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What Is Bitcoin (The Definitive Guide)

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Bitcoin.

We’ve all heard of it. Many of you will own some. 

But what do you actually know about it? And what do you want to know about it?

Keep reading in this definitive guide for everything you need to know about Bitcoin. 

Let’s get started! 

A good place to start would probably be to ask actually what is Bitcoin?

Bitcoin is the first cryptocurrency that was created. It was invented by pseudonymous creator Satoshi Nakamoto, with the first block created on 3rd January 2009. Although it can be used as an alternative to fiat, it is popular with many investors because of its perceived status as a store of value. 

Proof Of Work

Crypto mining isn’t mining in the traditional sense – obviously – but rather through a process in which miners verify any new transactions, with the data being added to and stored on the blockchain. 

This blockchain, which is basically a public ledger, stores these transactions through a secure peer-to-peer network, which is connected through devices called nodes.

All Bitcoin miners, those who create the new Bitcoin,  must agree to and verify any new transactions before they are added to the blockchain, through the Proof of Work (PoW) consensus mechanism.

PoW helps to maintain the integrity and safety of Bitcoin by ensuring that double-spending and 51% attacks don’t occur. Essentially, miners compete against each other to confirm new transactions on the blockchain. 

This works by rewarding miners who can solve complex mathematical problems called hashes with new Bitcoin. The current block reward, after the 2020 Bitcoin halving, is 6.25 Bitcoins. A halving occurs just under every 4 years, or 210,000 blocks.

The power needed to mine Bitcoin is huge, and so miners pool their resources together with other miners in mining pools to perform Bitcoin mining. This also means that normal computers just won’t do the job. Therefore, specialist hardware called mining rigs are used to perform the task. 

But how is this power measured? 

This power is measured through something called hash rate, which indicates how much computer processing power is needed to mine Bitcoin. 

A high hash rate is good news for the safety of the network, as it means more power is needed to launch a 51% attack, where a group of individuals can take over more than half the network and reverse transactions.

Luckily, the power needed to launch such an attack on the Bitcoin blockchain is so immense that it has never happened, and is extremely unlikely ever to happen. 

Related to the hash rate is mining difficulty, which is a measurement of the difficulty of adding new blocks to the blockchain. 

Bitcoin is added every 10 minutes to the network, and mining difficulty acts as a sort of checks and balances system, ensuring that this regularity is kept up.

As the hashrate increases, so does the security on the blockchain. However, this hashrate can’t get out of control, because then so would the number of blocks being produced.

Therefore, if the hash rate increases, then the mining difficulty increases too. On the other hand, if the hash rate decreases, the mining difficulty also decreases. Mining rigs are congregated in places called mining farms, where the Bitcoin mining takes place. 

The biggest mining farms in the world are located in Russia, Switzerland, and China.

The rewards for miners are halved roughly every 4 years. In 2012, it was cut from 50 to 25 BTC. In 2016, it was cut from 25 to 12.5 BTC. In 2020, it was cut from 12.5 to 6.25 BTC.

It is estimated at the time of writing (February 2021) that out of the 21 million Bitcoins that will ever exist, there are around 2.3 million Bitcoins left to be mined. The last Bitcoin will be mined in 2141. 

But is Bitcoin mining worth it? Several factors determine this.

Bitcoin Mining Equipment Costs

Bitcoin mining has come a long way since its humble origins. 

Even by 2010, an average computer using a Central Processing Unit (CPU) wouldn’t do the job. By that point, you needed a Graphic Processing Unit (GPU) to do the job. 

Soon after, mining rigs was the only way to do it, and Application-Specific Integrated Circuit (ASICs) were needed to mine Bitcoin. This equipment can be very expensive, running into several or hundreds of thousands of dollars. 

Bitcoin Mining Energy Costs

The high energy consumption costs of Bitcoin mining has inevitably led to some negative media coverage. 

A Guardian article in January 2019 proclaimed Bitcoin as being the “next big environmental fight” (after Oil) and “Bitcoin’s environmental footprint will haunt it”. Moreover, an article by BBC in February 2021 revealed the process of mining Bitcoin “consumes more energy than Argentina”.

It gives a caveat to Bitcoin miners that as the world moves away from oil and seeks cleaner energy, environmentalists could see Bitcoin mining as the next big enemy.

Bitcoin’s Price

Not surprisingly, Bitcoin’s price can have a big impact on the cost of Bitcoin mining. If the price of Bitcoin increases, then more power is needed to power these machines. 

This also means that smaller mining pools may not be able to cope with any long-term rises in Bitcoin’s price, and only the bigger ones survive. 

To overcome these issues, improving efficiency is the key to lowering energy consumption and as a result, costs. To these ends, the Lightning Network is being hailed by some as the answer to Bitcoin’s scalability problems. 

It allows many transactions to be completed without actually needing the blockchain to verify them. Therefore, the time and cost of transactions is a fraction of what it normally is. Several crypto exchanges have already implemented it. 

This, along with the move towards green mining is being seen by some as the future of Bitcoin.

What’s The History Of Bitcoin?

Ok, Bitcoin doesn’t go that far back!

In fact, not that far back at all. The extraordinary rollercoaster ride of Bitcoin can be traced back to August 2008, amidst the backdrop of the financial crisis that was enveloping the globe.

This was when Bitcoin.org was registered as a domain. After this, on Halloween 2008, the Bitcoin white paper was published. 

Entitled Bitcoin: A Peer-to-Peer Electronic Cash System, the white paper, coined by pseudonymous creator Satoshi Nakamoto, laid out a vision of how Bitcoin would revolutionize how we see money. But how so?

  • Allowing for cashless peer-to-peer transactions over a decentralized network – cutting out the middleman
  • To counter the problem of ‘double spending’, where an individual spends a currency more than once. It does through its proof-of-work consensus mechanism, with Bitcoin miners able to detect and stop any attempts at double-spending. 

So, what happened next?

Then came the creation of Bitcoin itself on 3rd January 2009. On this fateful day, Nakamoto mined the genesis block. Embedded on this block was the following ominous words:

Chancellor on brink of second bailout for banks

But, what does this mean?

This was a headline taken from The Times newspaper on that day, that referred to a bank bailout by the then UK Chancellor of the Exchequer, Alistair Darling, as the UK and the whole world struggled to cope with a massive crash in the financial markets.

So, how does this relate to Bitcoin?

Well, this headline highlighted exactly the reason why Bitcoin was created. The reasons for the global financial crisis were numerous, but it was obvious the financial markets weren’t working for the masses. 

Here was something that could function without the need for the intermediaries – the financial institutions and governments – who had failed millions of people: Bitcoin.

Buy things

Bitcoin is a currency, after all, so you can use it to pay for goods and services. It’s becoming increasingly accepted as a form of payment around the world. 

Let’s look at some of the things you can buy with it:

Travel

Fancy whizzing around the world thanks to your Bitcoin (when we’re allowed)? 

Well, you can! With Bitcoin, you can book hotels and accommodation on Travala, or book flights with Alternative Airlines

Gold

Bitcoin is labeled by some as ‘digital gold’, but you can actually buy real gold with it too.

JM Bullion allows you to buy gold and other precious metals such as silver and platinum with your Bitcoin. It could be a useful hedging option if you think Bitcoin’s price is going to fall. 

Real Estate

Yep, you read that right. You can buy real estate with Bitcoin.

Bithome lists numerous properties that you can buy with Bitcoin around the world, including in France, Italy, Switzerland, and the United States. Check out our what can you buy with Bitcoin guide for a handy overview of other things you can buy too.

An increasing number of payment providers also offer crypto debit cards, meaning you can spend your cryptocurrency anywhere that will accept debit cards, online or offline. You can also withdraw from ATMs with them. 

Crypto debit cards are a handy way round of spending your crypto, at a time when finding merchants that accept Bitcoin directly may still be a bit limited (but nevertheless, growing!)

Trade

The frequent price movements can give traders ample opportunities to make a profit. Two main types of Bitcoin trading exist: derivatives trading and spot trading. 

Derivatives trading involves traders speculating on the future price of Bitcoin without actually owning it. Instead, you own a contract that reflects the price of Bitcoin. 

Spot trading involves traders actually owning, buying, and selling the Bitcoin itself. As the name suggests, trades are settled instantly – on the spot. 

On Bybit, you can trade BTCUSD derivative contacts with up to 100x leverage. This is a core component of margin trading. 

But, what’s that?

Margin trading involves traders using borrowed funds (leverage) from an exchange to trade in an asset. It attracts traders as it gives them extra flexibility and the possibility of making big profits from relatively low amounts of capital. 

You should also be aware of the risks involved when trading. Margin trading, with leverage, should be approached with caution. In crypto, the market can be very volatile and change very quickly. 

When this happens, so can the liquidation of positions. Therefore, you should fully understand the ins and outs of margin trading before you take out positions with leverage.

Be careful, and only trade what you can afford to lose. Intrigued? Check our definitive guide to margin trading to learn more.

HODL

HODL? 

What does that mean you may ask?

Is it an acronym? Well, yes. But that’s not how the original term was coined. Confused? Don’t worry! It’s not complicated. 

The term originates from a Bitcoin forum in 2013, where an excited forum member misspelled “I AM HODLING!” when referring to what he was doing with his Bitcoin. It has since gone into crypto folklore, and as a happy coincidence, now also serves as an acronym – hold on (for) dear life. 

As Bitcoin becomes more and more seen as a store of value, the number of hodlers has grown exponentially in recent times. 

Lend

If you’re HODLING your Bitcoin, you can actually lend your Bitcoin for a profit. 

You can basically lend your Bitcoin to people who want to take out crypto-backed loans, and earn compound interest on what you’ve lent. Several platforms such as BlockFi and Crypto.com offer fixed interest rates on lending Bitcoin and other cryptocurrencies. 

But why are people HODLing their Bitcoin anyway? Well, for the reasons that we’ll shortly explain as to why you should buy it in the first place. To answer why let’s look at what happened to the price of Bitcoin in the late stages of 2020 and early 2021.

In case you hadn’t noticed, the price of Bitcoin went CRAZY. It hit a new all-time of past $20,000 on December 17, 2020, before doubling in price and soaring past the $40,000 mark on January 7, 2021. 

Then on February 16, it hit $50,000! It hit an all-time high of $58,000 on February 21.

It has come a long way over the last decade, as this chart shows. To answer why let’s look at what happened to the price of Bitcoin in the late stages of 2020 and early 2021.

In case you hadn’t noticed, the price of Bitcoin went CRAZY. It hit a new all-time of past $20,000 on December 17, 2020, before doubling in price and soaring past the $40,000 mark on January 7, 2021. 

Then on February 16, it hit $50,000! It hit an all-time high of $58,000 on February 21.

As everyone knows, the world has been gripped by the COVID-19 pandemic since early 2020. The consequences of this in every corner of the world have been far-reaching – both socially and economically. 

One of the most significant societal changes that the pandemic has accelerated is the digitization of money. 

While this process was well underway pre-pandemic, this train has sped up a few notches as a direct result of COVID-19.

As this Bloomberg article from November 2020 puts it:

Covid-19 has been good for Bitcoin and for cryptocurrency generally. First, the pandemic accelerated our advance into a more digital world: What might have taken 10 years has been achieved in 10 months. People who had never before risked an online transaction were forced to try, for the simple reason that banks were closed. Second, and as a result, the pandemic significantly increased our exposure to financial surveillance as well as financial fraud. Both these trends have been good for Bitcoin.

What the pandemic has also done is increase Bitcoin’s attractiveness as an investment – not just with retail investors, but with institutional investors too. 

The surge in institutional investors is a key difference to the 2017 bull run. In 2017, Bitcoin’s surge was mostly down to investment from retail investors, who bought it over the fear of missing out (FOMO). It had all the hallmarks of a bubble. However, this time…

This time, some big investors are behind Bitcoin. Some big investors who even were against Bitcoin in the past. 

Nick Maggilulli is one such investor. 

Writing in CoinDesk, he says he has “come to realize that Bitcoin isn’t the one-trick pony I thought I was” and there is a “collective belief”’ that it “will have value in the future.”

It is this belief that has seen massive pourings of investments into Bitcoin holdings. Bitcoin investment firm Grayscale Bitcoin Trust saw its assets increase by over 900% to $20billion in 2020 amidst a ‘frenzy’ of demand from investors. 

But what’s behind this belief? There is a growing acceptance of its status as a store of value.

As the pandemic has led governments around the world to launch massive stimulus packages to keep their economies afloat, people have further lost confidence in financial institutions and the power of fiat. 

This has also had the effect of driving up inflation and reducing purchasing power. What Bitcoin offers is an alternative – a safe haven from these issues. 

Until recently, that assertion would have been widely ridiculed by financial experts, but more and more are now agreeing that actually, this is the case. 

JP Morgan is a prime example.

In 2017, CEO Jamie Dimon called Bitcoin a ‘fraud’, and fit for people only in “Venezuela, Ecuador or North Korea”, or if you were a “drug dealer or murderer”.

So it’s fair to say he REALLY didn’t like it!

Well, JP Morgan has had quite the turnaround on the topic. In January 2021, the firm predicted that its price could reach $146,000, as it competes with gold as an ‘alternative’ currency. 

And they’re not the only ones bullish on Bitcoin’s long-term prospects. 

Adam Draper, Co-Founder and Managing Director of Boost VC, makes this interesting point:

My 1 BTC is still worth 1 BTC. It’s that other currency, US Dollars, that keeps falling.

Here’s an astounding fact for you: an estimated $9 TRILLION (22% of all circulating US dollars) were printed by the Fed Reserve in 2020. If this keeps happening, then its spending power will inevitably decrease.

On the other hand, the spending power of Bitcoin may well increase, as people look for fiat alternatives. 

But what about that, actually using Bitcoin to SPEND?

Sure. At the moment, it’s not really used for that.

But what about in the future? For this to happen, it needs to become mainstream. 

A 2020 report by Deutsche Bank, Imagine 2030, laid out barriers that Bitcoin and cryptocurrencies need to overcome to become mainstream (by 2030). They are:

1. To become legitimate in the eyes of governments and regulators

The report states that for this to happen, price stability must be achieved, and advantages adequately conveyed to merchants and customers. 

While all-encompassing regulation worldwide will be impossible to implement, collaborative regulation in areas such as cryptocurrency trading can help to minimize market manipulation, thus leading to a boost in confidence in the markets and a decrease in volatility. 

2. Allow for global reach in the payment market

To do this, Deutsche Bank asserts, major stakeholders in the payment market must embrace crypto. On this front, there was a very significant development with the news that from early 2021, PayPal customers will be able to buy, sell and hold cryptocurrencies on the platform, as well as pay for items with it. 

This is a huge development, as it opens up Bitcoin and crypto to a huge number of people. On recent estimates, Paypal’s global customer base was over 350 million at the end of 2020. 
In another development, Mastercard announced in February 2021 that they will allow merchants to accept crypto later in the year.

So, while these barriers still exist, there are signs that they can be overcome. 

Are there any other factors that may affect Bitcoin’s price going forward?

Well, there’s also the simple concept of supply and demand. 

Around 900 Bitcoin are currently mined daily, but with institutional investors such as Paypal and Grayscale Bitcoin Trust buying more than 900 Bitcoin every day alone, that’s a very bullish sign for the world’s most popular cryptocurrency. 

There’s also the matter of circulation. By 2025, it is estimated that there will be 20 million Bitcoin in supply. As we know, only 21 million will ever be mined – with the last to be mined still some way off (2141). 

So it doesn’t take a genius here to see that demand is likely to be outstripping supply for some time to come. Another bullish sign if there ever was one. As with any investment though, if you’re thinking of investing,  it’s important to do your own research. As ever, it’s wise to diversify your portfolio to minimize your risk. 

Are you keen on buying Bitcoins now? Let’s find out how!

How Can I Buy Bitcoin?

Well, as a matter of a fact, it’s very easy!

Here on Bybit, you can buy crypto in 3 quick steps.

Check out our how to buy Bitcoin guide for a step-by-step walkthrough (spoiler: it’s not difficult!)

Bitcoin, Ethereum and USDT are all available to buy, and can be in your wallet in a matter of minutes. If you prefer, you can buy offline too, from a Bitcoin ATM, but you’ll still need a wallet for that too.

Read our guide to Bitcoin ATMs to learn more about them. 

A wallet, I hear you say? In crypto terms, a wallet a medium in which you can store your Bitcoin and other cryptocurrencies.

These can be offline (hot wallets), or online (cold wallets).

No Bitcoin is actually stored in a wallet, though. They are all stored on the blockchain. Every wallet is essentially a software program that communicates with the Bitcoin network.

Every wallet has a public key and a private key.

A public key can be given to anyone and is used as an identifier to receive Bitcoin, like an email address. 

A private key on the other hand should only be known to you, and is essentially a password that you use to sign off on transactions. 

Check out our what is a crypto wallet guide for a run-through of everything you need to know on the topic, including how to set one up, and how to send and receive Bitcoin. 

On Bybit, you can be assured of the safety of your funds thanks to our industry-leading HD cold wallet system.

Talking about safety…

Is Bitcoin Safe?

Understandably, this is often a question that beginners to Bitcoin will ponder. 

Just how safe is Bitcoin, exactly? It’s very safe – as long as you follow procedures. Everyone will have a private key that is used to authorize a transaction. You cannot withdraw Bitcoin from your wallet without using your private key.  

It is very important therefore that you keep this in a safe place and give it out to no one. And we’ve already explored, the blockchain is set up in a way that hacks such as 51% attacks are very hard to pull off. 

So now you know about Bitcoin, but how does it compare to some of the other cryptocurrencies out there?

Bitcoin vs. Ethereum 

Bitcoin and Ethereum (technically known as Ether. Ethereum is the platform it lies upon) are the two biggest cryptocurrencies by market capitalization today. But in reality, that’s about as far as the similarity goes. 

That’s because, essentially, they have different goals as cryptocurrencies. 

  • Bitcoin was created as an alternative to fiat currency. Therefore, it is primarily seen as a store of value and a currency of exchange. 
  • Although both have until 2021 used the PoW consensus mechanism, with the onset of Ethereum 2.0, the network is set to shift to the Proof of Stake (PoS) consensus mechanism. 
  • Ethereum on the other hand was created to be a decentralized network on which decentralized applications (DApps) can be built upon using smart contracts, with Ether acting as the blockchain’s currency. 
  • The scalability of Ethereum is greatly reduced – a block is created in around 15 seconds, compared to 10 minutes to Bitcoin. This was a purposeful act by creator Vitalik Buterin, who was frustrated at Bitcoin’s block times. The shorter block times for Ethereum make it possible for Dapps to be built and is the core reason why Ethereum is used for this purpose, and Bitcoin is used more of a fiat alternative. 

To clue up on all things Ethereum, read our comprehensive What is Ethereum guide.
You can trade ETHUSD contracts right here on Bybit.

Litecoin is another one of the cryptocurrency old boys, having been founded in 2011, but how does it compare to its big brother, Bitcoin?

  • Known as the ‘Bitcoin of altcoins’, Litecoin shares many of the many same functions as Bitcoin, such as PoW. So why was it created?
  • It was created to combat some of the issues that Bitcoin encountered – primarily, the time to validate a new block on the blockchain, taking just 2.5 minutes (compared to 10 for Bitcoin). 
  • When it comes to scalability, it has long used The Lightning Network, something which is only now beginning to be used on the Bitcoin blockchain. 
  • They also use different hashing algorithms – Bitcoin uses SHA256, while Litecoin uses Scrypt, which is less energy-intensive. 
  • Litecoin has maintained relative popularity throughout its life, comfortably being in the top 10 cryptocurrencies by market capitalization. But it’s never been able to topple Bitcoin’s throne. Why is that?

Well…it’s just not Bitcoin. Despite Litecoin’s ostensible advantages, Bitcoin had a head start. It is accepted as a form of payment in far more places than Bitcoin.

Also, Litecoin has a higher absolute amount of coins, (84 million compared to 21 million). For investors, this is a big factor. The more there is of a coin, the lower the price probably will be. 
Read up all about Litecoin in our what is Litecoin guide.

Bitcoin vs USDT

Next in line, with the third-highest market capitalization, is Tether (USDT). 

Bitcoin is a different kind of cryptocurrency to USDT. It is a stablecoin

A stablecoin is a cryptocurrency that has its price pegged to the value of a stable asset, or group of assets. Most often than not this asset is a fiat currency, such as the US dollar. However, it may also be commodity assets such as gold or silver. 

In the case of USDT, the asset it is pegged to is the US dollar. This means its price stays at, or very close to, the price of the US dollar at all times. 

So what is its relation to Bitcoin?

  • Well, as we know Bitcoin can be volatile, and USDT can be a safer bet in times of volatility. 
  • For an inverse perpetual contract on Bybit, the underlying cryptocurrency (which in the case of BTCUSD is Bitcoin) is used to trade with. Therefore, traders must hold the cryptocurrency as margin. Therefore, even if a trader is just holding their position, there is the potential for traders to make losses.
  • However, with a BTCUSDT contract, there is no need for a trader to hedge their position to avoid the risk of suffering any losses. This is because the USDT is used as margin instead. 
  • So, in times of volatility, converting your assets to USDT-backed positions can be a useful option.

Read all about how to convert your assets here.

Is Bitcoin Legal?

In most countries around the world, Bitcoin is recognized as legal tender. 

However, discrepancies exist between countries, with some countries recognizing its legal status as a tradable asset and legal tender, some just recognizing it as legal tender, and a limited number of countries banning it completely.

The Bottom Line

Bitcoin has jumped over leaps and bounds in the last year – not just in the price – but the great thing is, the party is only just getting started. 

Over the next decade, the digital revolution of money looks to be only going one way, and Bitcoin looks set to be at the center of it. 

No one has a crystal ball, and it’s difficult to say how high its price can ultimately go, but signs are looking bullish for its prospects. 

Of course, unexpected world events can occur at any time, some of which may affect the price of Bitcoin.

Actually, that’s exactly what happened with the onset of the COVID-19 pandemic in early 2020. Its price initially crashed, even briefly stooping to around the $4,000 mark, but it recovered to hit all-time highs in early 2021, rocketing past $40,000.

Indeed, the pandemic has ultimately helped Bitcoin’s cause. Not only has it accelerated the digital revolution of money, but more and more investors are also seeing Bitcoin as a safe haven asset. 

One thing’s for sure: the future of Bitcoin looks bright.

With the new found knowledge in crypto, why not sign up to Bybit?

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Disclaimer

This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

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