What is Bitcoin?
What is Bitcoin? When looking at what is Bicoin we must first understand a brief history of Money.
Thousands of years ago we used a barter system to exchange goods, i.e. someone swaps two chickens for a pig. A few centuries later we moved onto using early forms of currency like glass beads and shells. Then the big daddy of currency came along that changed everything…. Gold!
Gold was easy to trade, easy to standardize and is portable. It made commerce boom across borders and quickly became a store of value and currency across the world. Gold continued to be used as the backing for paper currency up until 1971. It was then that the US government removed gold as the backing asset to the US Dollar. This form currency is called FIAT money (i.e. nothing backing it up but government assurance).
Now in the 21st century a new form of currency is available… Bitcoin.
Initially people were suspect on Bitcoin. Just like they new variations of money throughout history it took sometime to catch on. This video explains the scepticism best:
Bitcoin and Blockchain Technology - the Nuts and Bolts
Fiat currencies (i.e. AUD, USD etc.) are physical. You can use banknotes and coins. In contrast, bitcoin is a virtual currency – it does not have a physical form.
We create BTC (The shorthand for bitcoin) via the bitcoin mining process. Miners use powerful computers to solve mathematical equations. This process adds new blocks of data on the blockchain. The blockchain is used to record, verify, and save bitcoin transactions. This means that whilst there is electricity and the intenet, the blockchain and Bitcoin will continue to be available.
For the mining process, miners receive transaction fees, and bitcoins. The whole premise of Bitcoin is based on market supply and demand. This is because there is a finite number of bitcoins that we can create – 21 million. Also, we should reach the 21 million cap in 2140 – this is one of the main factors that differentiates bitcoin from other virtual currencies like Litecoin and Ethereum.
The below video gives a great run down of how the Bitcoin and the Blockcain work
The Importance of Bitcoin Wallets
Like any currency, we store bitcoin when not in use. The storage method is bitcoin wallets. Unfortunately, hacks occur when bitcoin isn’t stored securely.
The most infamous incident was the Mt Gox Hack of 2014. Here, hackers stole a staggering 700,000 bitcoins. Such an event highlights the need for security and the importance of bitcoin wallets.
A bitcoin wallet has a public address. People use this address to send and receive bitcoins from exchanges, and to other wallets. Also, each bitcoin wallet has a mathematical private key. We use private keys to securely access our bitcoin wallet. Private keys work with seed phrases that encodes identical information to the key, thus giving access.
Using a bitcoin wallet offers greater security than using an exchange to store bitcoin. When set up[ correctly a mobile phone Bitcoin wallet is extremely secure. Once you are familiar with your mobile wallet and how it works, you can also consider upgrading to a hardware wallet.
For more information on Bitcoin wallets – and it is essential you understand them before trading Bitcoin – please check out our Bitcoin wallets page.