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What is Bitcoin (BTC)? Beginners Guide
What is Bitcoin?
Bitcoin is the original cryptocurrency. The digital asset was born from the Global Financial Crisis (GFC) in 2008-9, amid society’s growing distrust for banking and centralised currencies. The concept behind BTC was simple – a coin that could be used as a means of exchange, outside the prying hands of governments and banks.
Did You know?
The very first Bitcoin transaction (called the Genesis block) had text embedded into it which read:
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.
The sentence is intended as a criticism of the current state of global banking.
Bitcoin’s creator has never been revealed. The whitepaper was penned by a pseudonymous developer(s) known only as Satoshi Nakamoto. Although the name has gone down in crypto (and eventually cultural) folklore, to this day, nobody knows who Satoshi is. Although this may seem strange, it fits with Bitcoin’s ultimate philosophy – a coin nobody owns.
The cryptocurrency’s first years weren’t especially exciting. A few developers understood the coin’s potential and started mining it, but its purpose as an anonymous means of transaction didn’t become a reality until May 2010.
The first commercial, real-world payment using Bitcoin was made by Laszlo Hanyecz, who purchased two pizzas for 10,000 BTC. Today, that amount of Bitcoin would be worth hundreds of millions – but at the time the coin was worth less than a cent.
What is Bitcoin mining and how does it work?
“Mining” has become almost synonymous with Bitcoin over the years. It is the economic backbone of the blockchain and is the only way new BTC can be generated.
To verify new transactions on the blockchain, independent miners must solve a complex mathematical algorithm that can only be figured out through brute force. Therefore, miners must use powerful computers that can output billions of guesses every second.
Once the equation is solved, the successful miner can verify the next block (batch) of transactions. In exchange for their work securing the network, Bitcoin miners receive a “block reward”, a set amount of BTC that halves approximately every four years. This event is known as the Bitcoin halving. This process of finalising transactions and declining fraudulent activity (such as attempts at double-spending) is called “Proof of Work”.
How to buy Bitcoin
Bitcoin is almost always purchased online through an crypto exchange.
Exchanges come in two forms: centralised and decentralised. Centralised exchanges are the most common platform for buying Bitcoin. Usually, investors just need to create an account, deposit fiat currency (or crypto) and then swap it for BTC. This trade is facilitated by a third party who is responsible for running the exchange.
You can view our review of the top crypto exchanges in Australia.
Decentralised exchanges are a little more complex and don’t involve a third party. Rather, investors can buy Bitcoin directly from other users without needing an intermediary.
Those interested in purchasing BTC can find a full guide on how to buy BTC in Australia here.
How is the price of Bitcoin determined?
Most traditional “fiat currencies” have a theoretically unlimited supply. Banks can print paper money at will.
However, Bitcoin has a supply limited to 21M coins. Therefore, there is a finite amount of BTC to be distributed among investors. So, if demand for Bitcoin outpaces supply, investors will increase the price they are willing to pay for BTC until someone is happy to sell.
The Bitcoin price has appreciated significantly since the coin’s inception in 2009 and has outperformed all other major assets in the same timeframe. However, this is no guarantee of future returns.
How do you make money on Bitcoin?
The most common way to make money on Bitcoin is like any other long-term investment – Holding on for Dear Life (HODLing). For example, somebody who purchased 1 BTC in February 2023 would’ve doubled their investment by December.
Those who believe in the long-term viability of Bitcoin may continually grow their portfolio by purchasing a fraction of BTC every month or two. If the value of Bitcoin increases, so too will the value of the portfolio.
There are other ways to make money on Bitcoin, although they are a little more advanced.
Experienced traders can leverage several strategies, such as arbitrage opportunities, and high-frequency or swing trading, to make short-term gains.
Some platforms offer “yield” (returns) for locking up Bitcoin in a long-term savings account – just like a high-interest savings account with a bank.
Author
Ben Knight
Ben Knight is a writer and editor from Melbourne with a passion for all things music and finance. He enjoys turning complex topics – especially the technical details of cryptocurrency – into digestible bites that anybody can understand. He acquired his Master’s in Writing, Editing and Publishing from RMIT in 2019 and has run his own creative writing business ever since.