What is Bitcoin?

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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 May 2021, bitcoin is the largest cryptocurrency in the world by market capitalization. But how does it work, and how is it 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.

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.

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

One of the interesting parts about bitcoin is that, unlike regular money, there’s no central bank to keep on printing bitcoin. Only 21 million bitcoin can ever be minted, and 18.7 million are already in circulation, as of May 2021. It’s estimated that the final bitcoin will be minted in about 2140; once that’s complete, there won’t be any more bitcoins. This provides relief to those concerned with the profligacy of central banks, who, for instance, printing money like there was no tomorrow to offset the damage caused by the coronavirus pandemic.

Therein lies the magic of the system. No governments, no banks, no nothing. It’s a community regulated by code. And since bitcoin doesn’t rely on those intermediaries, it’s very difficult to shut down the network. It would be very difficult for governments to ban bitcoin, in part because it’s hard for governments to coordinate unilaterally, but also because the bitcoin network can still survive if just a handful of computers run bitcoin nodes from underground bunkers. And since all the code is open source, you can easily create more blockchains. This feature makes bitcoin very popular with privacy advocates, criminals, libertarians, and anyone else anxious about state intervention.

Other cryptocurrencies

Bitcoin has cornered the crypto-economy, and holds over 43 percent of the market. But it’s one of thousands of cryptocurrencies, most of which rely on the same underlying technology. Different cryptocurrencies have different features. Some, like Monero and Zcash, are focused on privacy: They contain technology that obscures information f about the origin of a transaction, making it difficult to track how people spend their money online. Others, like XRP, are popular with banks because of how cheap it is to send money across borders with them. Some, like Ethereum, are popular with businesses and software developers, which create blockchain-based applications on their parent platforms. Ethereum supports entirely decentralized financial applications, such as lending protocols or decentralized exchanges; the DeFi market blew up in 2020, and the market’s got about $62 billion locked into it, as of May 2021. The January before, there was only about $1 billion in DeFi smart contracts. Companies can build dApps (decentralized applications), and use Ether to power them. The final major class of cryptocurrencies are stablecoins, like Tether, or USDC. These coins purport to hold a value that’s consistent with a fiat currency, such as the dollars. Lots of central banks are also considering blockchain technology. These coins, known as Central Bank Digital Currencies, don’t quite operate like bitcoin; instead, they are more centralized and would function as a complement to digital cash, or as a currency for inter-bank settlments. Most of the world’s central banks are exploring the tech, but only a few places, such as China, Cambodia, and the Bahamas, have actually started piloting them.

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, and 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 thrive.

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 that was 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 to 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 wrong time, they’d have lost a fortune; bitcoin’s price crashed to lows of about $4,000 when the coronavirus pandemic kicked into full swing, crashing global markets.

The cryptocurrency made a mighty recovery from the pandemic and hit highs of about $64,800 in April 2021, according to metrics site CoinMarketCap. Large financial institutions, including Goldman Sachs, Morgan Stanley, and Bank of America expressed interest in the coin, and several committed to offering bitcoin trading products and custody solutions to their customers. Large companies, such as US cloud computing company MicroStrategy, electric car company Tesla, and payments firm Square announced they had added billions of dollars of bitcoin to their balance sheets. PayPal added crypto trading services. NFTs, crypto-based digital art based on Ethereum, a rival blockchain to bitcoin, took off, selling for tens of millions of dollars apiece on reputable art auction houses Sotheby’s and Christie’s. Even eBay added a dedicated NFT service.

In May 2021, however, bitcoin crashed to lows of $31,000 after Tesla CEO Elon Musk trashed the coin, citing environmental concerns, and the Chinese government vowed to crack down on bitcoin mining and trading. Several national payments associations in China also warned against speculative bitcoin trading and reconfirmed their commitment to a 2017 ban that prevented them from doing business with crypto companies. Lots of news sites regarded this as a new ban, fanning the flames and making the crash even worse. As of this writing, the price of bitcoin is about $38,000.

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 brokerage, 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. There are thousands of them, each with their own quirks and features.

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.

Brokerages

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 functions as a brokerage service. You’ll pay a slight premium for the convenience.

PayPal, Robinhood Crypto, Wealthsimple and Revolut are among other popular crypto brokerages. These work a little differently: buy your bitcoin from one of these services and you can’t move your bitcoin out of your account or send it to an external wallet. So, even though you legally own the bItcoin you buy, you are, essentially, buying little more than an IOU from the company. However, most of the companies intend to add the ability for customers to withdraw their bitcoin to other cryptocurrency wallets as soon as is feasible. Revolut recently added limited bitcoin withdrawals.

ATMs

You can find local ATMs using Coin ATM Radar. Be aware that almost all coin ATMs are located in major cities. These function like mini physical cryptocurrency exchanges; you sell and buy your Bitcoin directly from the ATM.

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 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 inwhich 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 over 1,000 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 can also hook up to mobile cryptocurrency wallets. One, MyEtherWallet, lets you access a small number of decentralized finance protocols straight from your Ledger.

Ledger Nano S

  • CDN $89.00

  • 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. Trezor is Ledger’s main competitor; its wallets do much the same.

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. It supports multi-signature transactions—meaning multiple people have to sign off on the transaction before it is approved. It also touts 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 trade through Wealthsimple’s trading platform. However, only for those IOU notes—you can’t move your crypto to another account). Here are some of the most popular exchanges to trade on.

Coinbase

Coinbase is an American cryptocurrency exchange. You can buy and sell bitcoin to and from Coinbase itself, which operates as a brokerage. For purchases under or equal to $10, the company charges the greater rate of 1.49% or $0.99 per bank purchase of crypto, while using a credit or debit card comes with a 3.99% charge. These fees decrease 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. In April 2021, shares in Coinbase started trading on the Nasdaq. To be clear, buying shares in Coinbase is not the same as buying bitcoin; you are buying shares in the company, just like you might buy shares in Apple or Google.

Binance

Binance is an exchange originally based in China, but has since moved the world as it plays cat and mouse with regulators. . 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, colloquially known as 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. Binance also runs its own blockchain, the Binance Smart Chain, which is powered by its BNB coin. The Binance Smart Chain project is home to a raft of decentralized financial products, much like Ethereum.

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’s minimum purchase price is $200.

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 for selling cryptocurrencies are generally low, capping out at around 1% for money, goods and services, or up to 5% for iTunes and Google Play gift cards. Paxful also provides its own bitcoin wallet, just like Coinbase, although this wallet exclusively holds bitcoin as opposed to any other cryptocurrency.

LocalBitcoins

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

Bitcoin ETFs

In 2021, several bitcoin exchange-traded funds (ETFs) launched in Canada. These investment vehicles trade on the stock market, and are one of the only ways for Canadians to do so through regulated investment vehicles. The ETFs, which launched in March, 2021, to much success, are funds that are exclusively used to buy and sell bitcoin. Shares in the fund attempt to track the price of bitcoin, although fees can make ETFs slightly more expensive than buying bitcoin outright. The advantage to a bitcoin ETF is that investors don’t have to concern themselves with buying or storing bitcoin themselves, nor do they have to ensure that their financial activities are compliant with the latest regulations. They also make sense for investors who can’t invest in bitcoin directly for tax or legal reasons. The first bitcoin ETFs came from financial firms Exodus, Purpose, CI Financial, and 3iQ. It should be noted that Canada is one of the only countries in the world that offers bitcoin ETF, and that the securities regulator of its neighbor, the US Securities and Exchange Commission, has repeatedly blocked attempts for a bitcoin ETF on the grounds that the market is inherently manipulable.

Bitcoin Funds/Trusts

Bitcoin funds and trusts (the names vary, but the outcome for investors is similar) came about long before the bitcoin ETF, and they may well go extinct should the bitcoin ETF takes off around the world. These funds are actively-managed, unlike passively-managed Bitcoin ETFs. They sell shares of a big pool of money used to buy bitcoin, and the funds trade on the stock market. They are more expensive than a bitcoin ETF; while several of Canada’s bitcoin ETFs charge annual fees of 1%, most bitcoin funds or trusts charge about 2% a year. They are also less accurate at tracking the price of bitcoin than ETFs, meaning you might be paying far more or less for your bitcoin than necessary. The largest, by far, is the Grayscale Bitcoin Trust, which managed about $36 billion in bitcoin, as of May 2021. The Grayscale Bitcoin Trust alone controls about 3.12% of all the bitcoin in circulation. As of this writing, the largest ETFs manage less than $1 billion each. Lots of these funds and trusts, Grayscale included, plan to convert its product to a bitcoin ETF as soon as regulations permit.

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. And even those with the best of intentions can fall apart when the market crashes.Do your research before investing in obscure coins and exchanges, as they can be as untrustworthy. Canada has had an especially rocky past with exchanges going bust: Both 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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