Beginner’s guide to understanding how bitcoin works

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 operate in the sector. Satoshi´s real identity remains unknown.

Currently there are around 16.5 million bitcoins in circulation. They are slowly created (mined) as commissions to  parties (miners) that maintain the bitcoin network. The total number of bitcoins 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 unlimitedly. Limiting the 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 growth in the popularity and use of bitcoin.

As a result of the small number of Bitcoins and the strong increase in value, bitcoin has been used in many contexts 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, known as 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 what is it based on?

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 in the internet.

Bitcoin’s operations are based on a distributed database known as blockchain which can also be called bitcoin’s accounting book. 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 and 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 in users’ computers across the world. Network operations are executed with the help of users who donate computing power 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 every 12 minutes 12.5 new bitcoins are being generated. Approximately every four years, the number of new emerging bitcoins will automatically halve and all bitcoins should be created approximately on 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 late 2017 there are about 16.5 million bitcoins in the world which means that more than 80% of ever-coming bitcoins already exist.


All bitcoin transactions are saved in the same public ledger.

What are the benefits of Bitcoin compared to other currencies?

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

Currently bitcoin is most commonly used as an investment tool and a value retainer.  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 a low-interest accounts with these currencies.

Due to its very limited amount, bitcoin 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 in 2009-2013, as well as 2015,2016 and 2017.

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 transactions make bitcoin an attractive option for international transfers which can typically be slow and expensive.

Bitcoin’s independence from banks or centralized entities 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 the 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.

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 bitcoin-containing Bitcoin 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.

Purchase, storage and use of Bitcoins

If you want to buy bitcoins, the first thing you need to do is set up a Bitcoin wallet for the storage of bitcoins. 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, which acts like a bank account number. Anyone with the wallet address can transfer bitcoins into the wallet.

When choosing a wallet, you should consider for what use cases are you 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 Coinmotion platform is a good option. If you have an important amount of Bitcoins, you might also want to manage the funds by yourself in which case a cold storage (e.g. Ledger Nano S) is an option to consider. 

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 safely. By signing up for Coinmotion service you will get yourself a Bitcoin wallet that works in your browser. You can deposit Euros to your Coinmotion account from your regular bank account. Once you have deposited Euros to your Coinmotion account, you can buy bitcoins to your bitcoin wallet. You can use the service like a bank account, where you can keep both euro and bitcoins.

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

Get yourself Coinmotion bitcoin wallet here

The Vault service brings added security to Coinmotion account

When storing bitcoins as a long term investment, it is highly recommended to pay attention to the 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 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 accounts 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 version of it. Leading provider in the industry of physical coins is Denarium. Denarium bitcoin was created by the same company as Coinmotion, Prasos Ltd. Denarium Bitcoins are manufactured in Denarium factory in Finland under carefully supervised conditions. Apart from being a collectible item, they can be used as an easy cold storage for bitcoin funds. You can purchase Denarium bitcoins with the bitcoin amount of your choice starting from one hundredth of a bitcoin to 5 bitcoins per coin. Most commonly sold Denarium coins come with gold plating.

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 in 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 Bitcoin coin is 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.

Check the whole product line and get  yourself Denarium Bitcoins here

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 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 in 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. Bitcoins value has been increasing strongly during the last years but there has 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 up to date performed well. Therefore 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 investment in a longer time period. This can be accomplished, for example, by making investment 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 in 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.

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Bitcoin value has been rising through-out 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. 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 in 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. 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. It is estimated that in 2017 there are over 10 million bitcoin users. If the growth continues and the amount of bitcoin users grows tenfold in few years the value can skyrocket. Some financial experts expect this to be the case. A Harvard professor forecasted that bitcoin will reach value of 100 000 dollars by February 2021. Top analyst Kay Van-Petersen forecasted 100 000 dollars by 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.

Create safe and easy to use bitcoin wallet with Coinmotion here


Also published on Medium.

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