Bitcoin, the first cryptocurrency is a decentralized form of digital cash that can be used to make transactions without traditional intermediaries and bank supervision.
Bitcoin, launched in 2009, was the first of a new kind of asset called cryptocurrency, a decentralized form of digital cash that eliminates the need for traditional intermediaries like banks and governments to make financial transactions.
Instead, Bitcoin is powered through a combination of peer-to-peer technology — a network of individuals, much like the volunteer editors who create Wikipedia — and software-driven cryptography, the science of passing secret information that can only be read by the sender and receiver. This creates a currency backed by code rather than items of physical value, like gold or silver, or by trust in central authorities like the U.S. dollar or Japanese yen.
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party,” wrote Satoshi Nakamoto — the pseudonym of the mysterious Bitcoin creator, who remains unknown — in a white paper introducing the open-source technology.
How does Bitcoin work?
Each bitcoin (trading symbol “BTC,” though “XBT” is also used) is a computer file stored in a digital wallet on a computer or smartphone. To understand how the cryptocurrency works, it helps to understand these terms and a little context:
- : Bitcoin is powered by open-source code known as blockchain, which creates a shared public ledger. Each transaction is a “block” that is “chained” to the code, creating a permanent record of each transaction. Blockchain technology is at the heart of more than 6,000 cryptocurrencies that have followed in Bitcoin’s wake.
- : A bitcoin wallet contains a public key and a private key, which work together to allow the owner to initiate and digitally sign transactions, providing proof of authorization.
- Miners — or members of the peer-to-peer platform — then independently confirm the transaction using high-speed computers, typically within 10 to 20 minutes. Miners are paid in bitcoin for their efforts.
How does Bitcoin make money?
Bitcoin value follows the law of supply and demand — and because demand waxes and wanes, there’s a lot of volatility in the cryptocurrency’s price.
Besides mining bitcoin, which requires technical expertise and an investment in high-performance computers, most people purchase bitcoins as a form of currency speculation — betting that the U.S. dollar value of one bitcoin will be higher in the future than it is today. But that’s difficult to predict.
How to store Bitcoin?
Storing your bitcoins:
Hot wallets vs. cold wallets
Bitcoins can be stored in two kinds of digital wallets:
- Digital currency is stored in the cloud on a trusted exchange or provider, and accessed through a computer browser, desktop or smartphone app.
- An encrypted portable device much like a thumb drive that allows you to download and carry your bitcoins.
Basically, a hot wallet is connected to the internet; a cold wallet is not. But you need a hot wallet to download bitcoins into a portable cold wallet.
You can read about wallets in my article: WALLETS FOR CRYPTO