What is Bitcoin (BTC)? How Does it Work?

Earlier this year, Bitcoin managed to set a new all-time-high by trading just over $40,000 USD per coin. As this record was set, so did the public interest in Bitcoin. What is Bitcoin? How does it work, and how can you buy it? 

In this article, we’ll be going over the fundamentals of Bitcoin, highlighting its pros and cons, how to safely store Bitcoin, and how you can easily buy Bitcoin.

New to crypto? Read our intro on cryptocurrency.

What is Bitcoin?

By definition, Bitcoin is a decentralized digital asset known as a cryptocurrency that is created and held virtually – facilitating peer-to-peer transactions without the need of traditional intermediaries such as banks or governments. 

Bitcoin is fully decentralized and is powered by its users with no central authority governing its platform. Just like no one owns the technology behind the internet or email, Bitcoin is controlled only by its users, investors, and developers around the world. 

Learn more by watching our Bitcoin 101 guide on our YouTube channel!

History of Bitcoin

Bitcoin was first proposed in 2009 by Satoshi Nakamoto as a means for creating a currency system that did not have to rely on existing banks or financial institutions – and instead would operate autonomously using a decentralized ledger system known as a blockchain. 

The value of Bitcoin has had humble beginnings, historically surpassing $1,000 USD in January of 2017 before peaking later in that same year. Its value has seen highs and lows over the years indicating high volatility being the first crypto.

However, this did not deter investors as its following quickly grew to include individuals and institutions who believe in its potential for growth.  

How much is Bitcoin valued? Check the latest BTC rates.

Bitcoin (BTC) currently remains one of the most traded cryptocurrency – retaining its reputation as the hallmark digital currency for investors and hodlers alike.

It also remains the largest cryptocurrency with the highest market capitalization, with a value hovering around $738 Billion USD – placing it within the top 15 most valuable traded assets in the world as of this writing. 

Fun fact: One iconic real-world transaction involving Bitcoin was for two pizzas from Papa John’s. The two bitcoin pizzas were traded for 10,000 bitcoins (BTC) – valued today at over $300 million USD – making it the most expensive pizza transaction in history (adjusted for inflation, of course).

How does Bitcoin work?

As prefaced above, Bitcoin is a peer-to-peer payment system that runs independently of a central governing authority that would traditionally control the supply of currencies.

The flow of Bitcoin is controlled directly by its users; from one wallet address to another. The total supply is also hard-capped at 21 million coins, making it a fixed asset that is projected to continually increase in value over time.

To understand how Bitcoin works it’s important to understand the different contexts in which its system works in:

Blockchain

As mentioned earlier, Bitcoin is a digital currency that operates on a decentralized ledger system known as a blockchain.

This blockchain acts as a shared public ledger where each transaction is referred to as a block and is chained to the open-source coding creating a record of each transaction. This technology is what paved the way for the emergence of other cryptocurrencies 

Learn more: What is blockchain technology?

Private keys and Public keys

Bitcoins are stored in a cryptocurrency wallet, which contains your private and public keys. Think of these keys as the address to which you will be sending and receiving bitcoins and other cryptocurrencies.

Keep in mind that your private and public keys are what allows you to access your assets. The importance of keeping these keys secure cannot be overstated. Do not ever share your private keys.

More on safety: Read our tip on keeping your crypto safe.

Bitcoin miners

Bitcoin miners are members of the platform who independently verify and confirm the blocks, or transactions using high-performance computers – a process that involves solving an algorithm that will verify that transactions occurring on the blockchain are authentic. Miners are then rewarded Bitcoins for their mining efforts. 

Read more on mining: What are ASIC Miners and how do they mine Bitcoin? 

How to store your Bitcoins: Cryptocurrency Wallets

Just as you would store your fiat currencies in wallets or banks, cryptocurrencies also benefit from safe storage. 

Bitcoin and cryptocurrencies are stored in what is known as a cryptocurrency wallet. There are different types of crypto wallets, some offering more features than others.

When it comes to choosing which wallet is best for you, it’s imperative to understand the two main types of crypto wallets – software wallets (hot wallets) and hardware wallets (cold wallets),

Software Wallets

As its name suggests, software crypto wallets take the form of applications or software that run on your computer, tablets, or phones that are connected to the internet – hence the term hot wallets. 

The main advantages of software wallets are their convenience, accessibility, and on-the-go trading. This makes them a popular choice for beginners. 

The main drawback of hot wallets is the potential threat and susceptibility of hacks and/or data breaches. Despite this fact, however, it is entirely possible to fortify your hot wallets by implementing strong passwords, two-factor authentication, and the use of safe browsing practices. 

Notable software crypto wallets include Exodus and Coinomi.

Learn more: Read our comprehensive guide on cryptocurrency wallets.

Hardware Wallets

Hardware crypto wallets, or cold wallets, are places to store your Bitcoin and digital assets on physical devices that are not connected to the internet. 

These wallets store your form an offline environment for you to authenticate and verify transactions – essentially eliminating the threat to potential hacks or malicious software from breaching your assets or credentials. 

For the most part, hardware wallets are considered to be the most secure storage options for your bitcoins and other digital crypto assets. They do however require a bit more knowledge and expertise to set up properly. 

Excellent hardware crypto wallets include Trezor and Ledger, both incorporating state-of-the-art security features and both of incorporating industry-leading security features to protect your digital assets.

Pros and Cons of Bitcoin

For those keen on investing, it pays to understand its pros and cons:

Pros

• Transparency – A fundamental aspect of Bitcoin is its inherent transparency. Virtually all information that pertains to its supply and record of transactions are publicly available on the blockchain for anyone to verify in real-time. 
• Security – Due to its decentralized nature, owners have full control over their transactions. Payments involving Bitcoin can be made without the need to include personal credentials tied to the transaction. 
• Peer-to-peer transaction freedom – Bitcoin is not restricted to any country borders, bank holidays, or government bureaucracy. Anyone in the world can send and receive Bitcoins at any given time, as long as they have access to the internet. 

Cons

• Volatility – There is denying that Bitcoin has an inherent volatility that is caused by a number of factors including, but not limited to the circulation and number of institutions using bitcoins that are still relatively small than it could be. Therefore, business activities, large trading volume, and other small events can significantly affect its price. This volatility, however, is expected to decrease as Bitcoin’s technology becomes more mature and its application is further adopted by users and businesses around the world. 
• Acceptance – While public interest in Bitcoin is gradually increasing, its adoption is still a work in progress. Many people are still unaware and thus it will take some time to gain the trust and acceptance of businesses. However, this is quickly changing, as large institutions like Paypal have announced their intention to integrate Bitcoin and crypto spending into their U.S. market in 2021. 

Learn more: What are the different types of cryptocurrencies?

How to Buy Bitcoin in South Africa?

Bitcoin can be easily bought and traded securely through cryptocurrency exchanges. Specialized Bitcoin ATMs are also another option where you can use your debit card or cash to buy bitcoins.

Here at Easy Crypto, we make it easy for users to buy and sell Bitcoin and other cryptocurrencies – with buy and sell orders typically processed within the same day. 

Additionally, we also provide a crypto swap feature with competitive rates for easy swapping between your digital assets. An auto-buy feature is also available for those wanting to invest regularly in a particular cryptocurrency.

Considerations for buying Bitcoin

For some, the prospect of investing in Bitcoin may seem daunting. While Bitcoin and cryptocurrency, in general, can be volatile assets to invest in, it is still a popular alternative that helps you diversify your investment portfolio.

Common questions often asked for those interested in buying Bitcoin include the following:

Ready to invest? Click here to buy Bitcoin (BTC) today.