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What is Bitcoin (BTC) and Blockchain Technology

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Crypto trading
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Lesson 1

Bitcoin (BTC), also known as digital gold, is an electronic cash system that allows direct payments between wallets. Transactions could be approved in minutes without an intermediary financial institution. The cryptocurrency is used globally and is an alternative to all fiat currencies, such as U.S. dollars, Euros and Yens.

In essence, Bitcoin (BTC) is money and one can use it to purchase online, to invest or to fund trading account.

Even before Bitcoin, there were ideas for creating peer-to-peer cash systems, but Bitcoin was the first to solve the issue of double spending by adding proof of work. The digital transactions are verified by miners, and every transaction is stored on a public ledger, called blockchain. There are no physical bitcoins. In fact, bitcoins are algorithms with records of transactions.

The Bitcoin ledger started on 03 Jan 2009, and the mining machines have since been constantly guessing to find the right answer to math problems. The machine that finds the right answer first is the one designated to make the next update. The ledger is updated once every ten minutes by adding a new block on the chain.

What is Bitcoin

When you transfer fiat currency via e-wallet, such as PayPal or Neteller, these companies keep track of all transactions in one centralised ledger. For example, when you use your PayPal account to send money to a friend, the company keeps data for both accounts, and after each transaction, it updates the ledger. At any point, the company in charge can reverse or refuse your transactions, and you can do nothing but open a dispute.

By using bitcoins, you can send money to anyone without asking permission from a government, bank or financial institution. You simply choose the amount in your Bitcoin wallet and send it to the other Bitcoin address. The digital wallet could be stored on a personal device, and you don’t need to trust a third party to keep your money safe.

With Bitcoin, instead of being one ledger that keeps track of who has how many bitcoins, there are millions of copies of that ledger on every computer running the Bitcoin full node software. These millions of copies all stay in sync, and even if half of the computers stop working, the ledger stays intact.

Blockchain is the name of that worldwide ledger. It is updated in steps. Each step is a block of new information that is attached, and they are all chained together mathematically.

Bitcoin vs. Bitcoin Cash

The idea of a decentralised payment system is great, but there is a problem with Bitcoin. With more people wanting to use bitcoins, the transactions are becoming slower and fees are increasing. To solve the problem, in July 2017, the majority of developers and mining pools voted for a new technology, SegWit2x, which verifies smaller amounts of data in each block.

Another group of miners and developers thought the SegWit2x was going in the wrong direction for the technology, and they decided to create a new digital currency, Bitcoin Cash. Basically, they resolved the issue of slow transactions by increasing the block size to 8mb. Transactions with Bitcoin Cash are supposed to work much faster, and fees should be insignificant, but some people raised concerns about the security of the hard fork.

Advantages of Bitcoin

  • Decentralised currency
  • Limited amount
  • Secure network

By being decentralised, Bitcoin allows people to exchange money without limits from governments or financial authorities. Therefore, many countries are looking for ways to ban the cryptocurrency.

One Bitcoin can be compared to 100 million Satoshi, and the total supply of Bitcoins is limited to 21 million. That means the miners cannot create bitcoins forever in the way governments print fiat currencies.

The more computers mining, the more secure the bitcoin network. Once you buy bitcoins, you can keep them in digital wallets or use offline hardware wallets, such as Ledger Nano or Trezor.

How to buy Bitcoin

To buy bitcoins, you can register an account at a cryptocurrency exchange, such as Coinbase or Bitpanda. There are hundreds of exchanges, and most of them work with VISA and MasterCard or e-wallets, such as Neteller and Skrill. Basically, you are using your fiat currency to buy cryptocurrency.

If you decide to invest in BTC, you must be aware of the extreme volatility. The Bitcoin price could change by 50% in just one day, as you can see in the chart below.

Bitcoin chart

You might have heard that bitcoin is anonymous, and that is true when it comes to peer-to-peer payments on the bitcoin network. When you buy bitcoins from an exchange, in most cases, you will have to verify your identity.

To store your cryptocurrency, you can use the web wallet offered by the exchange or download a desktop wallet and install it on your device. You must be aware that if your device is stolen, your bitcoins will be gone. The safest way to store your bitcoins is a hardware wallet, such as Trezor or Ledger Nano.

Blockchain Technology

Thanks to the invention of Bitcoin, by the anonymous group Satoshi Nakamoto, we now have blockchain technology. It is a new type of internet, which allows digital information to be transferred between parties but not copied. Bitcoin itself is a great invention, but the underlying blockchain technology has much greater potential.

The Ethereum blockchain, for example, can virtually decentralize any application by allowing people to build smart contracts. These self-executed contracts can work on a public digital ledger and be programmed to record not just financial transactions but everything of value.

If you have invested in BTC or any crypto coins, you know Bitcoin is the base cryptocurrency. There are thousands of different altcoins on the cryptocurrency market, and many of them are backed with bitcoins. If you are not possessing any cryptocurrency, you must first buy bitcoins, and then you can trade your bitcoins for any other altcoin, such as Stellar, NEO or Dash.

You can also trade Bitcoin CFDs with leverage. In such cases, you don’t have to buy bitcoins; you just use your fiat currency in your broker’s account.