Although Bitcoin is now widely recognized and virtual, it remains a mystery to many. In this guide, you’ll learn what Bitcoin is, how it works, and why it’s so unique compared to other financial instruments and fiat currencies. Understanding the ins and outs of Bitcoin, the most recognizable cryptocurrency in the world, could be key to better understanding modern forms of money and the future of financial systems.
What is Bitcoin?
Bitcoin is a digital currency created in 2009 by an anonymous person or group operating under the pseudonym Satoshi Nakamoto. Unlike traditional currencies such as the dollar or euro, Bitcoin is not controlled by any central bank or financial institution. Bitcoin is decentralized, which means it operates in a global network of computers without intermediaries like banks.
By using advanced cryptography, every transaction is secure, and users can store their funds in special digital wallets. Bitcoin can be used as a medium of exchange—similar to traditional money—for conducting transactions both online and offline.
How does Bitcoin work?
Bitcoin is a payment system based on blockchain technology. A blockchain is a distributed, decentralized database that records all transactions made in the network. Every transaction in Bitcoin is recorded in a so-called block, and these blocks are linked into a long chain of blocks. This way, every transaction is immutable and can be verified by independent network nodes.
Bitcoin operates on a peer-to-peer (P2P) basis, meaning users can transfer Bitcoin units to each other without intermediaries. As a result, Bitcoin transactions are faster and cheaper than traditional financial systems like banks or PayPal.
The history of Bitcoin – from the beginning to today
Bitcoin was created in early January 2009 by a person (or group) operating under the pseudonym Satoshi Nakamoto. Blockchain technology was then a revolutionary invention aimed at solving issues associated with traditional financial systems, such as inflation, transaction delays, and the need to trust intermediaries like banks.
Over the years, Bitcoin has gained enormous popularity and has become the most well-known cryptocurrency in the world. Its price regularly fluctuates, attracting both investors and speculators. In November 2021, the price of one Bitcoin reached a record high, nearing $69,000, making it one of the most valuable digital assets.
Bitcoin vs. traditional currencies
Unlike fiat currencies like the dollar or euro, Bitcoin is not issued by any government or central bank. Its supply is predetermined at 21 million units, which aims to counter inflation. This sharply contrasts with the fiat currency system, where central banks can print money in response to changing economic needs.
Bitcoin is also divisible to the eighth decimal place, meaning its smallest unit, called a satoshi, is 0.00000001 BTC—just like 100 cents make up one dollar. This divisibility allows for transactions even with very small amounts.
Blockchain technology and its significance
Blockchain technology forms the backbone of Bitcoin’s operation. It’s a system that records transaction information in continuous data blocks, linked into a chain of blocks. This ensures data is protected against tampering, enhancing the security and transparency of the entire network.
Każda transakcja bitcoinowa musi zostać zweryfikowana przez górników, którzy przy użyciu specjalnych komputerów, zwanych potocznie koparkami, rozwiązują skomplikowane zagadki matematyczne, aby potwierdzić poprawność transakcji i dodać nowy blok do łańcucha. Ten proces nazywany jest wydobyciem (mining) i stanowi kluczowy element funkcjonowania bitcoina.
Security and storage of Bitcoins
Your bitcoins can be stored in a special wallet—a digital application that allows you to collect, send, and receive this cryptocurrency. Every bitcoin wallet consists of two keys: a public key and a private key. The public key is the address to which funds can be sent, while the private key is a unique string of characters that enables you to access and manage your bitcoins.
The private key is extremely important because it provides full access to your wallet. If you lose it or someone else gains access to it, you will lose your bitcoins with no way to recover them. Therefore, it’s essential to store bitcoins securely, ideally in offline wallets, known as cold wallets, which are not connected to the internet and are less vulnerable to hacker attacks.
The principles of Bitcoin
One of the most unique aspects of Bitcoin is its limited supply. It’s programmed so that no more than 21 million units will ever be issued on the Bitcoin network. Most of them are already in circulation, and the process of mining the remaining ones will conclude around the year 2140. Bitcoin’s limited supply makes it attractive as an investment asset that is not subject to inflation.
Interestingly, every four years, a so-called halving occurs—a process in which the rewards for mining new blocks are cut in half. This is intended to control the supply of new bitcoins, which in turn affects their value.
How to use Bitcoin?
Bitcoin is used both for transactions and as a store of value. You can use it to make bitcoin payments at a growing number of online and physical stores worldwide. Many companies and financial institutions now accept Bitcoin as a form of payment for services and products. With Bitcoin, you can make direct payments without intermediaries, often resulting in lower costs and increased privacy.
However, it’s worth noting that Bitcoin is not recognized as legal tender in all countries, and its use may come with certain legal restrictions.
Bitcoin as an investment
With its limited supply and increasing demand, Bitcoin has gained a reputation as an investment instrument with high return potential. Investors, attracted by its dynamic price increases, often view Bitcoin as an alternative to traditional financial instruments, such as stocks or bonds. However, it’s important to note that Bitcoin is also susceptible to significant price volatility, making investment in this cryptocurrency inherently risky.
Bitcoin and exchange rates
Bitcoin’s price is influenced by many factors, including demand, supply, and the overall situation in financial markets. In the past, Bitcoin has experienced spectacular price increases but also sharp declines, leading some analysts to compare it to a speculative bubble.
Traditional finance and its operating principles
Traditional finance is based on trusted institutions, such as banks, which manage funds in clients’ bank accounts according to legal requirements and regulations. In these systems, account balances are recorded centrally, and traditional currencies, like the dollar or euro, serve as units of account in transactions. Money is exchangeable and can be freely traded, but transactions often require the involvement of banks or financial institutions, which oversee regulatory compliance and provide investment advisory services for asset management.
Bitcoin, blockchain, and the significance of halving
Bitcoin, a decentralized digital currency, operates on entirely different principles. Bitcoin transactions are conducted directly between users through blockchain technology. The total number of Bitcoin units is limited to 21 million, affecting its exchangeability and value relative to market capitalization. The use of Bitcoin as an investment or unit of account is becoming increasingly common, but it requires having an appropriate digital wallet, where the balance is controlled by a long string of cryptographic keys. A significant event in the world of Bitcoin is halving, the process of reducing mining rewards by half, which directly impacts the supply of new bitcoins and the value of transactions during a given period.
Buying Bitcoin at a cryptocurrency exchange
At the Bitcoin Quark exchange, you can easily and securely buy Bitcoin, gaining full control over your funds. Thanks to an intuitive interface and professional support, the purchasing process is simple, even for those just starting their journey with cryptocurrencies. Bitcoin Quark offers competitive rates and transparent transactions, allowing you to maximize your profits. Additionally, you can count on full transaction security and instant purchase confirmation, ensuring that your bitcoins are delivered to your wallet without delay.
Bitcoin’s blockchain technology
Bitcoin as a digital currency is not difficult to understand. For example, if you own Bitcoin, you can use your cryptocurrency wallet to send smaller portions of this currency as payment for products or services. However, the way Bitcoin itself operates is far more complex.
Blockchain
A blockchain is a decentralized ledger, or a shared database, in which information is linked using cryptographic techniques. “Decentralized” means it is stored on multiple computers rather than on a single, central server, as is common in traditional data storage systems.
A network of automated programs installed on these computers maintains the blockchain and performs the operations necessary for its functioning. Each block in the blockchain is a file containing a header, a transaction count, and the transactions themselves recorded in the block. The block header consists of several key elements: the software version, the hash of the previous block, the Merkle root, a timestamp, the difficulty level, and the nonce, which is used to solve a cryptographic problem during block mining.
Encryption
Bitcoin uses the SHA-256 hashing algorithm to encrypt the data stored in blocks. Transaction data is transformed into a 256-bit hexadecimal number that contains all information about the transactions and data from previous blocks. Although this data is encrypted, each block remains readable, allowing users to audit the blockchain.
How to buy Bitcoin
If you don’t want to mine bitcoins, you can buy them on a cryptocurrency exchange. Most people cannot afford to buy an entire bitcoin due to its price, but it’s possible to purchase fractions of it with fiat currencies like U.S. dollars. Buying Bitcoin on platforms such as Coinbase is simple—just create an account and then fund it via bank transfer, credit card, or debit card.
How to mine Bitcoin
Various software and hardware can be used for bitcoin mining. Initially, the Bitcoin network allowed mining with regular computers. However, as Bitcoin’s popularity and the number of miners grew, the chances of solving a hash independently with a personal computer significantly decreased.
Effective mining options
To increase your chances of successful mining, you can use two main hardware options. The first is to use an existing computer with compatible bitcoin mining software and join a mining pool. The second option is to purchase specialized ASIC hardware designed for bitcoin mining.
How to use Bitcoin
Bitcoin was designed as a decentralized payment method between users. Today, many businesses, shops, and service providers accept Bitcoin as a form of payment for goods and services. To use Bitcoin, a cryptocurrency wallet is necessary, which stores the private keys needed to authorize transactions.
Investing and speculation
Investors became interested in Bitcoin as its value began to rise. Between 2009 and 2017, cryptocurrency exchanges emerged, enabling easy buying and selling of bitcoins. The price of Bitcoin reached a record high of $69,000 in November 2021, although it has experienced significant fluctuations in subsequent years.
Investment risks in Bitcoin
Investing in Bitcoin comes with many risks, including those related to legal regulations, security, insurance, and susceptibility to fraud. Market risk is also high, as Bitcoin’s value often experiences rapid changes. Therefore, consulting a financial advisor before investing in cryptocurrencies is advisable.
Conclusion
Bitcoin is an innovative digital currency that is changing the way we think about money, transactions, and investment. With its decentralized nature and unique features, such as limited supply, it has become an alternative to traditional banking systems and currencies. However, before deciding to use Bitcoin, it’s essential to understand how it works and the potential risks involved in using it.
