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What Is Bitcoin?

Bitcoin definition
Bitcoin (BTC) is a digital currency, which is used and distributed electronically.Bitcoin is a decentralised peer-to-peer network. No single institution or person controls it. Bitcoins can’t be printed and their amount is very limited – only 21 mln Bitcoins can ever be created.

Who created Bitcoin?
Bitcoin was first introduced as an open-source software by an anonymous programmer, or a group of programmers, under the alias Satoshi Nakamoto in 2009. There has been a lot of rumours about the real identity of BTC’s creator, however all of the people mentioned in those rumours have publicly denied being Nakamoto. Nakamoto himself once claimed to be a 37-year-old male living in Japan. However, because of his perfect English and his software not being labeled in Japanese, there are reasonable doubts about this. Around mid-2010, Nakamoto moved on to other things, leaving Bitcoin in the hands of a few prominent members of the BTC community. Also Satoshi named Gavin Andresen a lead developer. It has been estimated that Nakamoto owns around one mln Bitcoins, which amounts to approximately $3.6 bln as of September 2017.

Who controls Bitcoin?
According to Gavin Andresen, the very first thing he focused on after Nakamoto moved on from the project was further decentralisation. Andersen wanted Bitcoin to continue its existence autonomously, even if he would ‘get hit by a bus’. For a lot of people, the main advantage of Bitcoin is its independence from world governments, banks and corporations. Not one authority can interfere into BTC transactions, impose transaction fees or take people’s money away. Moreover, the Bitcoin movement is extremely transparent – every single transaction is being stored in a massive distributed public ledger called the Blockchain. Essentially, while Bitcoin is not being controlled as a network, it gives its users total control over their finances.

How does Bitcoin work?
A user sees only amount of Bitcoins on his or her wallet and and transaction results. Behind the scenes, the Bitcoin network is sharing a public ledger called the “block chain”. This ledger contains every transaction ever processed. Digital records of transactions are combined into “blocks”. If someone try to change just one letter or number in a block of transactions, it will also affect all of the following blocks. Due to it being a public ledger, the mistake or fraud attempt can be easily spotted and corrected by anyone. User’s wallet can verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses. Because of the verification process and depending on the trading platform, it may take a few minutes for a BTC transaction to be completed. The Bitcoin protocol is designed so that each block takes about 10 minutes to mine.

Characteristics of Bitcoin

Decentralised
One of Satoshi Nakamoto’s main objectives when creating Bitcoin was the network’s independence from any governing authorities. It is designed so that every person, business, as well as every machine involved in mining and transaction verification, becomes part of a vast network. Moreover, even if some part of the network goes down, the money will keep moving.

Anonymous
These days banks know virtually everything about their clients: credit history, addresses, phone numbers, spending habits and so on. It is all very different with Bitcoin, as the wallet doesn’t have to be linked to any personally identifying information. And while some people just simply don’t want their finances to be governed and tracked by any kind of an authority, others might argue that drug trade, terrorism and other illegal and dangerous activities will thrive in this relative anonymity.

Transparent
The anonymity of Bitcoin is only relative, as every single BTC transaction that ever happened is stored in the Blockchain. In theory, If your wallet address was publicly used, anyone can tell how much money is in it by carefully studying the blockchain ledger. However, tracing a particular Bitcoin address to a person is still nearly impossible.

Those who wish to stay anonymous with their transactions can take measures to stay under the radar. There are certain types of wallets that prioritise opaqueness and security, but the simplest measure would be to use multiple addresses and not transfer massive amounts of money to a single wallet.

Fast
The Bitcoin network processes payments almost instantaneously, it normally takes just a few minutes for someone on the other side of the world to receive the money, while normal bank transfers can take several days.

Non-repudiable
Once you send your Bitcoins to someone, there is no way of getting them back, unless the recipient would want to send them back to you. This ensures the reception of a payment, meaning that whoever you’re trading with can’t scam you by claiming that they never got the money.

How to get Bitcoin?
The simplest way of getting Bitcoins is to buy them. Bitcoins are available from various exchanges, but you can also buy them directly from other people via marketplaces. They can be paid for with cash, credit and debit card transfers or even with other cryptocurrencies. But first, you’ll need a Bitcoin wallet. There is a variety of options, but the main ones can be reduced to an online wallet and a software wallet on the hard drive of your computer. Neither option is completely safe, as a hard drive can become corrupted, while an online wallet might be prone to a hacker attack. There are also mobile wallets, which are very simplified due to an enormous storage capacity required to carry the entire Blockchain; dedicated devices called hardware wallets and paper wallets with two QR-codes that are not stored digitally anywhere, making them immune to standard cyber-attacks and hardware failures.

And, of course, there’s mining. Just a few years ago, anyone with a powerful enough computer could mine Bitcoins, but this is not the case anymore. The BTC’s ever-increasing popularity as well as its exchange rate caused big companies to step into the game armed to the teeth with mining-specific devices, hence why the difficulty and energy required to mine worthwhile amounts of Bitcoins has skyrocketed. What’s more, the amount of Bitcoins still to be mined decreases constantly and drastically.

Difference of Bitcoin from traditional currencies

Decentralisation
Every currency in the world, apart from cryptocurrencies, is governed by some kind of authority. Every transaction goes through a bank, where people are charged enormous fees, and it normally takes a long time for money to reach the recipient. Bitcoin, on the other hand, is not controlled by anyone. It’s a decentralised network and it’s built on the cooperation and communication of all the people taking part in it. Because of that, even if some part of the network goes offline, transactions will still be coming through.

It can’t be counterfeited
Bitcoin was designed as a currency that can withstand counterfeiting attempts. The legitimacy of BTC is ensured by the Blockchain technology, as well as by various different defence mechanisms built into every algorithm. Most other traditional currencies are extremely prone to counterfeiting and those who control them seem to be doing close to nothing to fix it.

Durability
Bitcoins don’t exist in physical form, which means they cannot be damaged. Every single Bitcoin is essentially eternal, unlike paper money or coins.

Once sent, cryptocurrencies can’t be recalled
If someone makes a mistake and sends money to the wrong wallet and wishes to get it back, they can’t. Like many other Bitcoin features, this was done in order to prevent fraud. Unfortunately, when it comes to traditional currencies, most transactions can be recalled, all it takes is one phone call.

Fungibility
While there are some traditional currencies like the dollar and euro that are accepted in multiple countries, most of the world’s currencies can only operate within the geographical borders of their country of origin. In contrast to that, BTC is an online currency, meaning that its authorised operating environment is worldwide.

How is Bitcoin taxed?
Bitcoin is yet to obtain a legal tender status in most jurisdictions, but some tax authorities have acknowledged its significance and proposed specific regulations. Those regulations vary significantly from country to country. For example, the U.S. Internal Revenue Service treats Bitcoin and all other prominent digital currencies as a property rather than a currency. Every taxpayer selling goods and services for Bitcoins has to include the value of the received Bitcoins in their annual tax returns. Miners are also subject to U.S. taxation, but only if the mining proves to be successful.

According to the European Court of Justice, Bitcoin is a currency, not a property. Although it is exempt from VAT, Bitcoin can still be subject to other taxes. The UK tax authorities treat Bitcoin as a foreign currency, with every BTC-related case considered on the basis of its own individual facts and circumstances. As of July 2017, the sale of Bitcoins is exempt from consumption tax in Japan, where it’s officially recognized as a payment method. So, as Bitcoin is a relatively new currency, the regulations frameworks governing its taxation significantly differ depending on a country. Moreover, in many jurisdictions there are no specific laws or regulations regarding the cryptocurrency.

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