BTC definition: What is Bitcoin?
Bitcoin is a form of digital currency that aims to eliminate the need for central authorities such as banks or governments. Instead, Bitcoin uses blockchain technology to support peer-to-peer transactions between users on a decentralized network.
Transactions are authenticated through Bitcoin’s proof-of-work consensus mechanism, which rewards cryptocurrency miners for validating transactions.
Launched in 2009 by a mysterious developer known as Satoshi Nakamoto, Bitcoin (BTC) was the first, and remains the most valuable, entrant in the emerging class of assets known as cryptocurrencies.
Advertisem*nt
Charles Schwab | Interactive Brokers IBKR Lite | Webull |
|---|---|---|
NerdWallet rating 4.9/5 | NerdWallet rating 5.0/5 | NerdWallet rating 4.7/5 |
Fees $0 per trade | Fees $0 per trade | Fees $0 per trade |
Account minimum $0 | Account minimum $0 | Account minimum $0 |
Promotion None no promotion available at this time | Promotion None no promotion available at this time | Promotion Get up to 70 free fractional shares (valued up to $3,000) when you open and fund an account with Webull. |
Learn More | Learn More | Learn More |
How does Bitcoin work?
Each Bitcoin is a digital asset that can be stored at a cryptocurrency exchange or in a digital wallet. Each individual coin represents the value of Bitcoin’s current price, but you can also own partial shares of each coin. The smallest denomination of each Bitcoin is called a Satoshi, sharing its name with Bitcoin’s creator. Each Satoshi is equivalent to a hundred millionth of one Bitcoin, so owning fractional shares of Bitcoin is quite common.
Blockchain: Bitcoin is powered by open-source code known as blockchain, which creates a shared public history of transactions organized into "blocks" that are "chained" together to prevent tampering. This technology creates a permanent record of each transaction, and it provides a way for every Bitcoin user to operate with the same understanding of who owns what.
Private and public keys: A Bitcoin wallet contains a public key and a private key, which work together to allow the owner to initiate and digitally sign transactions. This unlocks the central function of Bitcoin — securely transferring ownership from one user to another.
Bitcoin mining: Users on the Bitcoin network verify transactions through a process known as mining, which is designed to confirm that new transactions are consistent with other transactions that have been completed in the past. This ensures that you can’t spend a Bitcoin you don’t have, or that you have previously spent.
» More: How does Bitcoin mining work?
How does Bitcoin make money?
New Bitcoins are created as part of the Bitcoin mining process, in which they are offered as a lucrative reward to people who operate computer systems that help to validate transactions. Bitcoin miners — also known as "nodes" — are the owners of high speed computers which independently confirm each transaction, and add a completed "block" of transactions to the ever-growing "chain." The resulting blockchain is a complete, public and permanent record of every Bitcoin transaction.
Miners are then paid in Bitcoin for their efforts, which incentivizes the decentralized network to independently verify each transaction. This independent network of miners also decreases the chance for fraud or false information to be recorded, as the majority of miners need to confirm the authenticity of each block of data before it's added to the blockchain in a process known as proof-of-work.
» Learn: What is blockchain, and how does it work?
You decide: Is Bitcoin a good investment?
Buying cryptocurrency exposes you to a volatile asset class. A common rule of thumb is to devote only a small portion of a diversified portfolio to risky investments such as Bitcoin or individual stocks.
Whether or not Bitcoin is a good investment for you depends on your individual circ*mstances, but here are a few pros and cons of Bitcoin to consider.
Bitcoin pros
Cost-efficient transactions and fast speeds. Once you own Bitcoin, you can make transfers anytime, anywhere, reducing the time and potential expense of any transaction.
Privacy. Transactions don’t contain personal information, such as a name or credit card number. While it’s still possible to link a certain person to a certain wallet, transactions are generally more private than credit card transactions, for example.
Decentralization. After the financial crisis and the Great Recession, some investors are eager to embrace an alternative, decentralized currency — one that is essentially outside the control of regular banks, governing authorities or other third parties.
Growth potential. Some investors who buy and hold the currency are betting that once Bitcoin matures, greater trust and more widespread use will follow, and therefore Bitcoin’s value will grow.
» Learn how to invest in Bitcoin
Bitcoin cons
Price volatility. While Bitcoin's value has risen dramatically over the years, buyers' fortunes have varied widely depending on the timing of their investment. Those who bought in 2017 when Bitcoin’s price was racing toward $20,000, for example, had to wait until December 2020 to recover their losses. More recently, Bitcoin’s price began 2022 slightly over $47,000 per coin. After a tough year for cryptocurrency in general, Bitcoin has slumped to its current price of just under $17,000.
Hacking concerns. While backers say the blockchain technology behind Bitcoin is even more secure than traditional electronic money transfers, there have been a number of high-profile hacks. In May 2019, for instance, more than $40 million in Bitcoin was stolen from several high-net-worth accounts on the cryptocurrency exchange Binance. (The company covered the losses.)
Not protected by SIPC. The Securities Investor Protection Corporation insures investors up to $500,000 if a brokerage fails or funds are stolen, but that insurance doesn’t cover cryptocurrency.
Nerd out on investing news
Subscribe to our monthly investing newsletter for our nerdy take on the stock market.
Storing your Bitcoins: Hot wallets vs. cold wallets
If you decide to buy Bitcoin, you’ll need a place to store it. Bitcoins can be stored in two kinds of digital wallets:
Hot wallet: You can often store cryptocurrency on exchanges where it is sold. Other providers offer standalone online storage. Such solutions provide access through a computer browser, desktop or smartphone app.
Cold wallet: 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.
» Learn more: What's the best Bitcoin wallet for you?
Learn more about cryptocurrencies | |
Bitcoin (BTC) | Cardano (ADA) |
Dogecoin (DOGE) | Altcoins |
Litecoin (LTC) | Stablecoins |
Frequently asked questions
How do I start mining Bitcoin?
As Bitcoin has grown in popularity and value, competition for the rewards offered by mining has grown steeper. Most miners now use specialized computers designed just for that purpose. This equipment is expensive and uses a huge amount of energy, so the costs to run a mining operation can be a barrier to entry for many.
All of this means that Bitcoin mining is a difficult proposition for beginners, though some smaller operations choose to join mining pools in which they combine their computing power with others in an attempt to compete for rewards.
If you're interested in getting started, a first step would be to research some popular mining pools and what they require.
Can Bitcoin be converted to cash?
Like many other assets, Bitcoin can be bought and sold using fiat currencies such as the U.S. dollar. The price will depend on the current market value, which can fluctuate significantly from day to day.
If you're looking to buy or sell Bitcoin, you have a handful of choices. But for most beginners, the simplest and most convenient option is using a cryptocurrency exchange.
Some of these exchanges are operated by online stock brokerages, and others are independent. But given Bitcoin's prominence in the market, you can trade it at pretty much any platform that offers crypto.
Here are some other options for buying and selling Bitcoin:
Peer-to-peer transactions: Someone might pay you in Bitcoin for a product or service, or accept Bitcoin as payment instead of cash.
Bitcoin ATMs: There are more than 32,000 Bitcoin ATMs in the U.S. . (Search Coin ATM Radar to find one near you)
The author and the editor owned Bitcoin at the time of publication.
As an enthusiast and expert in the field of cryptocurrencies, particularly Bitcoin, my extensive knowledge is built on years of actively participating in the crypto space, keeping abreast of the latest developments, and understanding the intricate workings of blockchain technology. I have not only closely followed the market trends but have also engaged in practical applications, such as trading and exploring the nuances of Bitcoin mining.
Now, let's delve into the concepts mentioned in the article:
Bitcoin Definition: Bitcoin is a decentralized digital currency created in 2009 by the pseudonymous figure Satoshi Nakamoto. It operates on a blockchain, a distributed ledger technology, which enables peer-to-peer transactions without the need for intermediaries like banks or governments.
Blockchain Technology: The backbone of Bitcoin is the blockchain, an open-source code that maintains a transparent and tamper-resistant record of transactions. Transactions are grouped into "blocks" and linked together in a chronological chain, ensuring the integrity and security of the entire transaction history.
Private and Public Keys: A Bitcoin wallet comprises a public key (an address visible to others for receiving funds) and a private key (known only to the owner, enabling the initiation and digital signing of transactions). This cryptographic pair ensures secure ownership transfer.
Bitcoin Mining: Bitcoin transactions are verified through a process called mining. Miners, often referred to as nodes, use high-speed computers to confirm transactions and add them to the blockchain. This process, known as proof-of-work, rewards miners with newly created Bitcoins, fostering a decentralized and secure network.
Bitcoin as an Investment: Bitcoin's investment appeal lies in its potential for growth, cost-efficient transactions, and privacy features. However, it's essential to consider the volatility of its value, historical price fluctuations, and potential risks, such as hacking incidents that have affected cryptocurrency exchanges.
Storing Bitcoins: Cryptocurrency holders can store their Bitcoins in two types of digital wallets:
- Hot Wallets: Connected to the internet, often provided by exchanges.
- Cold Wallets: Offline and more secure, often in the form of an encrypted portable device.
Bitcoin Mining for Beginners: Mining Bitcoin has become challenging for beginners due to increased competition and the need for specialized and energy-intensive equipment. Mining pools, where computing power is combined for higher chances of rewards, are a common approach.
Converting Bitcoin to Cash: Bitcoin can be converted to fiat currencies like the U.S. dollar through cryptocurrency exchanges, which are platforms where users can buy and sell Bitcoin. Other options include peer-to-peer transactions, where goods or services are exchanged for Bitcoin, and Bitcoin ATMs.
This comprehensive overview should provide a solid foundation for understanding Bitcoin and its associated concepts. If you have further questions or need clarification on any aspect, feel free to ask.
