an in-depth analysis of all the cryptomontages, we can say that Bitcoin is very similar to the others, except on one key point: Adoption.

Bitcoin is the hashiest crypto currency that exists, the one with the most nodes working in its blockchain, the most accepted globally, the one with the most programmers checking their code continuously etc…

A great advantage of Bitcoin over the rest of the cryptomonies is that it has been in existence for 10 years without any security flaws. In spite of having suffered attacks, Bitcoin’s security has been tested in different occasions. The rest of Altcoins can’t say the same.

The size of the Bitcoin community makes it more accessible to everyone. Bitcoin is infinitely more liquid than other currencies, and don’t forget that right now, of all the money circulating in the crypto-currency market, approximately 55% is moved in Bitcoin. Most technology entrepreneurs are striving to make Bitcoin increasingly useful, so when you decide to compete against Bitcoin you’re competing against a virtually unbeatable business fabric.

How to invest in Bitcoin and not die trying

I remember the first purchase I made of bitcoins, it was a small amount, through Coinbase and I paid almost 20% in commissions, between Exchanges, “friends” etc… Really that first fruitful transaction was the germ of what today you know as Memejunkies.com.

There are certain aspects that are essential if you want to start investing in Bitcoins. The training and information seems to me the most important, I assume that if you have arrived here is because you are making that first step.

Without clear and concise information about the world of Bitcoin, I can bet you that your transactions will be at least as fruitful as my first one.

But don’t be discouraged, you won’t be the first or the last one to go crazy starting.

These are the steps I would follow if I started investing today (Oh… I wish I had done some research before I started investing)

Choose a wallet you trust.

You can see all the necessary information regarding Wallets in this guide that we have cooked with a lot of love for you. But if you’re in a hurry, don’t worry, choose the one that best suits your needs, I would always recommend the list of Wallets that Bitcoin.org recommends.

It is important to keep in mind that if the amount of money you are going to invest is significant for you, it is worth not being stingy and getting a hardware wallet.

It doesn’t matter which one you choose, but choose. If you want to save your bitcoins in an Exchange you will be putting all your pretensions at risk, so stop for a moment to think and choose a wallet.

Buy your Bitcoins

Once you’ve chosen your wallet, there’s practically an infinite list of Exchanges where you can buy your Bitcoins. One of the most famous ones is Coinbase, which I started with, and it stands out for its ease of use and high commissions.

Personally I would never recommend starting there, unless you’re in a hurry to get started and don’t want to pay attention to anything you’ve read here, which is your right. Let’s assume that we trust the official sources, which in this case is the official Bitcoin website. Interestingly, Coinbase is not included in the huge list of recommendations.

You can check the list of recommended Exchanges by Bitcoin.org here

Part of the Memejunkies.com team has also made purchases through Bitnovo which is a Spanish exchange based in Alicante. The experience was very good and in addition the commissions when making the purchase with card were half of what they would have been in Coinbase.

Diversify your investment

Be clear that part of your investment must follow a structure, as in any business we go. For that reason, it’s very important that you know where to keep the bulk of your savings (if you’ve followed my advice, you should already have a trustworthy wallet) and if your idea is to trade other currencies or to trade with Bitcoin, it’s important that you choose the right exchange to work with.

Once you’ve chosen that exchange, my recommendation is that you only trade in manageable amounts because, as you know, this world is characterized by its extreme volatility.

The most well known exchanges are Kraken, Bittrex, Binance or Bitstamp. Many people trade with Coinbase Pro.

Whatever your choice, my advice is to look for contrasting opinions from users of these exchanges as we will almost always find wonderful sites that may be masking a real hell for your money.

Conclusion

Bitcoin came into the world to change finance as we know it. There is no doubt that on this road we will see prices above the December 2019 highs and real crashes.

As the acceptance rate increases, Bitcoin will stabilize, mostly because we’ll stop the wandering and start acting accordingly.

Bitcoin is the ultimate disruptor, since it not only makes big players in the payment processing field, like Visa, MasterCard and PayPal, obsolete, but it also challenges the very existence of a monetary authority.

I have very strong faith in Bitcoin. I have it because of all the drawbacks we have discussed before, there is none that can’t be really solved.

I encourage you to enter this fantastic world, but always be well informed, calculate your steps very well, get advice and never stop learning.

Based on my experience in finance, I have been able to observe how people jump into the pool expecting great results without even looking at whether the pool is full or empty. Unfortunately, most of the time it is usually empty.

So don’t be shy about asking, sharing and signing up for events that many people organize to spread the word of Bitcoin.

Be clear about the risks you want to take, and if you can afford it, reduce them even more. But above all, if you really want to change tbihe world as we know it, invite everyone you can to join in.