What is Bitcoin?

What is Bitcoin?

Bitcoin is a digital currency. In many ways, it operates just like any other currency. You can use it to buy goods and services, and you can use it to store value, just like you would money in your bank account.

But Bitcoin doesn’t have any real value, right?

That’s right – the only value Bitcoin has is what people are willing to pay for it. If this sounds a bit crazy, think about the money in your pocket. A $20 note itself is worth nothing (it’s not even backed by gold). That note only has value because shops, banks, and other people all agree that that note can be exchanged for $20 of goods and services.

It’s exactly the same with Bitcoin. Bitcoin has no value in itself, but it is valuable because a community of people agree that it holds worth, just like with that $20 note. And for many people, Bitcoin is a better and more useful currency than the New Zealand dollar.

If it’s all digital, can’t you just create more Bitcoin?

The Bitcoin network sets a limit on how many Bitcoins can ever be created. That limit is 21 million, and currently around 80% of those have been created.

How are Bitcoins created?

The process to create Bitcoin is called “mining”. Miners process transactions on the Bitcoin network, otherwise known as the “blockchain”. If I want to pay you 1 Bitcoin, I ask a miner to record that transaction on the blockchain. As a reward for processing my transaction the miner also receives some brand new Bitcoin, which is how Bitcoins are created.

Can I just buy part of a Bitcoin?

Absolutely. The smallest unit of a bitcoin is 0.00000001 and is called a “Satoshi” after the creator of Bitcoin. Currently 5000 Satoshis are equal to 1 New Zealand dollar.

You can purchase Bitcoin in any amount that you want. However, when you purchase Bitcoin you also need to pay a fee for your transaction to be recorded in the blockchain. At the moment, the fee is around NZD$40, so a transaction of lower value than that wouldn’t be able to be processed. This is one of the downsides to Bitcoin as a currency.

What’s so special about Bitcoin?

There are a lot of ways in which Bitcoin is different from any traditional currency, and which make the Bitcoin technology so interesting.

  • Fully digital – Bitcoin has no physical appearance, it’s recorded electronically but doesn’t exist in any tangible form.
  • Decentralised – Bitcoin is not owned by a bank or government, or by anyone! While individual people can buy and hold Bitcoins (or parts of a Bitcoin), the network that runs the currency is controlled by the community that use it, and not by any individual or organisation.
  • Private – instead of using a bank account of credit card that has your name on it, if you want to buy something with bitcoin you don’t need to disclose any personal details. It’s not completely anonymous though, as all transactions are recorded and can be traced. However, you don’t have to link your name to your transaction.
  • Global – it’s as easy to send Bitcoin to your neighbour as it is to send it across the world. And there’s no extra cost for going across borders.
  • Trustworthy – you cannot make a fake bitcoin, put through a false transaction, or steal a bitcoin that is stored securely. The Bitcoin network has built in checks that make it impossible to cheat. Of course, there are always vulnerabilities through things like social engineering (e.g. if someone persuades you to tell them your private key) or if an exchange gets hacked, but the Bitcoin system itself is faultless.

As well as these great features, Bitcoin also has its downsides, which other currencies seek to address.

Stay tuned for our series explaining Ripple, IOTA, Ethereum and more!

To start buying bitcoin and other crypto, head here.

Downsides of Bitcoin

While Bitcoin has some amazing features, it also has its limitations. Some of the key drawbacks of bitcoin are:

  • No helpdesk – while being decentralised (i.e. not controlled by any bank or organisation) is a great strength of Bitcoin, it can also have its downsides. If you forget your password there’s no call centre to help you reset it, and if someone steals your wallet, you can’t just ask the bank to put a hold on your account.
  • Slow – the Bitcoin network can only process around 4 transactions a second, compared to Visa which can theoretically process more than 50,000 transactions per second!
  • Energy intensive – the power used by the Bitcoin network is estimated to be equivalent to 70% of the total power consumption of New Zealand, and this is growing. If Bitcoin were a country, it would be the 58th biggest energy consumer in the world.
  • Expensive to transact with – because Bitcoin uses so much energy, it is expensive to send transactions on the network. At the moment, a transaction costs around NZD$40 – which is pretty pricey!
  • Volatile – the price of Bitcoin can fluctuate massively, which makes it difficult to use for buying goods and services. If you bought a $4 coffee a year ago with Bitcoin, that payment would now be worth $100! And of course, the price can go down as well as up, making Bitcoin a risky investment option.

Not all cryptocurrencies have these same limitations though. While Bitcoin was truly ground-breaking as the first ever cryptocurrency, newer coins have since come along that seek to address some or all of these limitations.

How do I buy Bitcoin?

To buy Bitcoin you need to find someone who wants to sell their Bitcoin, and you need to provide an address where they can send that Bitcoin to. An address is like a bank account number, where funds can be sent to and from. You can create your own address at bitaddress.org , or you can purchase through Easy Crypto where we manage the whole process for you. Easy!

Want to know more?

Read more about what makes bitcoin unique, or read about alt-coins like Dash, Stellar and IOTA.