Bitcoin is a digital currency created in January 2009 following the housing market crash. The identity of the person or persons who created the technology is still a mystery. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies.
There are no physical bitcoins, only balances kept on a public ledger than everyone has transparent access to, that – along with all Bitcoin transactions – is verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity.
Understanding Bitcoin
Bitcoin is a collection of computers or nodes, that all run Bitcoin's code and store its blockchain. A blockchain can be thought of as a collection of blocks. In each block is a collection of transactions. Because all these computers running the blockchain has the same list of blocks and transactions and can transparently see these new blocks being filled with new Bitcoin transactions, no one can cheat the system. Anyone, whether they run a Bitcoin "node" or not, can see these transactions occurring live. In order to achieve a nefarious act, a bad actor would need to operate 51% of the computing power that makes up Bitcoin. Bitcoin currently has over 10,000 nodes and this number is growing, making such an attack quite unlikely.
In the event that an attack was to happen, the Bitcoin nodes, or the people who take part in the Bitcoin network with their computer, would likely fork to a new blockchain making the effort the bad actor put forth to achieve the attack a waste.
Balances of Bitcoin tokens are kept using public and private "keys," which are long strings of numbers and letters linked through the mathematical. (Bitcoin keys should not be confused with a Bitcoin wallet, which is a physical or digital device that facilitates the trading of Bitcoin and allows users to track ownership of coins. The term "wallet" is a bit misleading, as Bitcoin's decentralized nature means that it is never stored "in" a wallet, but rather decentrally on a blockchain.
Related - Is investing in bitcoin is profitable or not?
How Bitcoin Works
Bitcoin is one of the first digital currencies to use peer-to-peer technology to facilitate instant payments. The independent individuals and companies who own the governing computing power and participate in the Bitcoin network, are comprised of nodes or miners. "Miners" or the people who process the transactions on the blockchain, are motivated by rewards (the release of new bitcoin) and transaction fees paid in bitcoin. These miners can be thought of as the decentralized authority enforcing the credibility of the Bitcoin network. New bitcoin is being released to the miners at a fixed, but periodically declining rate, such that the total supply of bitcoins approaches 21 million. Currently, there are roughly 3 million bitcoins that have yet to be mined.
Bitcoin mining is the process by which bitcoins are released into circulation. Generally, mining requires the solving of computationally difficult puzzles in order to discover a new block, which is added to the blockchain. In contributing to the blockchain, mining adds and verifies transaction records across the network. For adding blocks to the blockchain, miners receive a reward in the form of a few bitcoins; the reward is halved every 210,000 blocks. The block reward was 50 new bitcoins in 2009 and is currently 12.5. By around May 11th, 2020 the next halving will occur, bringing the reward for each block discovery down to 6.25 bitcoins.
One bitcoin is divisible to eight decimal places (100 millionths of one bitcoin), and this smallest unit is referred to as a Satoshi. If necessary, and if the participating miners accept the change, Bitcoin could eventually be made divisible to even more decimal places.
Who Invented Bitcoin?
No one knows who invented Bitcoin, or at least not conclusively. Satoshi Nakamoto is the name associated with the person or group of people who released the original Bitcoin white paper in 2008 and worked on the original Bitcoin software that was released in 2009. In the years since that time, many individuals have either claimed to be or have been suggested as the real-life people behind the pseudonym, but as of May 2020, the true identity (or identities) behind Satoshi remains obscured.
Receiving Bitcoins As Payment
Bitcoins can be accepted as a means of payment for products sold or services provided. If you have a brick and mortar store, just display a sign saying “Bitcoin Accepted Here” and many of your customers may well take you up on it; the transactions can be handled with the requisite hardware terminal or wallet address through QR codes and touch screen apps. An online business can easily accept bitcoins by just adding this payment option to the others it offers credit cards, PayPal, etc.
Working For Bitcoins
Those who are self-employed can get paid for a job in bitcoins. There are a number of ways to achieve this such as creating any internet service and adding your bitcoin wallet address to the site as a form of payment. There are several websites/job boards which are dedicated to the digital currency:
- crypto wallet brings together work seekers and prospective employers through its website
- coinality features jobs – freelance, part-time and full-time – that offer payment in bitcoins, as well as other cryptocurrencies like Dogecoin and Litecoin
- Bitwage offers a way to choose a percentage of your work paycheck to be converted into bitcoin and sent to your bitcoin address
In March 2014, the IRS stated that all virtual currencies, including bitcoins, would be taxed as property rather than currency. Gains or losses from bitcoins held as capital will be realized as capital gains or losses, while bitcoins held as inventory will incur ordinary gains or losses. The sale of bitcoins that you mined or purchased from another party, or the use of bitcoins to pay for goods or services are examples of transactions that can be taxed.
Like any other asset, the principle of buying low and selling high applies to bitcoins. The most popular way of amassing the currency is through buying on a Bitcoin exchange, but there are many other ways to earn bitcoin.
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