Beginner’s guide to understanding how bitcoin works

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Why and how Bitcoin was created – a brief history review

Bitcoin is an open source code created by a person or community presenting himself as Satoshi Nakamoto. Bitcoin is the first decentralized digital currency that can not be tampered with and requires no more states than banks. Satoshi published a whitepaper for bitcoin and its operating principles in 2008. Since then, the currency development has been in the hands of the users and operators that together comprise the sector. The real identity of Satoshi remains unknown and has caused much speculation. However, since even Bitcoin’s creator can not manipulate the system in any way, it is safe to use regardless of who created it. 

Currently there are around 18 million bitcoins in circulation. They are slowly created through a process called mining as commissions to parties (miners) that maintain the bitcoin network. The total number of bitcoins ever to be created is limited to 21 million. The limited amount makes it different compared to, for example, the euro and the dollar, which central banks can create without limits. Limiting the maximum amount to 21 million makes bitcoin a scarce resource so there isn’t an unlimited amount of bitcoin for the users. Due to its scarcity, the strong increase in value is a natural consequence of the growing popularity and use of bitcoin.

As a result of the small number of bitcoins and the strong increase in value, bitcoin has in many contexts been used in smaller units. In general use is a thousandth of bitcoin whose acronym is mBTC. Another commonly used acronym is a hundred millionth of a bitcoin, the smallest possible unit known as a satoshi. The use of smaller units in conversation is easier when talking about small amounts of money. Their use has become more common with bitcoin’s strong appreciation.

What is Bitcoin and how does it work?

Bitcoin is a decentralized digital money system, developed by an open community that uses it. A well-known example of a system developed by an open community is Linux, which is the most common server operating system on the internet.

Bitcoin’s operations are based on a distributed database known as blockchain which can also be called bitcoin’s accounting book or ledger. This public ledger contains information of all the bitcoins in the world and bitcoin transfers executed in the network. The system is open and transparent meaning all existing bitcoins and bitcoin transactions are public. Privacy in the system is based on the fact that the ownership of the bitcoin addresses is not public.

The Bitcoin blockchain is maintained by users’ computers across the world. Network operations are executed with the help of users who donate computing power, also known as hash rate, to the network. As a reward they receive new bitcoins that are being created in the process. Thus they are called miners. Miners process all the transactions in the bitcoin network. To process a transaction the performing miner must solve a demanding mathematical equation.

The frequency of new bitcoins created is defined in a formula which was decided in the Bitcoin whitepaper. Currently 6.25 new bitcoins are being generated every 10 minutes on average. Approximately every four years, the number of new emerging bitcoins will automatically halve, which slows down their flow on the markets and further increases the scarcity of the supply. So far halving events have taken place in 2012, 2016 and 2020. Ultimately all bitcoins should be created around the year 2141. The maximum amount of bitcoins that will be created by then is 21 million. Subsequently miners will receive their rewards as commission fees from bitcoin transactions.

In early 2020 there are about 18 million bitcoins in the world, which means that more than 85% of all bitcoins that will ever exist have already been mined. It is also worth noting that an estimated half of all currently existing bitcoins are presumed lost, meaning their owners have died or otherwise lost access to their private keys. While these lost coins continue to exist in the blockchain, they can no longer be obtained or moved by anyone. This in turn makes the actual supply of bitcoins circulating on the markets much lower. 

With bitcoin’s increasing value and human mortality in mind, it is good to remember that even a small amount of funds can one day amount to a substantial inheritance. Therefore it is highly recommended that bitcoin owners make testament arrangements to ensure that their funds won’t be lost and can be legally inherited by family members or other trusted parties.

All bitcoin transactions are saved in the same public ledger.

What are the benefits of Bitcoin compared to other currencies?

Bitcoin has attracted growing numbers of investor funds during the past years. The various possible uses of bitcoin and the blockchain technology behind it have been getting increasing interest from both the media and the public.

Currently bitcoin is most commonly used as an investment tool and value retainer. The long-term value of the most widely used currencies in the world such as the US dollar and the euro is constantly downward. The decline in value is affected by the continuous increase in the amount of money. Due to the constant decline of value it might not be convenient to keep large amounts of money in cash or in low-interest accounts with these currencies.

Due to its very limited amount, bitcoin’s value doesn’t tend to drop like fiat currencies. As an investment it should rather be compared to gold than the dollar or the euro. As a result of increased awareness and use of bitcoin, the value can keep rising for many years to come. Bitcoin has at least doubled its value during the years 2009-2013, as well as 2015-2017 and 2019.

Throughout most of its history, bitcoin has been uncorrelating or even negatively correlating with traditional assets, meaning it either maintains its value or goes up when other assets drop. In March 2020, the worldwide covid-19 pandemic led to an unprecedented market panic, during which bitcoin’s price also temporarily crashed. This marked the first time bitcoin has ever correlated with the wider economy during its entire ten-year existence. However, bitcoin quickly recovered and has since strengthened its case as a durable safe haven and store of value surviving crises.

Bitcoin’s independence from banks or centralized entities also makes it very independent of social changes. It is used in many countries where social turbulence and corruption take place. For example the Greek banking crisis at the beginning of 2010 greatly increased the use of bitcoin within the country. Bitcoin wasn’t affected by the banking crisis and it was a safe and functional alternative to maintaining and transferring money for the Greeks dissatisfied with their banks. A similar development has been seen in other countries like Venezuela, where hyperinflation has left the national currency practically worthless while bitcoin use has literally saved lives. 

How fast are bitcoin transactions?

Bitcoin is also widely used in international money transfers and e-commerce platforms. Bitcoin transfers are processed at the same rate regardless of where the sender and recipient are located. Typically transactions take less than an hour. As the network is further developed, the transaction speed can drop to minutes or seconds in the near future. Fast and affordable transactions make bitcoin an attractive option for international transfers which can typically be slow and expensive.

In 2017 Bitcoin’s transaction speed was improved by the significant Segregated Witness update.  One proposed solution to further accomplish faster transactions is the Lightning Network. The Lightning Network is generally seen as one of the most promising answers to Bitcoin’s scalability problem.  It is a second degree solution, meaning that it is built separately to the Bitcoin network but interacts with it. In essence its purpose is to enable faster payments with lower fees. If successful, the Lightning Network could see Bitcoin’s transaction speed rise to seconds with almost non-existent fees. 

Bitcoin can be used to pay in an increasing number of stores and web stores. There are already tens of thousands of merchants internationally who accept bitcoins as a payment method. Paying with Bitcoins in stores typically takes place via the merchant’s QR code. The code is read by the client´s mobile phone with a bitcoin-containing wallet. There are different service providers for Bitcoin wallets for both Android and iOS devices. In online shopping, payments are made either by reading the merchant’s QR code or text-like wallet address.

Where to buy, store and use Bitcoin

If you want to buy bitcoins, the first thing you need to do is set up a Bitcoin wallet for the storage of your coins. A Bitcoin wallet can be compared to a cash wallet or a bank account. Once you’ve created a wallet, you can buy bitcoins to this wallet. In your wallet you find your personal wallet address or public key, which acts like a bank account number. Anyone with the wallet address can transfer bitcoins into the wallet. Be careful not to share your private key, since it is equal to a password and can be used to access the funds on your account. 

When choosing a wallet, you should consider for what use cases you are purchasing the bitcoins. If you buy bitcoins to make payments with them in stores, then a mobile wallet is a good option. There are multiple free wallets available that you can download to your mobile device, for example Mycelium (Android) and Breadwallet (iOS phones). Then again, if you want to purchase bitcoins and hold them, a secure storage like the Coinmotion platform is a good option. If you have a significant amount of bitcoins, you might also want to try managing the funds yourself, in which case a cold storage wallet (e.g. Ledger Nano S or X) is an option to consider. 

Aside from exchanges and platforms, it is also possible to buy bitcoins with cash from so called Bitcoin ATMs. These machines allow you to deposit or withdraw cash depending on whether you want to buy or sell bitcoins. In Finland the largest Bitcoin ATM network Bittimaatti is maintained by Prasos Ltd, the company behind Coinmotion. You can find more information about the service from Bittimaatti’s homepage.

Coinmotion bitcoin exchange and deposit service

Coinmotion is one of the leading bitcoin trading platforms in the Nordics. Through the platform you can buy, sell and store bitcoins as well as four other virtual currencies safely. By signing up for the Coinmotion service you will get yourself a Bitcoin wallet that works in your browser. You can also easily create separate wallets for four other virtual currencies, including Litecoin, Ethereum, XRP and XLM.

You can deposit euros to your Coinmotion account from your regular bank account or credit card. Once you have deposited euros to your account, you can buy bitcoins to your Bitcoin wallet. You can use the service like a bank account, where you can keep both euros and bitcoins as well as other cryptocurrencies.

You can also deposit or receive bitcoins to your Coinmotion wallet by using the wallet address or QR-code. You can find your wallet’s address and QR-code under the “account” tab, where all of your account information is located. From there, you will also see the balance of your account, the current transaction fees and the full history of your account’s transactions.

Get yourself a Coinmotion wallet with discounts here

The Vault service brings added security to Coinmotion

When storing bitcoins as a long term investment, it is highly recommended to pay attention to security issues. The biggest risk with storing bitcoins is that someone hacks into your account and withdraws the bitcoins. Most bitcoin thefts are performed this way.

In Coinmotion we provide extra security against such threats with our Vault service. By storing Bitcoins in Coinmotion’s Vault, you can protect Bitcoin transfers with a timelock that can be set from 12 hours to one month. So if someone hacks your account and tries to withdraw funds, you will receive a text message (if this is option is activated) and email immediately and can easily cancel the withdrawal by contacting our support during the time window.

Withdrawals from Coinmotion always need a separate verification from your email. This brings some extra security to all Coinmotion accounts. You can also set up two-factor authentication to further increase your account’s security.

Denarium coins provide a physical storage format for bitcoins

Even though Bitcoin is a virtual currency, there are service providers that have made a physical versions of bitcoin wallets. We used to produce those with the Denarium brand from 2013 to 2020.

Most commonly sold Denarium coins were plated in gold. Denarium has also produced gold bars capable of containing bitcoins, which combines the concept of traditional gold with digital gold in an elegant fashion.

One of the premium models of Denarium bitcoins is made out of gold.

In the Denarium coin the public key for the bitcoins is engraved on the coin’s surface. The private key that you need if you want to remove the bitcoins from the coin is located inside the coin under a hologram shield. Denarium coins are a safe and stylish alternative for physical storage of bitcoins out of the reach of hackers. If you want to exchange the Bitcoin reserve in Denarium to other currencies, you can transfer the bitcoins inside to a Bitcoin wallet like Coinmotion wallet. However, it is likely to be more profitable to sell a Denarium coin directly to another bitcoin user, as the coin itself also has value for collectors.

While Denarium has ceased manufacturing new products in 2020, the website and database continue to be functional. Prasos’ customer support also provides help with all matters related to Denarium products.

How safe is bitcoin storage and what are the risks involved?

Storing bitcoins has become safer over time while the most trusted service providers have developed their security standards. Investigating the backgrounds of the service provider you use is still highly recommended. During the existence of Bitcoin, especially in the early days, some significant bitcoin exchanges have been misused or used illegally, whereby users have lost their bitcoins.

There are different types of risks involved with investing in Bitcoin. The volatility of Bitcoin price is higher than the volatility of other other currencies or many traditional investment instruments. Even though the volatility has decreased during the last years, you should consider bitcoin as a high-risk investment. Bitcoin’s value has been increasing strongly during the last years but there have been significant downtrends as well.

You should pay attention to the fluctuation of the price especially if you are planning to make a short-term investment. As a long-term investment bitcoin has historically performed well. Therefore a long-term investment strategy is still the most recommended way of investing in bitcoin. Due to the price fluctuation, it can be wise to divide bitcoin investments over a longer time period. This can be accomplished, for example, by making investments in repetitive monthly purchases.

If you buy bitcoin as Denarium bitcoins, you should take care of the safe storage of the coins as the key to access the funds is located inside the coin. A safe in the home or a bank safe are both good options to store the physical coin. For virtual services, it is important to make sure that your password is secure. High-quality service providers also enable two-factor authentication which increases security.

Bitcoin value has been rising throughout its existence.

How has the value of bitcoin developed and what is its future outlook?

Bitcoin’s value has risen steeply since its creation. Volatility has slightly decreased as the Bitcoin market has grown and matured. When big companies and investors invest in bitcoin and bitcoin-related businesses the economy slowly stabilizes. However, in the near future the value of bitcoin is likely to continue fluctuating more than in the case of fiat currencies.

The value of bitcoin at least doubled during the years 2009-2013. In 2014, the value of bitcoin experienced a recession. This was affected by the significant Mt. Gox exchange service embezzlement. After 2014, appreciation has again been growing strongly and accelerated in 2017. The year 2018 marked a bear market similar to 2014, while 2019 and 2020 have seen the price climb again. Growth can easily continue in the same manner in the following years.

If bitcoin truly breaks through in the following years, it can become a global currency that can be used as a payment method all around the world. While exact numbers are impossible to count, it is estimated that there are currently around 100 million bitcoin users amounting to roughly 1% of the world population. If the growth continues and the amount of bitcoin users multiplies further, the value can skyrocket. Some financial experts expect this to be the case. A Harvard professor forecasted that bitcoin will reach a value of $100 000 dollars by February 2021. Top analyst Kay Van-Petersen in turn predicted $100 000 dollars by the year 2027. These are promising numbers for an investor.

For sure some experts think otherwise. Many critical forecasts come from people working in the banking sector. Obviously the rise of bitcoin can decrease the power of banks, so these people have a reason to be cynical. Nonetheless, it is worth being cautious and weighing the pros and cons of Bitcoin before making an investment decision. Bitcoin certainly includes risks – but it also has enormous potential for the future.

Create a safe and easy Coinmotion account here

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20/04/2020 18:00

Voinko ostaa Coinmotion kautta pareja kuten BTC-USD, LTC-UAS jne?

Robin Nyberg
Robin Nyberg
22/04/2020 10:44

Coinmotionissa ei toistaiseksi ole tarjolla tuollaisia vaihtopareja, mutta välittömät vaihdot euroista viiteen eri kryptovaluuttaan onnistuvat.

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Responsible for the file: Prasos Oy. Purpose: sending information about own products and services to the undersigned. Legitimation: consent. Recipients: The data will not be communicated to third parties. Rights: access, rectify and delete data, as well as other rights, as explained in the additional information. You can consult additional and detailed information in our Privacy Policy
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Would you like to be the first one to hear about our product updates, receive super hyper special offers and learn more about cryptocurrencies through our exclusive market reports? We are happy to send you an email every now and then – not too often – so please fill your information below. Let’s stay in touch! Are you already a Coinmotion user? You can also manage your subscription via account settings.
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Responsible for the file: Coinmotion Oy. Purpose: sending information about own products and services to the undersigned. Legitimation: consent. Recipients: The data will not be communicated to third parties. Rights: access, rectify and delete data, as well as other rights, as explained in the additional information. You can consult additional and detailed information in our Privacy Policy