When Bitcoin was introduced by its mysterious founder Satoshi Nakamoto in 2008, it was a thing used for illegal online purchases. Fast forward to this day, and the scene is completely different. Bitcoin has now become a global cryptocurrency, its value has soared by orders of magnitude and due to its significant rise, a whole new breed of cryptocurrencies has also emerged. Today there’re more people than ever who’re willing to jump into this fascinating world of digital currencies.
But before they do that, there’re a number of questions about these currencies that keep haunting them. If you’re also one of those peeps who are interested in cryptocurrencies but want some answers first, your search has come to an end. Because In this article we’re going to answer all those questions which may be roaming in your head about this altogether different world of currencies. Let’s begin:
How Bitcoin and other cryptocurrencies are different from regular currencies?
Cryptocurrencies are fundamentally different from the fiat currencies in 3 critical ways:
- Digital: First difference between cryptocurrencies and fiat currencies is that unlike their real-world counterparts cryptocurrencies are completely electronic. They have no physical form, and they can only be exchanged in digital ways. That’s why you’re required to have a wallet to store Bitcoins or any other similar cryptocurrency – because the wallet acts as sort of a bank account for your coins.
- Decentralized: the Second fundamental difference between fiat currencies and cryptocurrencies is that of decentralization. The cash that we use every day in our lives is a part of the centralized financial system. In a centralized system, the currency’s generation and flow are controlled by an entity. The entity may be a government, a private firm or any other kind of entity. In a decentralized system, however, no central authority controls the generation and flow of currency. Bitcoin and other cryptocurrencies belong to this kind of financial system.
- Secure: The third and last fundamental difference between cryptocurrencies and fiat currencies is that of security. Thanks to insanely strong levels of cryptography involved in their generation and flow, cryptocurrencies can’t be faked like paper notes and they can also not be stolen easily. Rather than relying on people and trust, the decentralized financial system of these currencies relies solely on algorithms and math to keep things secure.
What are the different Bitcoin units?
The most basic unit of Bitcoin is Bitcoin itself, also abbreviated as BTC. However, due to skyrocketing valuations of Bitcoin the smaller units of it have also appeared. One such unit is multi bitcoin or mBTC which is 1000th part of a bitcoin. That is, 1,000 mBTCs combine to make 1 Bitcoin. Then there’s Satoshis, which are the smallest units of Bitcoin (100,000th part of a bitcoin). It takes 100,000 Satoshis to make 1 Bitcoin.
Bitcoin Wallets: The first step towards the world of cryptocurrencies
A wallet is the first thing that you will need to start using Bitcoin or any other cryptocurrency. Just as you keep your money in your bank account, cryptocurrencies that you own are stored in the wallet. There’re many different types of wallets out in the world, but they can be broadly categorized into 3 categories:
- Online wallets: These wallets are also known as web wallets. Your private keys of these wallets are stored online, and they’re protected by the password that you set to protect them. The benefit of these wallets is that you can access them anytime from any internet connected device. However, the downside is that they provide the lowest form of security – just a password!
- Software wallets: As their name suggests, software wallets need to be installed on your computer or mobile device to work. These’re also known as offline wallets. If you choose this type of wallet, all data of your bitcoins, your private key and everything resides on your computer/mobile unless you do some sort of backup somewhere. No online servers to be hacked and no passwords that can be stolen or guessed. But it brings some other problems – you need to ensure that your computer or mobile device stay free from viruses and malware all the time. Plus, if you lose your computer/mobile or lose your data stored on it, you loose wallet, and thus, your coins.
- Hardware wallets: These are small pen drive like devices made for the sole purpose of storing bitcoins. The innovation associated with them is that bitcoins stored in them may be spent only when they’re connected to your computer or mobile phone. Some of them also come with screens, which allows you to see the coins that are leaving the wallet, and also the destination of those coins so there’s no chance of any spoofing attack. The private key of these wallets remains stored in a highly protected chip and it can’t be transferred in the form of plain text, which makes these wallets more secure than their software counterparts. Hardware wallets also remain immune to the viruses that can steal the bitcoins from a software wallet. All of this makes these wallets nearly impossible to be hacked. The downside of these wallets is their hefty price tag.
As you can see, all these types of wallets have their own advantages and disadvantages. Therefore, you should choose one accordingly. A hardware wallet is best for investing and saving bitcoins, while a mobile-based software wallet or online wallets are great for everyday use. Desktop-based software wallets, on the other hand, are good only because they’re free and only if you can keep your computer 100% secure from viruses and malware.
How Bitcoin and other cryptocurrencies work?
Since Bitcoin and cryptocurrencies are fundamentally different from fiat currencies, they also work in a much different way. The first thing that you need to do to start using Bitcoin (or any other cryptocurrency) is to install a wallet on your computer or mobile phone. As I said above, a wallet works like a bank account for the cryptocurrency of your choice. Once you’ve installed a wallet the wallet will generate a Bitcoin address for you, which you can share with your friends so they can share the coins with you. It’s very similar to an email address, except for the difference that a bitcoin address should be used for one particular transaction only. For next transaction, you should create a new address, which you can create from within the wallet.
The Bitcoin transactions are also different from transactions that we do in the real world with our fiat currencies. A publicly distributed and accessible digital ledger, called blockchain, keeps track of all transactions done in Bitcoins. The maintenance of this Blockchain ledger is done by the nodes involved in Bitcoin network running the Bitcoin software. These nodes stay connected with each other, which constitutes the Bitcoin network. When a new transaction is recorded on any particular Bitcoin node, that node validates the transaction, saves it in its copy of ledger and then broadcasts it to all other network nodes so they can also save the transaction in their copies of the ledger.
New transactions are shared in groups, and every group of new transactions is called a block. Approximately 6 times per hour new blocks of transactions are created, added to the blockchain and then broadcasted to all other nodes. Each block of transactions contains a cryptographic hash of the previous block, which helps in linking it to the previous block in series. And that is what gives the blockchain its fancy name!
The blockchain helps Bitcoin software in keeping track of all Bitcoins in the network. It helps the software in determining when a particular Bitcoin was spent or transferred, which is necessary to prevent double-spending in an environment where there’s no central oversight.
What led to the current skyrocketing valuations of Bitcoin?
A number of things have led to the spectacular rise in Bitcoin’s valuation. The chief among them was the economic crisis of 2008. The aftermath of that crisis was that people lost faith in traditional banking and financial system. So wealthy people started investing their wealth in other stores of value that doesn’t have a central authority over them, like gold. The value of gold is mostly derived from its scarcity – its creation and distribution cannot be completely controlled by the governments. Gold is unlikely to suffer from hyperinflation because governments can’t produce 10 metric tons of gold out of thin air. Paper money, on the other hand, can be printed as much as needed. Wealthy people started looking for this kind of assets to secure their wealth.
Bitcoin was also one such asset, which didn’t have the oversight of any central authority. It was also finite in amount, with only 21 million bitcoins in existence. The rate of Bitcoin creation was also quite controlled, as they can only be generated only through the time and the energy consuming process of Mining. It was because of these properties that people started calling Bitcoin the “Digital Gold.” As a result, Bitcoin also became an asset of choice for wealthy people after 2008 financial crisis, which significantly increased its value.
Other reasons which have contributed to the skyrocketing valuations of Bitcoin are hype, speculation and its actual potential. It has been heard that hedge funds and investors have now started eyeing the Bitcoin game, which has increased the valuations. And as valuations increase, it also adds to the hype of Bitcoin, thus pulling more individuals into it. Therefore, when more and people want Bitcoins, the valuations are obviously bound to increase.
The valuations are expected to stabilize over time as hedge funds and other institutional investors start investing in Bitcoin, but that will take some time. As of now, these investors are more cautious about it, as they don’t want their emotions to drive their decisions.
Which are other cryptocurrencies?
A number of other cryptocurrencies have also emerged after Bitcoin. The most popular ones among them are Etherum, Litecoin, Ripple, Zcash and Dash. As Bitcoin’s value has soared, these currencies have also seen a significant rise in their valuations. However, each of these currencies is different from each other. Some of them allow a very high number of transactions per second, some allow less. Some provide different ways of currency creation, and some are meant only for a certain type of transactions (i.e. ripple is designed for debt transfer).
And regardless of what conspiracy theories suggest, it’s very likely that almost all of these popular currencies will co-exist in the world. They don’t need to win over each other. The beauty of the decentralized financial system is that all of these currencies can exist at the same time, serving different purposes and appealing to different users.
So this was all that you should know before diving into the world of Bitcoin and other cryptocurrencies. You can get started in this fascinating world by purchasing first few coins of your preferred currency and storing them in a wallet. However, if you’re gonna do this for the sake of investment or savings, please be careful and perform thorough research on the technology and history of currency that you choose. You should also do your own research on the factors that contribute to the rise and fall in the prices of your chosen currency. This intro was to make you comfortable enough with the ecosystem of cryptocurrencies – it’s not a substitute for research. Happy investing!