What is Bitcoin?
by Alyona Shepilova
Nov 25, 2022
Bitcoin (or BTC, for short) is a digital currency created in 2008 by an anonymous inventor, or indeed a group of anonymous inventors, known only as Satoshi Nakamoto (it remains a mystery up to this day).
It is not tied to any of the world's economies or controlled by any central bank. It doesn't have any physical representation but exists solely on the internet, thus allowing anyone with an internet connection to make secure borderless transactions that can't be censored.
We'll be using upper-case 'Bitcoin' when referring to it as a concept or protocol (system) and lowercase 'bitcoin' when we mean currency. Let's dive in!
How does Bitcoin work?
Let's say you want to send 10 BTC to your friend. What happens to your money when you make a transaction?
Well, as BTC doesn't have any physical form, there must exist a way to prove that the transaction has taken place and that the money sent now belongs in another person's wallet. Some sort of a record-keeping system. And with cryptocurrencies, this role is played by blockchain.
Blockchain boils down to a big book of financial records – every bitcoin transaction ever made exists on one of its pages (or better – 'blocks'). And there isn't just a single copy of the book. Instead, thousands of network participants worldwide have a complete (or sometimes abridged) copy. They all communicate between themselves and update their 'book' when they receive a new piece of information.
So, once you make a transaction, it gets transmitted to the network, where it gets picked by miners – people responsible for confirming transactions. They confirm it by doing computational work called mining and communicate the results to the rest of the network. From there, your transaction is considered confirmed, and the 10 BTC reach your friend.
An exciting thing about blockchain is that you can only add new data to it, but you can't edit or delete what's already there. In other words, you can't cheat the financial records (for example, double-spend). And that's one of the significant advantages of the system.
How new bitcoins are created?
New bitcoins are generated via mining. Every time a new block of recently-made transactions gets added to the blockchain, the miner who added the block gets rewarded with a fixed amount of BTC. The coins are sent to the miner's wallet address and thus released into circulation.
There's a limit on the number of bitcoin that could ever exist, which is encoded in Bitcoin's source code and known as the 'hard cap'. This limit is 21 million bitcoins, nearly 19 million of which are already in circulation. It will take some time to mine the remaining two million coins. Even though 6.25 BTC are added to the active supply with every block (every ~10 minutes), there's also an event called 'halving'. It occurs every 210,000 blocks (or roughly 4 years) and halves the reward. With this in mind, the last bitcoin is expected to be mined circa 2140.
What happens when there's no new BTC to be mined?
The truth is, it's anybody's guess. Transaction processing fees will possibly be the only monetary incentive for miners to confirm transactions. From there, it will depend on the transactional volume. Will people use BTC for their daily purchases? Will it still be primarily used as a store of value or disappear completely? Mining is expensive, so what's the point of doing it if you can't profit?
Bitcoin is still in its relative infancy, and we're more than 100 years away from the last mined bitcoin. Time will tell.
Is bitcoin money?
Since we mentioned that bitcoin is primarily used as a store of value, let's see if it can be considered money.
Broadly speaking, bitcoin ticks the main functions of money:
a unit of account (you can set prices in BTC)
a medium of exchange (you can buy things with BTC – the adoption is not extremely wide (yet), but you can)
a store of value (you can keep buying with BTC in the future).
It also has the characteristics of money:
divisible (the smallest unit of BTC is one satoshi = 0.00000001 BTC)
fungible (you can easily swap two BTC just as two 5-euro notes)
scarce (19/21 million already in circulation).
Unlike traditional money, Bitcoin is not backed by governments or banks and doesn't rely on gold and silver. Instead, it is backed by math. And what you need in this case if you want to be considered 'real money' is trust and adoption.
What determines the bitcoin price?
Many factors dictate the BTC price. A traditional-finances company starts accepting bitcoin payments. One government bans crypto mining, and another makes BTC a legal tender. A famous person tweets their support or concern – all these are valid reasons to make BTC plummet or skyrocket. In fact, all did.
Price fluctuations are hard to predict, and speculation, of course, contributes. But it's also a question of demand (less supply): when bitcoin's price reached an all-time high of $67,5k in November 2021, it was because people were willing to pay that much for it.
How do I store my bitcoins?
Okay, a short prelude. We will not get too technical, but that's important to know.
When you first start googling bitcoins, blockchains and things like that, you may get ambushed by two terms: 'public keys' and 'private keys'. What are those?
Let's use a very simplistic analogy. A private key is your credentials (like email and password when you log in to your banking app) that prove that you're the owner of the money and can spend your BTC as you please. Your private key should be protected at all costs since if someone has access to your private key, they have access to your funds. If you lose access to your private key, unfortunately, it will mean that you will lose access to your funds because the private key cannot be restored. Stay on the safe side, and don't forget to back it up (but securely).
A public key is something like a bank account number. You give it to people so they can send you funds. It's absolutely safe to share it.
A fun piece of trivia. Both private and public keys are very long strings of numbers and characters (hundreds and hundreds of digits). Your public key is generated from the private key and can be restored if necessary. You can't recreate a private key from a public key.
And finally, there's also a 'wallet address', which is derived from the public key and, in essence, is its hashed (think compressed and modified), more laconic version. It's also a one-way process; you can't recreate the public key from an address.
Your private key generates your public key, which, in turn, generates your address. Top-level data can be used to retrieve the low-level data but not vice versa (hence, safety!).
Why are we talking about this? Even though you need both public and private keys to make a transaction on a blockchain, some wallets now handle this part for you. You'll only need a BTC address to send or receive funds, and the key business happens backstage.
Wallets can be divided into three main groups:
Software wallets (hot or connected to the internet)
Hardware wallets (cold or offline wallets)
Paper wallets (cold or offline wallets).
Software wallets are additionally divided into web, app and desktop wallets.
When we say that some wallets handle the key business for you, we're referring to the software wallets (namely, their web and app types). They are easy to create and give you full access to managing your funds. You can buy, store, exchange, send, receive and earn BTC in a few clicks or taps without leaving the safety of your easy-to-use, beautiful wallet (for example – Cryptopay).
Things to consider:
Your funds are as secure as access to your device:
Secure access to your wallet with a strong password and enable 2FA
Secure your device with a strong password and face/fingerprint ID.
It's a great option for those who actively use their cryptocurrency assets, as it combines greater freedom with a nice user experience.
Then there are browser software wallets that are pretty similar, but you're managing your private and public keys yourself. Again, your funds are as safe as your devices (and the keys): check for viruses and malware before starting dealing with BTC, and then just keep on checking. Also, don't forget to back up your data: keys are prone to get lost, and you can't restore your private key.
Unlike software wallets, hardware wallets are considered 'cold' as in 'not connected to the internet' (hot = online, cold = offline). They are electronic devices that generate and store your public and private keys. Since they're not connected to the internet, they're considered the most secure way to store your bitcoins (or other coins) long-term. They might not be so convenient if you're an active user of your crypto (or just a regular user) as they require connecting to a software wallet just the same to make the most basic operations like buying. But a very solid, sturdy way to store your coins.
And then there are paper wallets. Paper wallets are exactly what they sound like – a piece of paper with your private and public keys printed on it. They are usually created by paper wallet generator apps (typically offline) for you to print them out.
Things to consider? Many. First, an antivirus check before creating a wallet; going offline to generate the keys; making sure your printer is good quality; emptying bins, emptying temporary files, emptying cache, removing backups; making sure that your printer is not connected to a wider network of printers that stores files... If you think that's all, paper also burns, it soaks, and it gets misplaced, quite easily. Another rotten cherry on top, paper wallets don't support partial withdrawal of funds. Nothing wrong with it, just be prepared – after the first withdrawal, your wallet will be empty.
Once the most popular way to securely store your funds, paper wallets have lately fallen out of grace. It's still a perfectly valid method, but the market has moved on and now offers better ones.
Okay, another small thing, and we're done with wallets. When we talked about paper wallets, you might have thought to yourself – a piece of paper, how on earth can I store funds ON a piece of paper? And you're right, you can't. In fact, none of the wallets mentioned above stores your funds. They are simply a tool that allows you to communicate with the blockchain – BTC coins never leave the blockchain. Another interesting thing: blockchain doesn't record addresses; it records transactions. It both means that an address is invisible until used to receive money and that you can send money to an address that doesn't exist. Be careful.
To sum it up
Bitcoin is the original digital currency that exists on the internet and allows anyone to make secure borderless transactions that can't be censored. It doesn't depend on any government or bank but is governed by the people. Bitcoin transactions are irreversible and are nearly impossible to be falsified.
Bitcoin adoption is not very wide yet: some businesses accept it as a payment method, but BTC is used more frequently as a store of value. Cryptopay offers a quick and easy way not only to buy but also to sell BTC and earn on it. Begin your crypto journey now!
Bitcoin – the original decentralised digital currency (lowercase) and payment network (uppercase). The currency abbreviates as BTC.
Block – a container that accommodates a limited number of newly-made Bitcoin transactions. New blocks are created by using the information contained in the previous one.
Blockchain – quite literally a chain of blocks. Each one is connected to the previous one and the following one.
Halving – an event that occurs roughly every 210,000 blocks (or 4 years) and halves the mining reward.
Hard cap – the limit on the number of bitcoins that could ever exist encoded in Bitcoin's code.
Hardware wallet – an electronic device that generates and stores your public and private keys.
Miners are people responsible for adding new blocks (containing newly-made transactions) to the blockchain.
Mining – computational work done by miners which, if done correctly and faster than everybody else, allows them to add a new block to the blockchain.
Paper wallet – any piece of paper with your private and public keys printed on it. The keys themselves are usually created with a paper wallet generator app.
Private key – your credentials. Akin to email and password of a banking app. Your private key proves that you're the owner of the funds, so don't share it with anyone because it will give them access to your coins. Private keys can't be restored. If you lose access to it, you will lose access to your funds.
Public key – akin to your bank account details. You can share it freely so people can send funds to you.
Software wallet – a web, app or desktop wallet. Easy to create and gives you full access to managing your funds (buying, storing, sending, receiving, earning etc.) Web and app wallets additionally store public and private keys for you – you only need a wallet address to send and receive funds.
Wallet address – a hashed, more laconic version of a public key
Please note: From October 8, 2023, at 8 AM UTC, the new rules governing Financial Promotions come into effect; UK Customers will no longer be able to make Bank Deposits, buy cryptocurrencies with a bank card, and use Exchange functionality to buy or sell cryptocurrencies.
Check what services are available here.