What Is Bitcoin And How Does It Work? Everything you Need To Know
Cryptocurrencies are the new money, starting with the creation of Bitcoin. They’re virtual, decentralised, have little to no government control, give a lot of controlling power to the holders, and have changed a lot of lives in the process.
While bitcoins were initially publicly touted to be a scam or potentially an avenue for people to lose their money based on projected future value collapse, it has spent the past 11+ years growing in astronomical values, having stronger use cases around the world, becoming known as an asset class, and in more recent times, being recognised as legal tender, starting with the country, El Salvador.
Owning and trading bitcoins comes with a lot of risks and an upside long-term value. But if you don’t understand what bitcoins truly are, how do you make a decision to purchase one?
To help newbies and early cryptocurrency traders from Nigeria, Africa, or anywhere else around the world understand the origins, usage and value of bitcoin, this article covers everything you need to know about bitcoins and how it works.
What Is Bitcoin?
Bitcoin is a type of decentralized digital currency that is limited in value and controlled by no government or individual.
Bitcoin is called a cryptocurrency because it uses cryptography to ensure its security, and its value as a decentralised digital currency is because it has no physical form, its balances are stored on a secure & transparent public ledger, and its transaction records are verified by an immense amount of computing power called mining.
History of Bitcoin
Bitcoin was the first decentralised cryptocurrency, and it was introduced to the world in January 2009 after an unidentified mysterious person or organisation called Satoshi Nakamoto released its white paper detailing its purpose and use.
The original and consistent goal of bitcoin is to ensure easy transfer of funds around the world in a few seconds, promise far lower transaction fees than banks do, and create a financial system that is decentralised and independent of any government around the world.
Bitcoins are not issued by any government or financial institution. They are also not physical commodities. But as a currency trading in relation to the US dollar, its original trading price as at launch was between $0.0008 to $0.08 per dollar.
The success of bitcoin has led to the creation and growth of many other cryptocurrencies popularly known as altcoins, and today, over 13,000 of them exist worldwide with varying use cases.
Benefits of Bitcoin
Some benefits of bitcoins are:
1). Bitcoin is Independent:
Unlike other fiat currencies like the US Dollar that are subject to government restrictions, control, and economic risks, Bitcoin is 100% independent and its price is not controlled by the government.
2). Bitcoin Transactions Are Mostly Anonymous:
Unlike other transactions online or in the bank that requires documentation and KYC from the client, bitcoin transactions are mostly anonymous, as the only trace is either through the wallet address or if the person did the transaction through a centralised exchange.
3). Bitcoin Transactions Are Executed Via A Peer-To-Peer Model:
Unlike banks and other financial institutions, bitcoin transactions are done on a peer to peer basis. this means that a bitcoin owner can transfer bitcoin to another wallet address owned by another person without the need for any financial intermediary to control the transaction.
So unless you’re transferring bitcoins via a centralised exchange or a financial institution, bitcoin transactions are 100% peer-to-peer.
4). Bitcoin Transactions Have Very Low Fees:
Transactions that are done through the bank can carry anywhere from 0.2% to sometimes up to 5% transactions fees. But if the transactions are done via the blockchain network, it could cost as low as $0.5 to transfer over $1 billion worth of bitcoins which would have cost over $1m to $60m to execute with a bank or financial institution.
A classic example was a $2 billion US dollars worth of bitcoins transfer that was done via the blockchain network in September 2018 for a cost of just $0.78 instead of between $2 million to $100 million in charges using a 0.2% to 5% transaction rate.
5). Bitcoin Payments Are Location Independent:
Without having to go to a bank or staying at a particular location to make a transfer, bitcoin transfers are mobile. This means that the bitcoin owner can transfer funds to any part of the world within a few seconds or minutes without having to worry about being at a particular place or at a particular time.
6). Bitcoin Transactions Are Very Secure:
Without the private keys of your bitcoin wallet, it is virtually impossible to have your bitcoins stolen, unlike physical cash that can be taken and escaped with. Also, anytime a bitcoin transaction happens on the blockchain network, it has to be confirmed by several independent decentralised computers through a complex process called mining to verify it is a valid transaction, and this process is very secure, and so far, unhackable.
7). Global Access:
No matter where you’re from in the world, you can own and trade bitcoins. The global accessibility of bitcoins does not limit its ownership, and as such, no party can truly fully prevent anyone around the world from owning and trading cryptocurrencies no matter how much they tried.
8). Bitcoin Transactions Cannot Be Changed:
Transactions that happen on the bitcoin network are mostly always permanent. So it’s usually difficult for any government or private organisation to reverse them. If the transaction happens on some other blockchain network owned by a private company, it could be reversed, but not on the bitcoin network.
Some other benefits of bitcoins are:
- Bitcoin is open source
- Bitcoins cannot be seized on a decentralised network
- Bitcoin requires no permissions
- Bitcoin transactions are transparent for everyone to see
- Bitcoin represents freedom
Challenges of Bitcoin
Some of the challenges of bitcoin are:
1). Bitcoins Are Volatile:
The price of bitcoins, like other cryptocurrencies, can potentially rise by more than 100% in a day and crash by 99.99% the same day. While this type of rise has not been the case for bitcoins in recent years unlike many other cryptocurrencies, it does rise by over 30% on some days and falls by 50% on some other days, making it highly volatile.
2). Bitcoins Have Little to No Government Regulations:
Lack of proper government regulations makes the use of cryptocurrencies like bitcoins susceptible to criminal activities. With proper regulation, it would be easier to track and keep people in check.
3). Bitcoin Transactions Are Mostly Irreversible:
Depending on what network the bitcoin was sent through, the transactions are mostly irreversible and if you send your bitcoins to the wrong wallet address they are largely lost forever.
4). Bitcoins Have Limited Use For Now:
Unlike fiat money that can be used to pay for goods and services almost anywhere, bitcoins cannot currently be used everywhere to pay for goods and services, but rather in some places. As such, bitcoin has limited use only for now.
How To Buy Bitcoins
There are several ways to buy bitcoins. Some of them are:
- Buy from a decentralised exchange like Pancakeswap, Uniswap, and much more and store it in a crypto wallet like Trust Wallet, Metamask, or a hardware wallet like Trevor.
- Buy from a centralised exchange like Binance, Kucoin, and the likes and store in your wallet account on the exchange
- Buy from an individual or company and have it transferred to your online or offline wallet
To Sum It Up
The creation of bitcoins ushered in a new world of money, where the power to determine the store if value is slowly being transferred from the governments to the people no matter where they are anywhere in the world. By understanding how bitcoin works, its uses and impact on society, you can make good cryptocurrency investment decisions and you’d be able to not just own other cryptocurrencies, but also profit tremendously from them in Nigeria, Africa, or anywhere else around the world.