As Bitcoin grows in popularity, it’s more important than ever to fully understand the world’s most popular cryptocurrency.
What Is Bitcoin?
Bitcoin is a decentralized digital currency that’s secured using cryptography. Bitcoin, and other digital coins like it, are called cryptocurrency.
Bitcoin users can buy, mine, and store individual units of the cryptocurrency. The units are linked together by a central ledger (i.e., a record of transactions). The ledger is stored on a blockchain. The blockchain validates and records every transaction made using Bitcoin, ensuring the Bitcoin network’s integrity. Anyone can see Bitcoin’s public blockchain by using a Bitcoin blockchain explorer.
(Note: Read our guide to blockchains if you’d like to learn more about the underlying technology and its uses.)
Bitcoin vs. Fiat Currency
Is cryptocurrency better than cash? Unlike regular fiat currency, such as the US dollar, there is no central Bitcoin bank or government.
The creation and regulation of Bitcoin is controlled by an algorithm and is entirely digital. You cannot hold a physical Bitcoin in your hand, but you can hold physical hardware that contains data that corresponds to the Bitcoins you own.
The total number of Bitcoins that will ever be created is limited to 21 million. In theory, the limit will create scarcity and help to increase Bitcoin’s value. The limit stands in stark contrast to national currencies; one only has to look at the recent money-printing efforts by the Fed to understand the difference.
Similarly, Bitcoin is also very different from Ethereum, the world’s second-largest cryptocurrency. Whereas Bitcoin was created as a currency and payment system, the Ethereum blockchain allows for smart contracts. Read our Ethereum guide to learn more.
How Much Does Bitcoin Cost?
Bitcoin is expensive. There aren’t many who can afford to buy one entire Bitcoin outright; instead, most people purchase fractions of a Bitcoin. This is possible because Bitcoins are divisible to eight decimal places, meaning you can own as little as 0.00000001 BTC. You can’t do much with it, but you can definitely own it.
Where Can You Use Bitcoin?
On the macro level, Bitcoin adoption is growing. Many countries in the world are Bitcoin-friendly, with Malta, Bermuda, and Switzerland among the top rankers (though don’t get too complacent—there are still plenty of places that have banned Bitcoin, too).
It’s also increasingly easy to use Bitcoin for purchases in your day-to-day life. There is a growing list of companies who accept Bitcoin payments, you’ll find Bitcoin ATM machines in large cities, and more fintech services like Bakkt are coming online to process payments.
A common misconception is that Bitcoin payments are entirely anonymous. That’s not true; it is possible to trace the history of a coin, and information may expose its current or previous owner. If you need to spend Bitcoin anonymously, you might need to use a Bitcoin tumbler to obscure your coins’ origin.
How to Buy and Use Bitcoins
The easiest way to buy Bitcoin is via a dedicated service like Coinbase. But beware, despite’s Coinbase’s popularity, its fees are much higher than some of its competitors.
You can also buy Bitcoin (and other cryptocurrencies) on an exchange. Make sure you choose one of the best crypto exchanges to make your purchase—there are still a lot of cowboy operators among the less well-known ones. For the cheapest fees, have a look peer-to-peer exchanges like XCH4NGE.
If you don’t want to buy Bitcoin, you could try mining it instead. You can mine Bitcoins with any computer, and you can even mine Bitcoins using your Android device. If you plan to spend money on some decent hardware for Bitcoin mining, read our guide on how to find the best Bitcoin mining GPU then consider which of the many Bitcoin mining pools you want to join. Make sure you understand what a mining pool entails before you sign up.
And remember, if you’re a gamer, you might want to try playing some games that allow you to earn crypto—it’s more fun than using an exchange!
How to Store Bitcoin
Bitcoin (along with other cryptocurrencies) is stored in a wallet.
To learn more, check out the best Bitcoin wallets available today and the best Bitcoin wallets on Android. For added security, you could try using a Bitcoin wallet specifically designed for anonymity.
The Pros and Cons of Using Bitcoin Today
Like all technology, Bitcoin has its pros and cons. Here’s are few for you to consider:
- Freedom: Users can send and receive Bitcoin anywhere in the world, irrespective of local currency. You can even send payments via SMS for a fraction of the price of a bank wire transfer.
- Decentralized: There is no central bank to control new Bitcoin; users are in control of the network.
- Transparent: The blockchain ledger underpinning Bitcoin is available to anyone who wants to download it.
- Privacy: While there are ways to trace Bitcoin transactions back to their source, Bitcoin is largely anonymous. In addition to confidentiality, Bitcoin transactions protect against identity theft and credit/debit card fraud by using only digital wallet IDs, never your actual details. If you really need anonymity, consider one of the most private cryptocurrencies instead.
- Supply: There is a finite supply of Bitcoin; only 21 million Bitcoin will ever exist. Several million are already presumed irretrievably lost, increasing demand for the rest. Bitcoin is also the baseline for almost all other cryptocurrencies measure against.
- Protection: Unlike regular currency, you cannot counterfeit Bitcoin. Sure, there are scams out there to steal Bitcoins, and unscrupulous individuals will try and sell fake Bitcoin, but you cannot fake a Bitcoin.
- Fees: In the early days, Bitcoin transaction fees were minimal, but they have been creeping up in recent years.
- Volatility: Price volatility makes Bitcoin challenging to use as currency. Many vendors are unwilling to risk their incoming payments decreasing in value by the time it processes. Unlike a regular US dollar, the value of your Bitcoin could drop considerably overnight, leaving you with nothing.
- Refunds: One of the positives of Bitcoin is payment privacy. Unfortunately, it is also a downside. If you send money to the wrong Bitcoin address, there is no way to claim it back. Similarly, if you purchase something using Bitcoin and it never arrives, there is no charge-back function.
- Competition: Other cryptocurrencies offer more regarding privacy, security, and functionality. They cost less, and could eventually overtake Bitcoin.
- Unregulated: Similar to the lack of refunds, some Bitcoin-related scams are virtually impossible to recover from. Law enforcement can do nothing once your coins are gone, other than commiserating and filing a report.
- Loss: It is possible to irretrievably lose Bitcoins, be that through destruction, encryption, or even a hacked exchange. The worst exchange hacks have seen billions of dollars’ worth of crypto vanish overnight.
What Is the Future of Bitcoin?
One of the most significant issues facing Bitcoin is sustainable growth. At present, the Bitcoin network cannot process enough transactions to compete with fiat currency solutions (like Visa and Mastercard). Several proposals would mediate this issue.
One such solution lies with “Layer 2” Bitcoin network protocols. Layer 2 protocol solution aims to increase network capacity and decrease transaction times without requiring a hard fork. Instead, a Layer 2 protocol sits atop and interacts with the existing Bitcoin network.
The most notable example of a Layer 2 protocol is the Lightning Network, though its introduction has proved controversial among Bitcoin’s core developers.
Lightweight nodes are another development to keep an eye on. Unlike a full node, a lightweight node does not need to download the entire Bitcoin ledger in order to operate. Although they are still in their infancy, lightweight nodes have already proved to be a great way to support the Bitcoin network.
Learn More About Crypto
Now you’ve got a thorough grasp on Bitcoin, it’s time to learn about some of the other areas of the crypto sector.
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