An introduction to Bitcoin: the world's first — and largest — cryptocurrency, and the most important things you need to know about the Bitcoin blockchain.
Bitcoin is the biggest cryptocurrency in the world, but many people do not even know the basics of Bitcoin.
For example, Bitcoin is the first decentralized peer-to-peer (P2P) payment network in the world that allows users to send money without relying on middlemen. This concept was dubbed "cryptocurrency" by Wei Dai in 1998 and eventually realized by a mysterious person called Satoshi Nakamoto in 2009. Satoshi vanished in 2010, and his identity has since remained unrevealed.
Even though some understand Bitcoin to be controlled by Satoshi or possibly its miners or whales, in reality, no one controls the network — it belongs to all its users. Bitcoin can only work if a consensus among all users is reached, which happens through a process called mining. This process checks the validity of each transaction and requires the use of specialized hardware to earn a reward in bitcoins. However, on the front end, the network is a mobile app or a computer program with a wallet for sending and receiving coins.
To clarify more misconceptions about Bitcoin, CoinMarketCap looks at:
- How to create a "Bitcoin account" (a wallet)
- Why Bitcoin and other cryptocurrencies have value
- The safety of Bitcoin
- The largest crypto hacks involving Bitcoin
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How to Create a Bitcoin Account?
Most beginners think they have to create a Bitcoin account to start with Bitcoin. But that is false.
There is no Bitcoin bank or a Bitcoin sign in as such. There is also no minimum Bitcoin investment. Bitcoin does not work like a bank. Imagine it more like a giant chain of lockers that constantly keeps expanding and where everyone can get a locker to deposit their coins in.
The equivalent of a Bitcoin account is a Bitcoin wallet. It serves to send and receive bitcoins. However, although the amount of bitcoins you own is displayed in the wallet, they are not there as a file would be on a computer. Instead, imagine your wallet like a digital access key to this virtual series of lockers that is the blockchain. With the access key, you can always access your coins.
There are several types of wallets:
- Desktop wallets: they allow you to manage your coins from your computer. You can use a wallet like Exodus or choose a suitable wallet from the Bitcoin site.
- Hot wallets: wallets that are connected to the internet are called hot wallets. Both mobile wallets and desktop wallets are hot wallets, although they can also be cold wallets if you keep the devices permanently offline. These are considered less safe than cold wallets.
- Hardware or cold wallets: cold wallets are usually USB drive-type of devices that can be connected to your computer to manage your coins. The most popular ones are called Trezor and Nano Ledger. They are considered the safest options.
- Mobile wallets: mobile wallets are apps on your smartphone that make transporting and sending your coins convenient. However, if you lose access to your phone, you may lose access to your wallet and your coins. You can download a mobile wallet app from the App Store or Google Play store.
- Paper wallets: paper wallets are not in use anymore, but in principle, you can generate a Bitcoin address with only a piece of paper. However, they are deemed unsafe because it is easy to lose them.
Find out the difference between hot wallets and cold wallets, the best hot wallets for beginners and the best Bitcoin wallets for 2022.
Why Does Bitcoin Have Value?
Bitcoin opponents often ask, "why does Bitcoin have value," implying there is no fundamental value to the Bitcoin network.
However, the truth about Bitcoin is that the value is in its utility and in the trust people ascribe to it. One popular theory says that cryptocurrencies in general, and Bitcoin in particular, are better forms of money than fiat currencies like the dollar. Although physical dollar bills have almost no intrinsic value, we value them because we trust the monetary system to redeem the bills for goods and services. The monetary system, in turn, derives its value from the economy and the goods and services all citizens produce.
Bitcoin is similar. It has value because its network performs a service people find valuable: sending money quickly and cheaply without having to trust an intermediary. Moreover, the supply of coins is scarce. As a result, the more people conclude that Bitcoin is a valuable commodity, the more people want to buy it, and its value rises. This has led Bitcoin to be considered a store of value like gold. Some people value Bitcoin not only for its ease of sending money but also for its network's safety and the possibility of storing wealth. That is why Bitcoin has been one of the best performing investment asset since it launched in 2008.
Is Bitcoin Safe?
The truth about Bitcoin is that it is probably a lot safer than the money we know and use today.
For instance, the protocol and cryptography used by Bitcoin are impossible to hack with current computing technology. The biggest security risk of Bitcoin is the user, which is why cybercriminals often target users through scams or phishing attacks. Another target are exchanges or wallets, which can be hacked. However, that does not imply the Bitcoin network is not secure in the same way that a bank robbery does not make fiat money not secure.
The Bitcoin network is also being updated, further reducing the minuscule chances of the network being compromised. The blockchain itself has never been hacked, despite reports to the contrary. Bitcoin is potentially vulnerable to quantum computing, but so are banking systems relying on cryptographic security. However, quantum computing is not an imminent threat to the network in the short term.
Crypto Hacks Involving Bitcoin
Only because there are no Bitcoin headquarters and no Bitcoin bank doesn't mean that Bitcoin cannot be stolen.
On the contrary, some of the biggest crypto hacks have included millions of stolen bitcoin. For example, in 2011, the Mt.Gox hack looted the biggest crypto exchange at that time for 850,000 BTC. Only recently has a rehabilitation plan been approved that is supposed to help victims recover at least a part of their losses.
Another big hack was the Bitfinex hack in 2016 when hackers stole $60 million worth of BTC. The coins were recovered in 2022 and are now worth $3.6 billion. Allegedly, a couple is responsible for the hack, although the trial is yet to come.
However, crypto hacks are not only limited to exchange hacks. Regular users are probably more likely to fall prey to some sort of Bitcoin scam. Some of the most well-known Bitcoin scams include:
- "Bitcoin recovery services" that offer users to help recover lost coins and charge outrageous sums.
- Trading system scams that promise stellar returns without any risk.
- Celebrity scams that use the social proof of celebrities to offer Bitcoin-related scam products.
- Phishing attacks trying to trick users into revealing their wallet access data.
- Fake hardware wallets being sent to users to access their coins.
While it is not difficult to protect yourself from 90% of the scams, it can be challenging for newcomers to Bitcoin. That is why it's important to remember:
- There is no Bitcoin bank or Bitcoin account.
- If you lose your seed phrase, you cannot recover your coins.
- Cold (hardware) wallets are more secure than hot (software) wallets.
- Bitcoin scams will tell you trading is an easy way to make money when it is not.
Read our piece on the timeline and price history of Bitcoin for a more detailed dive into how Bitcoin started.
Stay safe and enjoy the positive aspects of Bitcoin!
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