Everyone that is not a Cryptocurrency enthusiast always had the same question on their mind back in 2017 and until now, "What is Bitcoin and how the hell does it work?"
Bitcoin was invented for the sole purpose of removing intermediaries such as banks and credit card companies. For example, if you need to transfer 500 USD to someone in Europe, the money has to go through a bank and the bank will process it and charge you a fee and send it to the person you sent it to, but wait there's more. Your friend's bank charges a fee too.
Banks also have sensitive of their customers of which they store on their servers, banks are famous for being hacked consistently and easily, does that sound like something you want to risk putting your money into? not to mention banks also abuse their power, which lead to the financial crisis in 2008 and Bitcoin started in 2009, just after the crisis.
Why was Bitcoin created and how does Bitcoin work?
The solution to these problems was to build a system that has no single authority (like a bank or credit card company) because no single entity should have all the power of holding everyone's money, entities such as the government, banks and credit card companies, that is why Bitcoin was created.
The creator of Bitcoin made three main points for Bitcoin that is crucial to understanding the principles of Bitcoin.
- Supply and Demand
- Decentralized Networks
Let's begin with Cryptography - What is Cryptography?
Cryptography to put in simple terms is a way to turn something that you can read into code that you can't read. In World War 2, Cryptography was used for that same purpose, converting radio messages into code that nobody could read. To convert that code back to its original message you'd need a key made from mathematical formulas. Bitcoin uses the same thing, rather than converting radio messages, Bitcoin converts transaction data
Next is, Supply & Demand - What does Supply & Demand have to do with Bitcoin?
When something is limited, it has more value! the more people that want it, the more the price will go up. Bitcoin is using the same concept, the supply of Bitcoins are limited and is produced at a fixed rate and it decreases over time and halves ever four years. Bitcoin has a limit of 21 million coins, once 21 million coins have been found, there will be no more bitcoins created. As of today (09-06-2019) there are 17 million Bitcoins founded.
Finally, Decentralized Networks - Understanding Decentralized Networks
Having data all set in one place is a horrible idea. If you want to google search something and Google's main server is down, nobody has access to google because it is a centralized network, it's only in one place. Now, on a decentralized network, data is everywhere, it will never go offline.
The Advantages of Bitcoin (Pros)
- International payments are faster than banks
- Fees are extremely lower
- Nearly impossible to hack its blockchain technology
- Decentralized - It cannot be shut down from a single point
- Transparent - You don't have to put your trust in anyone
- Anonymous - No need to use your real name
- Powered by the community - Fees are shared
- No verification for new users, anyone can use it
The Disadvantages of Bitcoin (Cons)
- Finding (Mining) a Bitcoin takes a lot of electricity
- It's not as fast as other cryptocurrencies
- The fees are always changing
- The anonymity means some will use it for crime
- It's difficult to use - private keys, public keys and much more.
How do I buy Bitcoin?
To buy Bitcoin, you have 3 main options.
- Broker Exchanges - The simplest way to buy Bitcoins with a normally used identity, IDs and broker fees that cost between 1-5%. You can buy with your bank, debit card or credit card. One popular exchange is Coinbase.
- P2P(Peer-to-Peer) Exchanges - Similar to Broker Exchanges but without the middleman, having no broker. Amy can send bitcoins to John and John can send Bitcoins to Amy. P2P uses an escrow to keep things fair. When John asks Amy for Bitcoin, John will send the money to the escrow and Amy will send the Bitcoin to the escrow and the exchange will happen, no fees, just them two.
- Bitcoin ATMs - Bitcoin ATMs are the least popular ways to buy, There's not many Bitcoin ATMs and will have to find one that's probably really far away. You can buy it using cash and the fees are high, usually 5-10%.
Bitcoin has had a massive impact so far in the digital world and we will only see it keep coming. It gets rid of banks and credit card companies. Although Bitcoin has not completely replaced these middlemen, it will start to take a toll when everyday bank users realize the benefits of Bitcoin.