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What is Bitcoin?

robertstevens

Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.

As of January 2020, Bitcoin is the largest cryptocurrency in the world by market capitalization. But how does it work, and how is traded?

How Bitcoin works

Bitcoin is the name of the oldest, most popular, and most expensive cryptocurrency. Those people who became millionaires overnight after they bought a few internet coins back in the early 2010s? That was bitcoin.

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Think of bitcoin as digital cash. But instead of, say, a credit card, which relies on regular money (the cryptocurrency community calls dollars and pounds and euros and so on “fiat”), “crypto” is backed by the network itself.

Bitcoin isn’t minted by a central bank—that’s the whole point. Instead, its supply is dictated by “miners,” other computers in the network that create bitcoin by getting their computer to solve hard math puzzles. If you’ve got a powerful enough bitcoin, you can “mine” for bitcoin (in the same way that someone might “mine” for gold). Mining costs computational power (and the electricity to run the computers), which is why bitcoin is “worth” something.

Therein lies the magic of the system. No governments, no banks, no nothing. It’s a community regulated by code.

How Bitcoin was started

So who created Bitcoin? Who knows? Supposedly, it was created by the pseudonymous Satoshi Nakamoto, who published a proposal for Bitcoin back in 2008, titled: “Bitcoin: A Peer-to-Peer Electronic Cash System.”

Nakamoto’s identity remains a mystery, though many people have claimed to be (or know) him.

Still, the anonymity of Nakamoto didn’t stop its development. After Nakamoto put forward the idea for Bitcoin, a team of (non-anonymous) developers continued work on it and further its development. In 2011, the Bitcoin Foundation was started, headed by Gavin Andresen, Jon Matonis, Patrick Murck, Charlie Schrem, and Peter Vessenes. Many still work on it today. However, anyone can continue to work on the Bitcoin protocol. And if you want, you can “fork” your own version of Bitcoin—essentially, to split it into a currency—and pray to above that the community’s with you, and adopts your new coin instead of bitcoin.

Bitcoin’s rise (and fall)

A month prior to the publication of its whitepaper, a major investment bank, Lehman Brothers, shut its doors. The financial crash of 2008 was well underway, giving Bitcoin, a financial system that didn’t require banks, a reason to live.

One of Bitcoin’s first major use cases was a means for money laundering and criminal activity. The Silk Road, one of the largest online black markets, set up in 2011. Between 2011 and 2013 (it was shut down when its founder, Ross Ulbricht, was arrested—he now serves life in prison without parole) prosecutors said that sellers on Ulbricht’s site made over $214 million.

Since then, Bitcoin’s become a more legitimate financial instrument. Bitcoin used be worth almost nothing, but the price of a single Bitcoin reached around $20,000 in late 2017 (known as the height of the Bitcoin bubble). Anyone who bought early and sold at the right time, became rich. But if they waited too long, or bought at the right time, they’d have lost a fortune, too. Bitcoin’s price now sits at around $8,500, less than half of its all-time high.

How bitcoin trading works

Eager to start trading on the bitcoin market? You’ve got to work out how to get your hands on it first. There are a number of different ways to buy bitcoin. If you are interested in trading, then you will most likely want to buy from an exchange, since this means your crypto is immediately available to trade against other coins. But there are a bunch of other ways to buy bitcoin, such as purchasing directly from a broker, or even from an ATM. Here’s the lowdown.

Exchanges

Exchanges are one of the most popular ways to buy bitcoin. The advantage of them is that, upon purchase, you can trade your crypto within the platform for other cryptocurrencies. Exchanges usually look fairly daunting; they look a little like trading platforms investment bankers might use in a trading shop. But they’re not that complicated.

You can buy bitcoin off of exchanges using a range of different currencies. US Dollars are fairly universal as an accepted currency, and other fiat currencies are also accepted across a variety of exchanges. But you can also buy Bitcoin with other cryptocurrencies.

The disadvantage of keeping your funds on exchanges is that your bitcoin is at the behest of the owners of the exchange. If the exchange closes down unexpectedly, or its owners turn out to be thieves, there’s nothing you can do. So, make sure to do your research on the exchange, to work out if it’s worth your trust.

Brokers

Sometimes it’s easier to buy your bitcoin straight up, without worrying about how to trade with other users. In that case, you can consider buying directly from Coinbase, one of the largest exchanges that also offers a brokerage service.

ATMs

You can find local ATMs using Coin ATM Radar. Be aware that almost all coin ATMs are located in major cities.

What are bitcoin wallets?

To trade bitcoin, you’ll want a bitcoin wallet. You can keep your funds in exchanges, but, as previously mentioned, this isn’t necessarily the most secure solution, should the exchange go bust.

Bitcoin wallets store cryptocurrencies in a theoretically secure location. Wallets contain a public and private key that, when used together, can be used to access your private bitcoin address.

Wallets come in a variety of formats: hardware, software and paper. Hardware wallets are a little like USB sticks: these are secure from internet hackers, but can be stolen from you in person, or, well, lost. Online wallets are the opposite: they’re based in apps or websites, and are a useful medium with which to store your crypto. Paper wallets are just that: You scribble down your private keys and public bitcoin address on a piece of paper, then use the codes to sign transactions online.

Here are some popular wallets:

Hardware wallets

Ledger Nano X

  • CDN $159.00

  • Supports 1184 different cryptocurrencies

Ledger produces two different wallets, the Nano X and the Nano S. Ledger’s flagship wallet, the Nano X, is bluetooth enabled, meaning you can connect it to phones, tablets or computers wirelessly. Ledger publishes regular updates that fix future vulnerabilities, so it’s a fairly solid choice for a hardware wallet.

Ledger Nano S

  • CDN $79.00

  • Supports over 1000 cryptocurrencies

The Nano S is considerably cheaper than the Nano X. It’s so far sold over 1.4 million units worldwide as of May 2019. The Nano S doesn’t use bluetooth, so you will have to use a USB cable.

Virtual wallets

Coinomi

  • Free

  • Software Mobile Wallet

  • Wide coin support

Coinomi, founded in 2014, is a virtual wallet that lives in your phone. It’s completely free to use (though you’ll have to pay regular transaction fees, which pay miners, who in turn verify the transactions by adding them to the blockchain). As stated, virtual software wallets are vulnerable to hacking attacks, so don’t put too much cryptocurrency into one. For a small amount of crypto, they are a good solution.

Armory

  • Free

  • Dedicated Bitcoin “cold storage”

  • Private keys stay private

If you’re looking for ways to store more of your bitcoin online, consider products like the Armory wallet. Each transaction is multi-signature—meaning multiple people have to sign off on the transaction before it is approved. And it has GPU-resistant encryption. The idea is that GPUs can perform cryptographic hacking on keys with low memory, so Armory increases the memory of their keys to protect against these attacks.

Bitcoin paper wallets

  • Free

  • Secure—unless you lose the piece of paper

Paper wallets are a decent alternative to their higher-tech cousins, the software and hardware wallets. These are paper wallets, and they’re as simple as the name suggests. You keep the keys to your Bitcoin address on a piece of paper, which you can store wherever you want. This, theoretically, has absolute security—to get the key, someone would have to break in and find the physical scrap of paper. Of course, you may lose the paper wallet, so copies are essential. Still, this is a good option if you want to buy and hold bitcoin offline in a secure environment, but either can’t afford or simply don’t trust other types of wallet.

How to trade Bitcoin

So how to trade Bitcoin? It’s possible to sell Bitcoin to whomever you want—set up a trade in the parking lot, and the deal’s on. But the most popular method of trading Bitcoin (usually for other cryptocurrencies) is to trade through a cryptocurrency exchange.

There are a number of different trading exchanges you can use to trade your cryptocurrencies, with different benefits and drawbacks. (You can’t trade on Wealthsimple’s trading platform, however, which is just for stocks). Here are some of the most popular exchanges to trade on.

Coinbase

Coinbase is a San Francisco-based cryptocurrency exchange. You can buy and sell Bitcoin to and from Coinbase itself, which operates as a brokerage. For small amounts, the company charges a rate of 1.49% per bank purchase of crypto, while using a credit or debit card comes with a 3.99% charge. These fees go down as you spend more money. But Coinbase also has an exchange, Coinbase Pro, on which you can trade cryptocurrencies with other users. Coinbase’s products that go beyond just trading. It has a crypto wallet and a stable cryptocurrency, called the USDC, which is pegged to the US dollar.

Binance

Binance is an exchange based in Malta (a crypto-friendly jurisdiction). Requiring a minimum purchase of $1, it is similar to Coinbase in its low barrier to entry. It also has a fund that covers users in the event of a hack, the SAFU (Secure Asset Fund for Users). Binance also has its own coin, BNB, which allow those who hold it to save on transfer fees, among other things. The platform also has an impressive collection of charitable projects. In particular, Binance has an interest in Africa, with a program that funds school meals with cryptocurrencies.

Bitpanda

Bitpanda is another cryptocurrency exchange. It’s based in Austria. Bitpanda accepts bank transactions as well as credit and debit cards, so you have options when it comes to buying your crypto. The minimum purchase is $25—a little more than Coinbase. Fees are not immediately displayed to purchasers though, instead they’re included in the total price.

eToro

eToro operates a little differently than other exchanges, as it considers itself a “social trading platform.” This means you can copy other trader’s strategies, ideal for casual investing or if you simply don’t want to get too bogged down in research. The platform does feature a $200 minimum purchase, so be careful, and do your research before committing to this platform.

Bitbuy.ca

Canada’s own cryptocurrency exchange, and a significant player since the collapse of its Canadian rivals, Einstein and QuadrigaCX. To use the site, you transfer funds from your bank account to a Bitbuy account, which can then be used to buy currencies from the site.

Peer-to-peer exchanges

Paxful

Paxful is a US-based peer-to-peer exchange, which means you are buying and selling your cryptocurrencies with other people instead of with traders on an exchange. You can trade Bitcoin for over 300 (non-crypto) currencies, including gift vouchers for businesses like Spotify and Applebee’s. Transaction fees are generally low, capping out at around 1%. Paxful also provide their own bitcoin wallet just like Coinbase, although this wallet exclusively holds bitcoin as opposed to any other cryptocurrency. Be warned though: It’s an exchange that’s heavily dependent on trust.

LocalBitcoins

If you’re interested in trading bitcoins for money, the peer-to-peer exchange LocalBitcoins.com is one of the most popular. As it is peer-to-peer, you will be trading with other people using the exchange, with the platform acting as a mediator. Make sure you only buy from sellers who’ve been vetted by the platform.

The risks of Bitcoin investing

Bitcoin is notoriously volatile, and the crypto-asset class as a whole is prone to significant swings. As always, only invest what you can afford to lose. Exchanges may well turn out to be scams, so dispersing your investment between different exchanges and wallets, or sticking to well known exchanges, is considered a good idea. Do your research before investing in obscure coins and exchanges, as they can be as untrustworthy. Canada has had an especially bad year with exchanges going bust: Both the Einstein Exchange and QuadrigaCX collapsed in 2019. You can’t count on much government protection; your risks are your own.

Last Updated January 29, 2018

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