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The Beginner’s Guide to Bitcoin and the World of Cryptocurrencies

What is Cryptocurrency
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What is Cryptocurrency

First things first, what is a Cryptocurrency?

Cryptocurrency is a digital electronic that’s not issued by a government, unlike traditional currencies; but rather created electronically as the generation of cryptocurrency units. The verification of transaction processes is controlled by complex encryption techniques performed by computers instead of a Central authority.

Bitcoin, the first cryptocurrency in the world, was lanuched in 2009 by an anonymous programmer (or group of software developers) who goes by the pseudonym ‘Satoshi Nakamoto’.

In this article we will be talking about Bitcoin; specifically as it is the first cryptocurrency created and #1 in the world of cryptocurrencies.

But first of all, we need to understand what distinguishes bitcoins; (or Cryptocurrencies generally) from conventional currencies and what are their distinctive properties.

So what makes Bitcoin or Cryptocurrency so unique?

Bitcoin is characterized mainly by being digital as it is produced by computers through a process that’s called “Mining”; which involves complex encryption techniques and has no physical properties.

“Bitcoin Mining” is the definition given to the process through which bitcoins are generated and the transactions are added and verified. ”Mining” is performed by special fast computers solving complex mathematical problems; using the appropriate software in order to create or “mine” bitcoins and get rewarded with bitcoins in return.

For each block that is generated the miner is rewarded with 25 bitcoins. This value is halved every four years until all bitcoins are mined (yes the total number of bitcoins to be ever mined is limited).

In the current financial system, central banks along with other political institutions are responsible for controlling and regulating the processes of monetary units generation.

On the other hand, Bitcoin is a decentralized cryptocurrency as the process of its generation is not controlled by any government or central authority. The supply of bitcoins depends solely on the efforts exerted by the miners.

Bitcoin is a virtual currency, as the private keys for your bitcoin addresses (which are used to access your bitcoins) are stored in digital wallets.

So a Digital Wallet is the first thing you need to have in case you want to buy bitcoin. There’s a variety of digital wallets to choose from.

You can have your digital wallet on your desktop or on your mobile or have an online digital wallet, or you can have it as a physical device (which is considered by many to be the safest and most secure storage option.

Another options for bitcoins storage include storing at an Exchange (which offers several services as well like exchanging, sending and receiving bitcoins) and there are many competing Exchanges and wallet providers at the moment so it won’t be difficult to find one nearby.

Bitcoin is a peer to peer currency, meaning Bitcoin operates on a network of user based computers, and the bitcoins are transferred from one party to another across the internet with no 3rd party needed for the transfer process to be completed but the whole network nodes are responsible for monitoring and verifying the transaction process and that is the main idea of the Bitcoin mechanism.

But how does Bitcoin work?

We mentioned before that miners and the connected nodes of the network are responsible for monitoring and digitally regulating the transaction processes that take place between senders and receivers.

And as we know now, bitcoins are stored in digital wallets. Each of these wallets has a unique private key used and known only by the user and a public key which is considered to be the user’s payment address.

In order to understand how transactions work, there are 3 main parameters that are needed to be known and specified for a transaction process to be initiated

  • The address of the bitcoins sender
  • The address of the bitcoins receiver
  • The amount of bitcoins to be transferred from the sender to the receiver

The transaction carries a digital signature that is produced when the private key of the user is mixed with the data he wishes to send in a mathematical algorithm and each transaction has its own digital signature.

When sender “A” decides to send an amount of bitcoins games to receiver ”B” through Internet, the transaction with its data is combined with other requested transactions that are requested at the same time to be recorded in what’s called a “Block”.

Each block has its unique ID, time of the process and a reference to prior block.
The block is then broadcasted to each node in the network.

For a transaction process to take place, all the nodes of the network have to confirm the validity of the process and the authenticity of the digital signature using the public key of the user. This process also prevents
double-spending from taking place making Bitcoin a safe middle of exchange.

Once verified by the nodes of the network, the “Block” representing the transaction is then added to what’s known as the “Blockchain” which is a distributed public ledger shared by all the nodes of the network and functions as a database where all the transactions process are stored.

We can think of a blockchain as a giant ledge containing all the transactions that ever happened. Once a block is added to the blockchain, it cannot be modified nor can it be removed.

“We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership.” – Satoshi Nakamoto

How to acquire bitcoins?

Currently there are two methods to get bitcoins:

1 – Become a “Miner”: which is not recommended if you are a beginner as it requires expensive efficient mining hardware (like FPGAs and GPUs) for the mining process to be profitable because using slow CPUs is not a practical solution at all considering its poor output with respect to time.

Also Read: How to mine Bitcoin?

2 – Buy them: You can buy bitcoins through an Exchange or online by yourself using your fiat money or credit card, but, as we mentioned earlier, you will need a wallet in which your bitcoins can be stored.

At the Exchange, things work the same way they work at Stock Exchange, a buyer offers to purchase an amount of bitcoins with the price that he wants to pay for each bitcoin, and a seller offers to sell an amount of bitcoins with the price at which he wants to sell each bitcoin.

When the price placed by a buyer matches the price placed by a seller a trade takes place automatically.

And this how the price of a bitcoin is determined (At least for now because the number of bitcoins generated is still increasing and will continue to increase till all bitcoins are mined, after that the value of the bitcoin won’t rely really on its Supply but might rely on its Scarcity or on other variables) with the exchanges being responsible for organizing the trades between buyers and sellers and fixing the price of bitcoin according to the supply and demand of the cryptocurrency.

Here’s a list of some famous Bitcoin Exchanges by country:

The United States

  • Bitstamp: recommended because of the low trading fees it imposes on Bitcoin trades
  • Coinbase: one of the top Bitcoin exchanges that offers wide variety of services including: storing, exchange, buying and selling bitcoins and other cryptocurrencies like Litecoin and Ethereum as well. It operates in 32 countries.
  • Cryptsy: platform that offers its services for different cryptocurrencies and not just Bitcoin.
  • Gemini
  • Kraken : operates in the U.S, Canada, the E.U and Japan.

India

  • Zebpay : has applications for Apple devices and Android users
  • Unocoin: India’s leading Bitcoin Exchange which is known for being backed by investors in the United States and Indian investors as well.
  • Coinsecure: an Indian Bitcoin Exchange that is known for its extremely low fees.

China

  • BTCC : the Chinese bitcoin exchange is the world’s second largest bitcoin exchange
  • LakeBTC
  • GateCoin
  • Huobi : enabled Etherium trading recently .
  • OKCoin : operates in many countries worldwide.

Australia

  • CoinJar
  • BuyaBitcoin
  • Coin Loft

To summarize, in order to buy bitcoins you need to:

  • Open an account with the bitcoin exchange you choose. (Make sure you know how much fees the exchange charges for purchases)
  • Fund your account with fiat money or link it with your bank account
  • Place an order

Once your order is fulfilled , you can use your bitcoins

Is there anything else I can do with my bitcoins?

Besides shopping and using them as a long-term investment , Yes! There is!

Peer to Peer Bitcoin lending platforms

Peer to peer bitcoin lending platforms are places for the borrowers to borrow bitcoins and the lenders to lend bitcoins to borrowers at specific interest rates. As the name suggests, these are peer to peer networks; where the files and data are sent to and from nodes; without the need of a central server which provides security to the clients.

Peer to peer bitcoin lending platforms offer lenders relatively high monthly interest rates that range from 3% to 8%.Though Lenders don’t pay fees, however borrowers do (but they are considerably low).

And in case you’re looking for low-risk options, you can open a bitcoin saving account, deposit any amount of bitcoins into your account and earn interests.

Here the three current best peer-to-peer bitcoin lending platforms:

1-Loanbase : Based in San Francisco and launched in 2013; Loanbase is considered to be one of the world’s largest peer to peer bitcoin lending platform. Borrowers and lenders from all over the world meet there to borrow and lend bitcoins.

2- Bitbond : founded by  CEO Radoslav Albrecht, Bitbond is one of the safest peer to peer bitcoin lending platforms. It has facilitated bitcoin loans for more than 1,500,000 USD and has over 80,000 registered users. It has the AutoInvest tool which makes auto-investing easier.

3- BTCPop : Based in the UK, BTCPop is the world’s largest peer-to-peer bitcoin lending platform , it operates in over 60 countries and it is the first Bitcoin bank in the world!

Bitcoin Games

Bitcoins can be used in games and they can be mined too by playing games. There are two types of games that involve the cryptocurrency: Mining games, where you play mobile games, solve puzzles ,  and answer questions to get bitcoins in return,however you don’t really earn that much from mining games but in the end of the day you play games and get bitcoins in return so it doesn’t sound bad!

Here’s a list of the best Bitcoin Faucets

And there are Gambling games and Casino games like Poker,  where you use bitcoins instead of traditional money.

Challenges facing the fast-growing cryptocurrency

Bitcoin and cryptocurrencies  face a number of massive challenges due to their unique characterstics.

Energy Consumption

The biggest challenge with Bitcoin is the extensive energy consumption of Bitcoin mining process. According to Digiconomist, the  amount of energy consumed in Bitcoin mining process combined with the amount of energy consumed in Ethereum mining process exceeds the amount of electricity used by Jordan , Syria, and Iceland all combined. However ,according to researchers, modifications to the PoW systems is one way to reduce high-energy consumption.

Renewable energy sources can be used in the future for the Bitcoin mining process to be more efficient and sustainable.

Limited Supply

Since the mathematics behind  the Bitcoin system limit the number of the bitcoins to be created; the maximum  number of bitcoins to be ever  generated  is fixed (It is said to be around 21 million); which consequently means that the value of bitcoin will eventually rely solely on its demand which in turn depends on several factors  like the trust in the Bitcoin system , the utility  and flexibility of Bitcoin as a currency, the investors , the governments, and the energy needed to keep the system going (which one of the major challenges facing the fast-growing digital currency at the moment ).

By the end of 2009, the year in which the bitcoin was launched, over  1.6 million bitcoins have been generated. The number of generated bitcoins increased dramatically to reach 5 million by 2010. And by 2012 the total number of bitcoins that have been mined reached 10 million.

As of April 2014, the total number of Bitcoin users surpassed 2.5 million with a monthly average growth of  5.46%

The number of merchants,  businesses and retailers who accept bitcoins as payment is increasing as well. According to Overstock.com Inc. board member Jonathan Johnson , the cryptocurrency transactions processed had tripled since the Internet retailer decided to recognize Bitcoin as a method of payment.

Legal Status of Bitcoin

Many governments have serious concerns regarding the anonymity aspect of bitcoin. Despite the fact that each of the transactions that happen in the Bitcoin system  is recorded in a public ledger; the identities and names of buyers and sellers remain secret (except their wallet IDs of course) . While that protects bitcoin users’ privacy, officials are concerned about the possibility that Bitcoin makes money laundry and the transactions in underground economies easier . And unfortunately Bitcoin ,since its creation, has been used widely by criminals to trade illicit goods and fund their illegal activities.

Some  governments are working toward imposing regulations on Bitcoin and the other cryptocurrencies, which in turn strengthen the legitimacy of digital currencies.  While some others adopted an unfriendly attitude towards the fast-growing digital currency. Russia has taken an action against Bitcoin banning the digital currency and the government prohibited individuals and entities from using cryptocurrencies.

The E.U recognizes the cryptocurrency as a convertible currency.  A few days ago, the government of Australia has introduced a bill that would impose regulations on the decentralized global digital currency in an effort to counter money laundering and terrorism funding.  And earlier this year,  Japan recognized Bitcoin as a legal method of payment.

In China ,the country whose mining pools control about 70% of the Bitcoin network’s hashrate, possession and trading of bitcoins by individuals is totally legal, however the government did not impose regulations in favor of  Bitcoin, yet.

For more information about Bitcoin mining in China , check this link.                                                                                     https://www.buybitcoinworldwide.com/mining/china/

In the United States, a congressional hearing was held in November 2013 to discuss the legitimacy of cryptocurrencies including Bitcoin. At the hearing, a federal  judge representing the Department of Justice described the virtual digital currency as a “legal means of exchange”.

In March 2014, the IRS (Internal Revenue Service) which is responsible for collecting taxes released guidance regarding possession of virtual currencies, and the guidance recognized “Bitcoin” as “property”. In July of the same year, the New York State Department of Financial Services imposed regulations in favor of Bitcoin. Bitcoin is accepted as a method of payment by many U.S based retailers and companies; such as: Dell Inc, Overstock.com, WordPress , GYFT and Amazon.

In India, there are many Bitcoin exchanges that operate in the country and Indian authorities are researching  Bitcoins and holding hearings to discuss the future of the legal status of the virtual currency in the country.

According to Sandeep Goenka , the CEO of Zebpay, the number of Indians interested in investing in Bitcoin is increasing rapidly.

The Future of Bitcoin

The 7 years following the creation of Bitcoin proved that cryptocurrencies have the potential to replace traditional currencies; and could be the next big thing of the 21st century. With their values  skyrocketing and rising up after each drop they experience. 2017 was a great year for cryptocurrencies and Bitcoin specifically, as Australia and Japan recognized Bitcoin officially as a method of payment; to impose regulations on the digital currency and the value of promising currency hit an all-time record high climbing above $4500 just a recently.

Bitcoin is still in its infancy and still has a long way to go before it can replace traditional currencies but it did prove that it has the potential to become the future of the financial world.

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