Bitcoin (BTC) is a digital currency created (technical term is “mined”) and stored electronically. Unlike the euro or the dollar, bitcoins are not physically printed or produced by central banks, but are produced locally by individuals around the globe using computer power. Bitcoin, as well as other digital currencies, is not subject to any central or state control.
Bitcoin is the best known example of a fast growing Cryptocurrency. The following tutorial explains the main features and characteristics of the digital currency.

What is bitcoin and how does Bitcoin differ from other digital currencies?

Bitcoin can be used to purchase goods and services as well as to conduct financial market transactions. In doing so, Bitcoin fulfils the same functions as conventional currencies, euro or US dollar or any other currency.
However, the most important characteristic of the bitcoin is its decentralization. The Bitcoin network is not subject to any institutional control. This means that no central bank or state can control the money supply and set the framework conditions – the network controls itself.

Who created Bitcoin?

A software developer with the pseudonym Satoshi Nakamoto has supposedly created the bitcoin. Nevertheless, it is still unknown whether this is a single person or a group. The unexplained identity of Satoshi Nakamotos therefore leaves room for speculation and conspiracy theories to this day. Read more about history and origin of bitcoin.

How many Bitcoins are there and can be produced?

The Bitcoin protocol has been developed for a maximum of 21 million bitcoins, which can be mined by miners. These coins can be divided into smaller parts (the smallest part is a hundred millionth) and is called Satoshi – named after the Bitcoin inventor Satoshi Nakamoto.

What is bitcoin based on?

Bitcoin is based exclusively on mathematics. There is no institutional structure behind bitcoin that decides its intrinsic value. People around the world use software that follows a mathematical formula to generate Bitcoins (also known as mining).
This software is an open source, which means that it is possible for everyone to understand what this software does and its purpose. The Bitcoin-based technology is known under the name of Blockchain, and at present – just like Bitcoin – is on great interest from many companies, institutions and governments. Decisions in the Bitcoin network are made from the network through a consensus mechanism defined in the program code.

Bitcoin is decentralized

The network is not controlled by any central institution. Every computer that calculates and transfers Bitcoins is part of the network. This means that no central institution can make monetary policy decisions for the Bitcoin network or possess authority to take Bitcoins away from users. If the system goes offline for any reason, the Bitcoins will still be retained. The entire protocol of the Bitcoin network can be stored theoretically on a hard disk or even printed on paper.

Bitcoin is easy to handle

Opening an account or business account with a bank is often associated with bureaucratic hurdles. A Bitcoin account (wallet), on the other hand, can be opened up for anyone without having to provide any evidences.

Bitcoin is pseudo anonymous

Users can have multiple BTC accounts (wallets). These are not associated with any names, residential addresses, or other personal information.

Bitcoin payments are 100% transparent

The network stores every single transaction in the Blockchain. The Blockchain is like a huge register. If someone has a public BTC address, everyone can see how many Bitcoins are on that account. However, it is not visible to whom this BTC address belongs. Nevertheless, many users keep changing addresses and only transfer parts of Bitcoins to an address.

Transaction costs are low

An international bank transfer at a conventional bank quickly is expensive involving various charges such as foreign exchange fee, service charge and few others. However this is not the case with Bitcoin as it does not matter whether the recipient one mile or several thousand miles away from the sender.

Bitcoin is fast (peer-to-peer)

Bitcoin can be transferred anywhere and it only takes a few minutes for the network to confirm the payment. A bitcoin transfer takes place peer-to-peer, i.e. no middleman or intermediary is involved in between. In contrast to bank transfers, the transaction takes place directly and without detours from A to B.

Why are Bitcoins so valuable?

It is difficult for many people to understand that there is a currency that only exists digitally. The easiest way to compare it is with gold: It’s very rare, so it’s so valuable. Bitcoin is limited: the upper limit is 21 million Bitcoin, which can be created. There can be no more, that has been set.
The fact that this digital currency is currently worth so much is, as already stated, at its current popularity. When Bitcoin was invented, only a few people were interested in it – at that time they were worth only a few cents. Over the years, more and more people wanted to Bitcoin – and so did the value.

Where to buy and sell Bitcoins?

Similar to share market, bitcoins are traded on stock exchanges where you can buy and sell bitcoins. However bitcoin experts always advise to keep them in your own digital wallet and not to store it at the stock exchanges to prevent your money from any hacking or malfunctioning, though there has not been the case till now. The online account with such a stock exchange should be seen as a checking account. These wallets can be installed on the computer to store the bitcoins.

Are bitcoins a good investment?

In the long-term bitcoin is heading towards positive development only, but it is associated with high risk. There are many individuals who believe they are going to be millionaires through day to day trading with Bitcoin. This is certainly possible, but one should definitely deal with it on a regular basis.
However it will not always go uphill. At the moment there are too many large shareholders owning lot of bitcoins. If they start selling, this could have an impact on the bitcoin market. “That’s why people really should only invest money that they can lose, or sit out when Bitcoin is stagnating or even loses value over a long period of time.” If you get panic as an investor when things go downwards sell it in negative thinking that it will go down even further – then the problem is big.

Author Bio:

Hi, I am Nikesh Mehta owner and writer of this site.

I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business.

I can be reached at nikeshmehta@allonmoney.com. You may also visit my LinkedIn profile.