Bitcoin Basics Explained

​Bitcoin, the world’s most famous cryptocurrency, experienced meteoric highs towards the back end of 2017. The worlds media worked themselves into a frenzy whilst stories, tips, and memes flooded the internet. Early investors in Bitcoin were feeling a bit smug as many were made into millionaires practically overnight.
But just what is Bitcoin? There’s a lot of terminology and jargon surrounding the topic that can be hard to follow. It’s not just a flash in the pan either, Bitcoin could change the face of finance as we know it. Fans of Bitcoin will tell you that it’s the next best thing since sliced bread and in many ways, it is.
Others will tell you it’s a stock market bubble just waiting to burst. These people normally stand to lose money if Bitcoin is a huge success, but they’re not wrong either. It does have all the characteristics of stock market bubbles before it and its value has plummeted in recent months. Still confused? Let this infographic from Cartwright King break it down for you.

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What is a Bitcoin?
Bitcoin (BTC) is a digital currency, officially classified as a ‘cryptocurrency’. It doesn’t exist in a physical form, but rather virtually, on bits of computer code that have been encrypted and secured. You can buy and sell things for Bitcoin just like dollars, pounds or euros.
Bitcoin relies on something called ‘blockchain’ technology for its existence. A number of Bitcoin transactions are grouped together to form a ‘block’. These get added to a chain of blocks by the users of the Bitcoin network and stored in what is referred to as a ledger. This ledger exists in digital format only and is perpetuated by Bitcoin ‘mining’.

What is Bitcoin Mining?
Mining for Bitcoin is a far cry from mining for gold. There is however one similarity: anyone can do it. Where anyone can get a bowl, or a pickaxe and start digging for gold, anyone can purchase the hardware needed to mine Bitcoin. However, if you have a digger, you’ll find more gold and if you have more computing power, you’ll mine more Bitcoin. But how does this process of ‘mining’ work? Let us explain:

1. A Bitcoin transaction is initiated. This can be done by purchasing something online and using BTC as your payment method. This transaction gets grouped with others and put into a ‘block’.
2. The Bitcoin network is notified that there is a new block. They then can verify the transactions within that block if they are deemed to be valid by enough users.
3. Once it has been approved, a large piece of code found in the header of the previous block is put into the new one. This code is known as a ‘hash algorithm’. It is basically a very complicated puzzle.
4. Bitcoin miners then compete to solve the hash algorithm. The first to do so is awarded with brand new Bitcoins.
5. The block is processed and added to the block chain. All the transactions are processed, bitcoin gets transferred to where it needs to be, and the process starts again.

This sounds very complicated but is normally all done within a matter of seconds. As Bitcoin mining has now become so lucrative, you’ll need to amass a fair amount of computing power to compete.

How Do You Buy Bitcoin?
If you don’t have the resources to mine Bitcoin, you can just buy it instead. Bitcoin exchanges allow people to spend their money on acquiring the cryptocurrency, which is stored in a digital ‘wallet’. Coinbase and Bitstamp are the two most popular exchanges. Your wallet is unique to you, but as always, exercise caution with the details of your Bitcoin wallet to avoid cyber-attacks. Bitcoin is incredibly hard to steal, but it has been known to happen.

How Do You Spend Bitcoin?
Just as easily as you spend your money now. You will need to check that the retailer you are buying from accepts Bitcoin, but other than that, you don’t spend it any differently than you would normal currency on your credit/debit card. Big names like Wordpress, Amazon and Etsy accept the currency. Expect more to follow. 

What's Next?
The cyptocurrency did experience soaring highs towards the back end of 2017 but has since seen its value plummet. Its still very expensive and has been extremely successful, but its price is now too volatile for some and has been steadily decreasing. At the time of writing, 1 BTC is worth over £5,500. Compare that with highs of nearly £20,000 in late 2017.

Bitcoin has certainly managed to shake off its reputation as the dark web currency of choice. Its encrypted nature meant people could swap Bitcoins for nefarious goods and services on the dark web without fear of it being traced back to you. It’s taken a few years, but authorities are now getting better at tracking Bitcoin transactions, causing many criminals to abandon it.

It does also represent a big challenge to the status quo of finance. Major companies and even countries are experimenting with and developing cryptocurrencies of their own. However, much of the convenience of Bitcoin has now been replicated with online banking and systems like Apple Pay. And the Bitcoin stock price did plummet just like the naysayers forewarned. Whether Bitcoin will see off its competitors and continue to mount a challenge to central banks is yet to be seen but don’t think you’ve heard the last of it just yet.
As it becomes more mainstream and accessible, expect more SMEs to be dealing in Bitcoin.