You’ve probably heard someone talk about how much they made from investing in cryptocurrencies or seen posts on social media about bitcoin. What is bitcoin and what is the big deal all about? Bitcoin is a currency like naira or US dollar but unlike those, bitcoin is a virtual currency.
This is to say that just the same way you can use your physical cash to walk into a shop and buy a cold bottle of Pepsi and today’s bread, you can use bitcoin to make transactions online. Also, unlike other currencies, bitcoin exists independently without the supervision of the government, central bank or other financial institutions.
Let’s break that down. You see, physical currencies use a centralized solution. This means that there is a single authority in charge of keeping tabs of transactions and everything involved. There is one ledger that holds the record of money, who owns it, what transactions they are making and who is receiving it. A single authority like the bank or other financial institution keeps this ledger. That is why you can request for your bank statement and other details of your account from the bank because they have that information and to get it, you have to go through them.
How does bitcoin work?
Bitcoin on the other hand, is decentralized. There isn’t one system or authority that keeps the ledger and information regarding the accounts. Every computer that participates in the bitcoin system keeps a copy of the ledger and can access the information whenever they want to. With bitcoin, everyone involved is the ‘central bank’! You can also call this information or ledger the blockchain.
Unlike your traditional banking system where you can’t request for information regarding accounts that are not yours, you can do that with bitcoin. You can check accounts, see how much they have, the transactions they have made, the destination of the transactions and the entire history of the account.
However, while you can access all this information, you can’t tell the identity of the people who own these accounts. This is because bitcoin is pseudo anonymous. While your bank accounts have your full names and identity, bitcoin accounts are named with a combination of long tail letters and numbers called bitcoin addresses.
The currency is called bitcoin (BTC) and the ledger and everything that powers the currency is called the blockchain. So when you hear bitcoin, it refers to currency and bitcoin blockchain refers to the mechanism behind the currency
How safe is bitcoin?
Because bitcoin is decentralized, it is safer than the traditional financial systems where a singler system holds all the control. The blockchain is accessible widely and not just to one person so if someone wanted to hack the blockchain, there are millions of other copies of the ledger. Can a hacker bring them all down? This has never happened.
Double Spending Problem
While bitcoin is not a physical currency like naira, and therefore is different from a physical currency, there are still a lot of similarities between the two. When bitcoin is used for a transaction, the ownership of the bitcoin changes from the person who made the transaction to the receiver. It’s like going to buy beverages in the mall. After you hand the seller your cash and take the milk and milo, the money is no longer yours. You exchanged it for the milk and mill you’ll take home.
Since bitcoin is virtual and can’t be seen and touched, how does ownership of the currency pass from one person to the other? If Mr. Femi does a transaction with Felix and pays with bitcoin, how does the bitcoin transfer to Felix? What if Mr. Femi tries to use the same bitcoin to buy from Felix and Chidi and 10 other people? Good questions. In cases when one uses the same money to make multiple different transactions, it is called the double spending problem. It will eventually lead to inflation.
Remember, bitcoin is a decentralized currency scheme and this means that all the transactions with bitcoin are controlled by several systems (network of users) instead of a single system. After bitcoin transactions are confirmed, they are time stamped and included in the blockchain and thereby everyone has access to it. The record can’t be duplicated or tampered or changed afterwards. As a result, bitcoin ownership transfers after payments are seamless and transactions are secure.
Origin of bitcoin
Who created bitcoin and how has it gotten this wide acceptance? On October 31, 2008, Satoshi Nakamoto, whose identity is still unknown, published a white paper titled, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ online. In his article, Satoshi talked about a cash system that uses cryptography and can be sent from one party to another without relying on financial institutions.
Satoshi also pointed out in the white paper that bitcoin is protected against inflation because it doesn’t rely on the trust based model where a third party – the financial institution – has the responsibility of processing payments. His article shared details of the bitcoin system and the solutions that come with it.
Bitcoin has gone ahead to be used for all kinds of transactions after Satoshi subsequently launched it on January 3rd, 2009.
How can people make a profit from bitcoin?
How does bitcoin profit anyone? Why own bitcoin when you can own your local currency without bothering about all these? Again, good question! Owning bitcoin is like owing digital money and just like your physical cash, it can appreciate or depreciate in value. People buy bitcoin with the hope that its value will increase after some time and they can sell or make transactions with it when it is a higher value than they bought. It’s like buying fuel at 200 naira per liter and holding on to it. After a while when the price is 250 naira per liter or even more, you sell and go ahead to live your best life with the profit you’ve made or even buy some more fuel and start all over.
This process is called investing in bitcoin because it’s actually an investment and like all others, it has its risks and rewards. Its value can go lower than when you bought it and by selling, you’ll be at a loss. To get started with investing with bitcoin, you need a digital wallet where you’ll store your bitcoin like you’ll put your cash in a purse. With your bitcoin wallet, you can send, receive or store bitcoin. When you buy bitcoin, you exchange the currency you have for its bitcoin value. When you sell, you exchange the bitcoin you have for its value in a currency or another cryptocurrency of choice.
To buy bitcoin, you need to use an exchange. There are a lot of popular exchanges online like Binance and Coinbase. Think of exchanges like market places where you can buy, sell your bitcoin and do other cryptocurrency transactions. Bitcoin investing where you get to buy and hold is one of the major ways people profit with bitcoin. Other options include bitcoin mining, lending bitcoin, trading, etc.
Conclusion
While bitcoin is the most adopted and oldest cryptocurrency, others have sprung up from 2011 and they are known as altcoins. Some of the most popular altcoins are Ethereum, and Litecoin, and just like bitcoin, they have their own unique mechanisms and functionalities. Even if you forget everything else, remember, bitcoin is decentralized, transparent, and pseudo anonymous. With its increasing mainstream acceptance, the disadvantages of bitcoin continuously pale in comparison to the futuristic solutions it proffers to the world.
