Bitcoin for Beginners
Toon's expertise is Bitcoin. Joins the Telegraph's Crypto Update regularly.
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In this article you will read everything you need to know about bitcoin. And don't worry: we'll keep it short (really!).
Bitcoin is a digital, independent currency
Bitcoin is a digital currency. It was designed during the global economic crisis of 2008. And that’s no coincidence. The anonymous creator of bitcoin felt that large parties such as central banks had too much power. He (or she!) therefore developed a digital currency without interference from banks or governments.
Bitcoin is designed to be independent. Independent from governments, independent from banks.
There is no organisation controlling Bitcoin. Anyone can join, and everyone has an equal voice. It’s a decentralized system.
Bitcoin only exists on the Internet. You don't have any physical coins.
Bitcoin is global, it transcends all borders. It doesn't matter if you send bitcoin to your brother in Australia or to your grandmother in Brazil. Both receive their bitcoin at the same speed.
What’s unique about bitcoin is that you are in control. You are your own bank. You store your bitcoin yourself, and keeping them safe is your own responsibility. If you do so, no one can access your coins or control your money in any way.
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Bitcoin uses blockchain technology
"Blockchain is the future!" according to every tech fair since 2017. The technology behind bitcoin has become extremely popular. But in essence, the blockchain is nothing more than a general ledger with all bitcoin transactions.
Unlike with a bank, bitcoin makes its transactions publicly accessible, for anyone to see. That has been possible since the very first bitcoin on 3 January 2009. This digital ledger is the backbone of bitcoin.
All transactions are processed in blocks. These blocks are cryptographically linked to each other in chronological order. So you can see it as a kind of chain of blocks, or a ‘blockchain’.
Bitcoin is a team effort
But it's not just this blockchain technology that makes bitcoin special. It is also the immense network surrounding it. Bitcoin is like a sports team: its success depends on playing well together, functioning as a collective.
Bitcoin’s team has several players on the field. For example, there are nodes, which are computers that check transactions. They make sure bitcoins aren’t spent more than once, and that the sender has enough bitcoins on his balance sheet to make the transaction. After this check, the nodes include the transaction in the blockchain.
There are also miners: computers that secure the network and process transactions on the blockchain. The more computers and the more processing power, the more secure the bitcoin network is. By solving a cryptographic puzzle, mining computers process transactions in blocks.
The first miner to solve the puzzle is allowed to add the block of transactions to the chain. In addition, the miner receives a fixed reward, as well as all transaction costs from that block. This reward ensures an influx of new bitcoins.
What started out as a small network has now grown into the largest and safest system in the world. Day in, day out, thousands of computers are working to make the network more secure and stable.
This system is virtually impossible to hack. If you want to do that, you would have to own the majority of the computing power of all computers.
But what can you actually do with bitcoin, at this moment?
Bitcoin is a digital payment system, without the intervention of a bank. So you can use it to pay for goods and services.
More and more companies are accepting bitcoin. Are you in the Dutch city of Arnhem, San Francisco or Hong Kong? Then you can pay with bitcoin in many places. From bookstores to restaurants, from supermarkets to hotels. These cities are all known to be bitcoin friendly.
With an international transaction, it sometimes takes days before the money reaches the recipient's account. Isn't it crazy that a payment can take even longer than sending a letter in the post?
Enter bitcoin. With bitcoin, the money is often in the recipient's account within ten minutes already. They can order a round of drinks straight away!
This speed is possible because in a bitcoin transaction, the geographical location of the sender and the receiver does not matter. On the blockchain you simply see: '1 bitcoin goes from owner A to owner B'. These transactions happen 24 hours a day, 7 days a week. No hassle with business hours or holidays!
You can also use bitcoin as savings. That may sound a bit boring, but it can be incredibly useful. While the savings rates are decreasing, product prices continue to rise (which is called inflation). Some argue that if you have euros in your bank account, you can actually see your money slowly ‘evaporating’.
In the last ten years, the bitcoin exchange rate has been very volatile, but you still see an upward trend. With this in mind, it may be more interesting to invest in bitcoin as savings rather than leaving euros in your savings account. Please note this is speculation, this is not financial advice.
Besides saving, you can also take a more active approach and trade in bitcoin and other cryptocurrencies. This works in the same way as other currencies, for example by trading between the euro and the dollar. By trading at the right moment you can try to achieve the highest possible return.
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