Bitcoin came to existence in 2009 after the Occupy Wall Street movement protested against banking institutions over their imposed budget cuts and tuition hikes. In their defence, the move was crucial for them to survive the great recession of 2008. Consequently, a yet to be identified Satoshi Nakamoto seized that opportunity to create a digital currency that doesn’t fall under the control of banks or the authority of governments. Bitcoin was created to be transparently accessed by its owners who need not rely on a trusted third party to process their transactions.

What exactly is Bitcoin?

It is a new kind of electronic money or digital currency whose capacity as a medium of exchange is in cryptocurrency transfers. These transfers are only carried out on the internet. Therefore, it is practically impossible to physically handle a Bitcoin or value it as a commodity.

The architecture of Bitcoin is a collection of computers known as nodes, which are all connected on a peer-to-peer network. The transaction logs of all Bitcoin owners are stored as blocks in a ledger system that is both public and decentralized. At the same time, the balances of various owners can be calculated from the records in the blocks. However, the system’s high-level security, immutability and transparency is made possible by the blockchain technology it leverages.

Digital transactions with Fiat currency

The Fiat currency is a government established money, regulated by a national bank and accepted as a national legal tender. It has no value in itself but is only as valuable as the government makes it.

When a certain Peter initiates an online transaction with a Merchant XYZ to purchase a Product ABC, he provides the information on his debit card which could be a Mastercard to the digital payment gateway. The information is sent to Peter’s bank to be verified, confirm the availability of funds and approve the transaction. On receiving the bank’s authorization, the payment processor debits Peter’s bank account with an amount equal to the price of Product ABC to credit Merchant XYZ’s bank. In the event of a successful transaction, a certain percentage of debit will be made on Peter’s account and shared between his bank and Mastercard as a cost of the transaction. It is also worth noting that the completed transaction has the possibility of reversal and likewise, the mediation to reverse it is also done at a cost.

Blockchain and Cryptocurrency

Blockchain is the very essence of the Bitcoin cryptocurrency. It is a progressive linked list of immutable records which are verified with timestamps and unanimously managed by a network of computers called nodes. In a blockchain ledger, every new block of records is linked to a previous block, having a hash pointer that contains a hash of the widely verified data in that block.

A Blockchain Ledger - Image by Timusu, pixabay.com

How Bitcoin works

Even though Bitcoins are technically not stored anywhere, Bitcoin transactions are stored in public blockchain records. The transactions are made transparent to just about anybody because the millions of computers supporting the Bitcoin blockchain all have a uniform record of confirmed transactions.

An electronic coin such as the bitcoin is a string of digital signatures. They are transferred from one owner to another when a current owner signs the hash of the bitcoin’s previous transaction alongside the public key of the owner to be. The signatures are then appended to the end of the bitcoin to establish a transfer of ownership.

Instead of relying on banks as a third-party trust that prevents double-spending, Bitcoin ensures the currency owner is not allowed to spend it more than once by a computational cryptographic algorithm known as a Proof of Work. A transaction, once confirmed, is hashed, timestamped and published widely across the entire network in chronological order of occurrence.

Any attempt to alter block data in the blockchain is an attempt to carry out a new Proof of Work on the block and all the previous data blocks it is chained to. Such an attempt is bound to be unsuccessful because every CPU on the blockchain network has to supply a vote to validate the new Proof of Work.

Bitcoin Transaction Fees

When a Bitcoin owner initiates a transaction, the process begins immediately. But the time required for the transaction to be confirmed with the evidence of a new balance depends on the CPU power available on the network for use. Transaction duration can range from two minutes to one hour as the case may be. However, the speed of a transaction can be expedited by opting for a higher transaction priority. This will attract a negligible cost called a miner’s fee, to pull more CPU power(miners) from the network to make the transaction faster.

How to trade Bitcoin

The first step to take when getting started with Bitcoin trade is to sign up for a Bitcoin wallet by trusted providers such as Paxful and Luno. You will be offered four types of wallet technology to choose from. They include; desktop, mobile and hardware wallets. You can read more about them here.

Once you have established a Bitcoin wallet with a wallet ID, a private key is created for you from the wallet. A public key is in turn generated for you from the Private key and finally, a unique Bitcoin address is created from the private key for you by means of specific cryptographic calculations. Get a detailed description of how the address is generated in Blockchain Address 101.

A Bitcoin address is usually a string of alphanumeric characters that begins with 1. Any Bitcoin trader who needs to transfer bitcoins to you can only do so by sending funds to your address. As soon as a process of bitcoins transfer is initiated, a block is created for the transaction which eventually gets added to the blockchain after verification.

On the other hand, if you are sending funds to another Bitcoin trader, you will need to;

• 1. Verify the transaction with your private key.
• 2. Sign a cryptographic signature on the recipient user’s public key.
• 3. Provide the user’s address as a destination for the funds transfer.

The Bitcoin wallet is where your private key, public key and address are saved. It therefore serves as your virtual bank account by making use of these data to calculate your spendable balance after every verified transaction.

First things first

What you need to do is visit a “bitcoin exchanges’‘ outfit such as Coinbase. You will be directed on how to buy bitcoins that will be saved in your wallet with your local fiat currency. You can also buy bitcoins directly from bitcoin.org. The balance of your wallet is tied to your public key and address instead of your name. This grants you a pseudonymous identity on the network.

5 Reasons to Trade Bitcoin

1. Full autonomy and zero censorship

With Bitcoin, you have absolute control over how and when you like to spend your money. There are no authorities to place transaction limits on your Bitcoin trade because the bitcoins are not issued by any such. All this is made possible by the consensus mechanism used by Bitcoin when verifying and confirming transactions. It is impossible to reverse, steal or cancel a process that was unanimously vetted across a peer-to-peer network.

2. Anonymity and privacy

Inasmuch as all transactions on the Bitcoin network are made transparently public, the transactions are not linked to names or any traditional means of identification. Therefore, trading Bitcoin gives you an unusual right to full privacy. It also gives you control over what personal information you decide to make public. External influences like government and opposition parties cannot spy on your finances because the network makes them untraceable to you.

3. Low rates on global transactions

The global nature of Bitcoin preserves the interest of international merchants as they aren’t subjected to any stringent laws bordering on international transaction rates and tariffs.

4. Elimination of profit cuts by third-parties

We saw earlier on how online payment processors and banks are entitled to profit cuts for every successful transaction. Unlike the fiat currency’s mandatory transactional cost, Bitcoin does not impose any standard charges on the currency owner. The reward of bitcoins that go to Bitcoin miners is a negligible “maker and taker fees” that are charged on occasional deposits and withdrawals

5. Reduced exposure to fraud

Bitcoin payments are made to an anonymous address via a public key and signed with a private key. This scenario does not leave any room for a possible theft of sensitive financial information. Additionally, Bitcoin transactions are irreversible. Unless the new owner decides to send back the funds he received, there is no way such funds can be manipulated back to the source. This prevents fraud and theft in a long shot.