Honestly how could it not have? The idea of Bitcoins was a genius thought. Giving freedom and anonymity to people who were tired of being controlled ended up creating an extremely successful currency.
However, quite a few people are still somewhat confused when it comes to Bitcoins. They know the general idea of what this currency system is, but often brush it off as a gimmick or never take it seriously.
However, it is important for everyone to know some basic things about Bitcoins. So we have compiled a list of the most Frequently Asked Questions aimed at enlightening those who are looking to gain some knowledge about Bitcoins and possibly other cryptocurrencies. Without any further delay, let’s get started!
1 What Is Bitcoin?
- 1.1 Who Created Bitcoin?
- 1.2 Who Is In Control Of Bitcoin?
- 1.3 How Do Bitcoin Transactions Work?
- 1.4 Do People Really Use Bitcoin?
- 1.5 How Can You Get Bitcoins?
- 1.6 How Hard Is It To Make Bitcoin Payments?
- 1.7 Why Should You Use Bitcoin?
- 1.8 Why Should You Not Use Bitcoin?
- 1.9 Why Should You Trust Bitcoin?
- 1.10 Can You Make Money With Bitcoin?
- 1.11 Is Bitcoin A Virtual Currency?
- 1.12 Are You Really Anonymous When Using Bitcoin?
- 1.13 Can You Lose Bitcoins?
- 1.14 How Likely Is It For Bitcoin To Become A Major Payment Network?
- 1.15 Is The Use Of Bitcoin Legal?
- 1.16 Is Bitcoin Used For Illegal Activities?
- 1.17 Can Bitcoin Be Regulated In Any Way?
- 1.18 What Is The Relationship Between Taxes And Bitcoin?
- 1.19 How About Bitcoin Consumer Protection?
- 1.20 How Are Bitcoins Generated?
- 1.21 How Is It Possible For Bitcoins To Hold Value?
- 1.22 What Influences The Price Of Bitcoins?
- 1.23 Can The Value Of Bitcoins Become Worthless?
- 1.24 Is Bitcoin Experiencing An Inflation Bubble?
- 1.25 Isn’t Bitcoin Just Another Ponzi Scheme?
- 1.26 Aren’t Early Adopters Getting More Out Of Bitcoin Than Others?
- 1.27 Isn’t Limiting The Amount Of Bitcoin To A Fixed Amount A Bad Idea?
- 1.28 Is Deflationary Spiral A Problem That Bitcoin Could Face In The Future?
- 1.29 Won’t Volatility And Speculation Become A Huge Problem For Bitcoin?
- 1.30 Can’t A Wealthy Person Buy All The Bitcoins?
- 1.31 If Bitcoin Is So Secure, Why Do I Have To Wait For A Confirmation?
- 1.32 How Much Should I Pay In Fees For My Transaction?
- 1.33 What Happens If Someone Sends Bitcoins To My Wallet And I'm Offline?
- 1.34 Why Does Synchronizing Take So Long?
- 2 Final Words
What Is Bitcoin?
Bitcoin is a form of digital currency which is based on an open source code that was created and is held electronically. Bitcoin is a decentralized form of currency, meaning that it does not belong to any form of government and is not controlled by anyone.
Unlike traditional currencies, Bitcoins are not printed. Instead, this form of currency is produced by people and businesses around the world through the means of solving complex mathematical formulas which get more and more difficult to calculate as more Bitcoins are created.
Who Created Bitcoin?
There is a little bit of controversy surrounding this particular question. Officially, Satoshi Nakamoto is the person responsible for designing Bitcoin and its reference implementation. However, the issue is that Mr. Nakamoto was somewhat secretive about his identity. He has claimed before that he was a man living in Japan who was born on April 5th, 1975.
The issue is that with no proof, we have no way of knowing if this is indeed true, and the true creator could be a different person entirely or even a group of people. The most common speculation is that the true identity of the person or group responsible for developing Bitcoin has stayed a complete secret.
In fact, many think that Bitcoin was developed by a group of cryptography and computer science experts who were living in the United States and Europe at the time.
Nakamoto’s work first surfaced around October of 2008 and was titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” It was a paper that was published to metzdowd.com which described the Bitcoin digital cryptocurrency.
The first software responsible for launching the network and the first unit of Bitcoin currency appropriately titled Bitcoins was released by Nakamoto in January, 2009. On January 9th, 2009, version 0.1 of the Bitcoin software was posted onto Sourceforge by Nakamoto himself.
Nakamoto continued to work on the Bitcoin project up until the middle of 2010, when he handed off full control of the source code repository to Gavin Andresen, distributed a few domains which were related to Bitcoin.org among prominent members of the Bitcoin community, and completely vanished from the Bitcoin project.
Up until shortly before this point, Nakamoto was the only person who had made any changes to the source code responsible for the existence of Bitcoin.
As it turns out, Nakamoto left a message in the code of the originally mined block which read “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” This quote is a reference to a headline of The Times newspaper on January 3rd, 2009.
Including this short and simple message in the code made it very transparent that the first block was mined no earlier than that date. This was important because the original block, or the genesis block as many call it, did not have any previous blocks that could be referenced, meaning that the code had to be custom made in order to mine the first block.
It is also important to take note that due to the time stamps on all early subsequent blocksit appears that Nakamoto did not try to mine all early blocks for himself in an attempt to benefit from some sort of a scheme.
Who Is In Control Of Bitcoin?
As we mentioned earlier, the Bitcoin currency system is not controlled by any single entity. The system is decentralized and thus no government has any authority over it. True control over Bitcoin is with the people and businesses that invest into it, mine it, or use it for purchases.
The Bitcoin software was developed in a specific way. In order to be able to use Bitcoin you have to have a compatible version of the software which complies with the same rules. In simple terms, this means that everyone needs to be on the same page in order to be able to partake in the Bitcoin revolution.
The developers of the software are constantly improving the code and making Bitcoin even more secure. Since the users are in control of which protocol and versions of the software they want to use, the developers can’t force changes to major aspects of the Bitcoin code.
The only way that the Bitcoin software will work correctly is if the users and the developers adhere to a complete consensus among each other, thus it is in everyone’s best interest to protect this consensus.
How Do Bitcoin Transactions Work?
From an end user side, using Bitcoin is extremely simple. It can be based on software on your computer or an application on your mobile device. You use the software to send or receive BTC to and from your wallet. This wallet has a unique encrypted set of numbers and letters which is linked only to your software and no one else’s.
Users can send money to your wallet and you can send money to other wallets on the Bitcoin network. When using a mobile device, you will often see the use of QR codes which make the process of paying BTC to another user a lot simpler. All you have to do is scan the QR code and verify the amount of BTC you wish to transfer.
At the heart of the Bitcoin network these transactions are somewhat more complex. Every transaction is publicly shared on a Bitcoin network on a ledger labeled the “block chain”.
This ledger contains every single transaction ever made, which gives complete transparency for each transaction and allows any computer on the network to verify its validity. A digital signature is linked to each transaction, which corresponds with the sending address.
This is done to give authenticity to each transaction and permit all users full control over all bitcoins which they can send from their Bitcoin address. Additionally, users who have high end hardware can use it to authenticate these transactions as they go through and in turn are rewarded with bitcoins for their services, this is known as “mining.”
Do People Really Use Bitcoin?
In short, yes. There are millions of transactions of Bitcoins per day, which means that the Bitcoin network is being used frequently. In fact, every day you see more and more businesses starting to accept Bitcoin as a method of payment.
However, it is nearly impossible to give an exact number of how many users are using Bitcoin. The reason is because one person can possess multiple wallets. If someone forgets their wallet address, it doesn’t expire; instead it is still active on the network without any transactions. So adding up all the wallets won’t give us an accurate number of users.
Checking transactions isn’t reliable either since multiple wallets can belong to a single person. This is the dilemma which we as Bitcoin users face. Because of the ability to use Bitcoin with complete anonymity, it is impossible to track how many people are using it on a daily basis.
Judging from the value and the price of BTC and its constant upswing, we think that the number of users is steadily rising.
Yes, Bitcoin is a relatively new phenomenon; it has been around for only 8 years, which is a very short amount of time when compared to fiat currencies. But over those short 8 years it has gained in value more than any other currency out there.
When compared to all other currencies, the amount of people who use Bitcoin is most likely relatively low, around 1 or less percentile. However, as technology advances and more people become knowledgeable about cryptocurrencies, we think that Bitcoin has the potential to become the dominant world currency.
Think of it as gold: not everyone uses it to buy, sell, or trade, but its value is still unhindered and on a constant upswing.
How Can You Get Bitcoins?
There are four ways to get Bitcoins. The first one is pretty simple and self-explanatory: you offer goods or services in exchange for Bitcoins. No strings attached, just determine the price of your service or goods in BTC and make the exchange.
The buyer will send the appropriate amount of BTC to your wallet and upon receiving it you will provide the requested service or goods.
The second way to get BTC would be to make a purchase through Bitcoin exchange. Generally, there are plenty of different exchange sites available where you can look for buyers and sellers of BTC. You will also need to use your Bank Account, which will be linked to the exchange website to make BTC purchases.
Although there are a few exchanges that let you buy BTC with other methods of payment, such as PayPal, usually there are additional fees involved when using these alternative payment formats.
The third option is a bit less private and anonymous, and more hand to hand. You can find a person near you who is offering to sell BTC and pay them in cash for the transaction. This option is usually deemed as more risqué since hand to hand transfer of money is involved, thus we suggest avoiding this method of acquiring BTC as much as possible.
The last way, and to some the most appealing way, to get Bitcoins is through “mining.” Bitcoin mining is a process through which transactions on the Bitcoin network are validated and stored on the blockchain, the ledger which keeps track of all Bitcoin transactions.
Essentially, it is a term used to describe the confirmations and processing of Bitcoin payments. There is specific hardware which has been developed and designed to make the calculations to verify transactions more optimal and efficient than if it was done by a standard computer.
Every time a block chain is solved, a reward of Bitcoins is given to the solving machine. As of June 2017, the reward for solving one blockchain is 12.5 BTC. This number is halved roughly every 4 years. This ensures that there isn’t a constant infinite flow of Bitcoins into the Bitcoin network.
In fact, the open source code which was created by Satoshi Nakamoto dictates that there will be no more than 21 million bitcoins generated throughout the lifespan of Bitcoin.
How Hard Is It To Make Bitcoin Payments?
Often, completing a Bitcoin transaction is easier than making a purchase with a debit card or a credit card. All you need is your wallet address and you can make payments or request Bitcoins through your PC software, mobile application, or web wallet.
You can even create custom QR codes which, when scanned, will automatically put in the amount of BTC you are charging and your address so that all the sender has to do is confirm the information and click send.
There is even an option to use Near-Field Communication (NFC), which most smartphones are equipped with today, to simply press your phone back to back with the seller’s or buyer’s phone and complete the transaction.
Why Should You Use Bitcoin?
There are a few reasons why you might want to decide to use Bitcoin over traditional currencies. One of the most sought after reason is the ability to use Bitcoin anywhere, anytime, and in any amount. When you are working with Bitcoin, there are no borders, no bank holidays, no bureaucracy; all aspects of Bitcoin are controlled by the users.
Much lower fees is another reason why so many people are starting to choose Bitcoin as a form of currency. When receiving Bitcoins you do not pay any fees, and when sending Bitcoins from your wallet, often you will be given an option to choose how high your fees are depending on how fast you want the transaction to be verified and completed.
The best parts isn’t the low fees, it is the fact that all transactions, no matter how many Bitcoins you are sending, will cost the same amount in fees. You can send 200,000 BTC or only 2 BTC and the fee for the transaction will be the same.
Additionally, merchants are offered special merchant processors who assist merchants with processing transactions, exchanging BTC into the merchants’ preferred form of fiat currency, and depositing the money directly into their bank account.
Since all of these transactions are Bitcoin network based, the fees are much lower than those of Credit Card networks and other financial institutions like PayPal.
Furthermore, all Bitcoin transactions are irreversible, secure, and contain no personal information related to the buyer, which makes it the perfect currency for merchants who are seeking security and stability.
This opens up a world of opportunities for any merchant, giving them the ability to expand into locations that have high fraudulence risks or where Credit Cards aren’t accepted as a method of payment, all while keeping their services or products safe from fraud.
The final outcome is lower fees, since there is no need for PCI compliances, far lower administrative costs, and an ability to expand to larger markets. No matter how you spin it, this is a win situation for merchants.
On the flip side, each user has full control of their wallet. It is impossible for a merchant to charge a user without their knowledge, as often is seen done by many unethical businesses.
Payments can be made without attaching any personal information to the transaction, so in theory the merchant doesn’t even have to know your name to complete a transaction. Additionally, if a user still feels unsafe or vulnerable, they can protect their Bitcoins via a backup or encryption.
Finally, what many people consider the best feature of the Bitcoin system, all transactions are transparent and clear on the public blockchain. This means if there are any complications with any transactions, they can be instantly looked up on the public ledger and verified.
Bitcoin is completely neutral and its core code cannot be manipulated in any way to give an edge to either the seller or the buyer, because everything is cryptographically secured.
Why Should You Not Use Bitcoin?
Although Bitcoin has put a huge dent in the currency world, relatively there is still a small amount of businesses and people using it. The main reason for this is low knowledge of the benefits that Bitcoin offers, and even though many businesses are on-boarding and are seeking to incorporate Bitcoin in their payment system, the list is still small.
The result is slow growth when it comes to the Network Effect, the effect that one user has on the value of Bitcoin to other people.
For example, if a large company or corporation that is known worldwide decided to use Bitcoin as a method of payment, this would have a huge effect on its value to other businesses and corporations, making it more desirable. While this is happening slowly, the Network Effect isn’t very prominent yet.
High volatility is something else that you should consider if you intend on starting to trade or use Bitcoin. Because the amount of businesses that use Bitcoin is rather low, any event, trade, or activity in these businesses can have a rather high effect on the price of Bitcoin.
Of course, over time this volatility will decrease and stabilize as more and more companies start using Bitcoin and as the technology world grows at its current rate.
Unfortunately, the concept of Bitcoin is new and it is very difficult to estimate or predict what will happen with this currency, but at the same time it is a very cleverly designed system which is already offering much more than other currencies.
Just like with any new software, there are still things that are in development when it comes to Bitcoin. New and more secure code is constantly being revised and worked on to make Bitcoin even more secure than it already is.
Technologies and ideas are in the process of being implemented into the Bitcoin code to make it even easier to use, but some of this code isn’t yet polished. Some of these service, tools and features which will inevitably make Bitcoin much better are still not ready for everyone.
Companies and businesses that deal with Bitcoin offer no insurance because this currency is still new. In other word, Bitcoin is still maturing and this presents a certain degree of risk.
Why Should You Trust Bitcoin?
It is easy to put your trust into a piece of software that has deliberately been designed in an open source environment. All code related to Bitcoin and how it operates can be viewed by anyone at any time, and every transaction can be verified by anyone at any time. This is exactly why it is so easy to put trust into Bitcoin.
If there are no hidden doors, or any doors at all for that matter, then there is nothing to hide. If at any point you feel that something is wrong with the Bitcoin code you can easily look it up and check for potential flaws. The same can be said about each transaction.
If at any given moment you feel a transaction was made erroneously, you can easily check its validity on the blockchain. There is no third party reliance, and everything is handled by the Bitcoin network. It’s all out in the open.
The community of users controls all aspects of Bitcoin and the direction that it is headed into; no corporation, business, or government has influence over Bitcoin.
Can You Make Money With Bitcoin?
This is one of the hardest questions to answer. When approaching Bitcoin from a perspective of a techie enthusiastic about new technology, the answer is “Of course you can! It’s absolutely brilliant!”
The problem with this statement is that there have been plenty of new and seemingly revolutionary inventions in the past that didn’t take off at all, or took off for a minute or two and then sunk like a rock in a lake.
On the other side, when talking about Bitcoin strictly from a financial standpoint, the answer is something along the lines of “WHAT?! I can’t hear you from behind this mountain of cash I made while trading Bitcoin.” Then again, things aren’t as peachy as they seem on this side, either.
Yes, this currency took off like crazy over the past 8 years and the price per Bitcoin has been, for a lack of a better term, skyrocketing. The problem is stability.
How long will Bitcoin stay afloat while businesses slowly on-board the payment method? Will it be enough for it to survive? The factors that need to be taken into account are far too many to make even an educated guess as to where Bitcoin will be by 2020.
As with any new invention or a new company on the NSE, risk is something that needs to be evaluated carefully and approached with utmost importance. Is there an opportunity to make money via the use of Bitcoin? In short, the answer is “Yes.” At the same time, there are some risks that you have to consider.
If neglected, they can cause you huge financial losses. All we can say is that you need to make good and sound decisions when considering Bitcoin as a method to making a profit, and always anticipate that you might lose it all.
Is Bitcoin A Virtual Currency?
The best way we can put it is that Bitcoin is as virtual as a Debit Card or a Credit Card is. While technically Bitcoin does not have a physical form, Bitcoin balances are stored in a large network which distributes the information among the holders of each balance. This network cannot be altered by anyone.
The most convenient way to use Bitcoin remains via your mobile device, but you can purchase physical devices or coins which represent a certain bitcoin balance and contain a wallet address that starts with a single Bitcoin on it. It is impossible for Bitcoin to simply vanish, because they are stored on the Bitcoin blockchain.
So while technically this currency can be considered virtual, in reality it is much more than that.
Are You Really Anonymous When Using Bitcoin?
While all Bitcoin transactions are anonymous, technically speaking hand to hand cash transaction are still more secure. This is because there is no public record of cash transaction while all Bitcoin transaction are posted on the blockchain and can be accessed by anyone.
Yes, the identity of the user who purchased or sold something with the help of Bitcoin can always stay anonymous, but there will always be a digital trail leading to the transactionand that specific public wallet address.
Although there are many mechanisms that already exist within Bitcoin and many more are in development designed to protect each user’s privacy, unfortunately more work needs to be done from a development standpoint in order for these feature to be used by Bitcoin users correctly.
This concept of nearly full anonymity has raised concerns about the potential use of Bitcoin for illegal transactions when selling or purchasing illegal goods. But as time goes on, inevitably, Bitcoin will be subject to the same rules and regulations which exist on other established financial systems.
The fact remains that Bitcoin will never be more anonymous than cash, thus it is impossible to prevent any type of criminal investigation regarding Bitcoin purchases versus cash purchases. Furthermore, Bitcoin is designed in a way to prevent financial fraud. If anything, this should reduce the amount of crimes committed through financial transactions.
Can You Lose Bitcoins?
Since Bitcoins are stored in your software wallet, it isn’t possible for you to lose the Bitcoins. However, you can lose the wallet which contains your Bitcoins. If this happens, then the Bitcoins are simply out of circulation and aren’t being used since there is no way anyone can find the private key you need to access each wallet.
When a wallet is lost, the missing Bitcoins are offset by the law of supply and demand. The missing Bitcoins will increase the value of the remaining Bitcoins, resulting in compensation for those that have been lost, albeit on an economical rather than a personal scale.
How Likely Is It For Bitcoin To Become A Major Payment Network?
At the given moment, the Bitcoin network can already handle many more transactions per second than other payment networks out there. However, the scale of current payment networks which are being used each day is much higher than that of Bitcoin.
This means that if everyone who is using the more used payment network switched instantly to Bitcoin, the network would not be able to handle it. With that said, further development is underway to ensure that future increase in network activity can be handled by the Bitcoin system.
Requirements for the influx of users are fully understood and constant development to lift the networks limitations is always in progress.
Additionally, as more users are showing up on the Bitcoin network, the amount of transactions which are being processed every second is also increasing.
Luckily for the Bitcoin network, the more users become a part of the system the more calculations can be done. Bitcoin was developed with its users in mind and will continue to mature, grow, and become more optimized as the community grows.
Is The Use Of Bitcoin Legal?
Because the Bitcoin network is decentralized, there are few limitations which are superimposed onto this new currency. However, some jurisdictions, such as those in Russia, severely ban or limit the use of foreign currency, which under technical terms Bitcoin belongs to.
There are a few other jurisdictions which may limit the use of Bitcoin related entities, such as some Bitcoin exchange services or websites.
As knowledge and use of Bitcoin is becoming more common, different jurisdictions are taking steps to ensure that clear guidelines are present to ensure that all businesses and merchants are able to integrate Bitcoin as a method of payment into their regulated financial system.
Among these jurisdictions is the Financial Crimes Enforcement Network, a United States Treasure Department bureau. They have clearly stated non-binding guidelines on how they view specific activities which involve the use of virtual currencies.
Is Bitcoin Used For Illegal Activities?
This is a yet another controversial topic. Because of the freedom and the degree of anonymity that the use of Bitcoin offers, many users who were seeking to purchase or solicit illegal goods or services initially turned to the use of Bitcoin as a method of payment.
Although if you calculate the estimated percentile of bitcoin transactions that have been used for illegal goods or services and compare them to legal transactions, the painted picture is a far less troubling image than many think.
The percentile of Bitcoin transactions involving illegal goods is far smaller than those of cash, credit cards, and banking systems. The ability to trace back all transaction on the blockchain will more than compensate for the amount of finance related crimes versus any other currency used around the world.
There are a few financial crimes that Bitcoin is actively combating without many people even realizing it. For example, a simple and yet overlooked fact is that Bitcoins can’t be counterfeited. Think about the thousands of counterfeit bills that are currently in circulation amongst the USD?
It is estimated that more than $200 million of all money circulating in the United States is counterfeit. This would not be an issue if the currency in use was BTC. Another good example is the inability to make fraudulent charges. Think about all the times you had to call your bank about that random small transaction you saw on your statement?
With Bitcoin, these transactions wouldn’t exist because the user is in full control of all money entering and leaving their wallet. The way that Bitcoin is designed makes it the perfect currency to use for all transactions.
There are some people who think that because Bitcoin transactions are irreversible it will inevitably create an influx of scamming and con artist like crimes, and we all remember the prince in Africa chain mail. The reality is that these crimes hit any currency.
Cash transactions which are scams occur on a daily basis, and the same can be said for wire transfers. Bitcoin is an excellent currency system, but it is also susceptible to similar bitcoin scams as regular currencies are.
As we mentioned earlier, Bitcoin will be subject to the same regulations which are being used by financial institutions to counteract these types of crimes, and in no way will Bitcoin ever prevent criminal investigations of these crimes.
These types of controversial conversations and scrutiny are to be expected with a breakthrough invention such as Bitcoin. Even writing paper was disliked by many when it was originally used in place of chalk slates.
Can Bitcoin Be Regulated In Any Way?
Again, when a user decides to use a specific type of software for their Bitcoin wallet, they are deciding what direction the Bitcoin network is heading towards. In other words, you need the cooperation of nearly every single user in order to modify any aspect of the Bitcoin protocol.
And since the eye of every single Bitcoin user is on all of the developers working on the Bitcoin code, distributing specific rights to any local authority over any part of the Bitcoin network is essentially impossible.
In theory, a super wealthy company could buy a ridiculous amount of Bitcoin mining hardware and start mining all the future generated Bitcoins. After all, we are only 8 years into the lifespan of Bitcoin. This is equal to only two divisions of the blockchain calculation completing reward, and there are supposed to be 62 more divisions.
But in order for this company to make any type of an impact on the Bitcoin market, they would have to have enough equipment to equal all other miners in the world, which practically speaking is impossible.
However, there is another way that Bitcoin can be regulated. Just like any other currency, even though it is decentralized, jurisdictions could create limitations for virtual currencies or Bitcoin currency specifically, which will in turn produce a type of regulation.
At the same time, completely banning the use of or severely restricting the use of Bitcoin is definitely a very bad idea, since it will slow down the economic growth of businesses within that jurisdiction. This will result in overall wealth decline while other jurisdictions that have lighter or no limitations will most likely prosper far beyond the restricted jurisdiction.
The main challenge of regulating anything that has such a huge impact on the wealth of a specific location is to create effective solutions while not hindering the development of wealth, improving companies and businesses which have an impact on the said specific location.
What Is The Relationship Between Taxes And Bitcoin?
As of right now there is no way for any jurisdiction to effectively tax Bitcoin because it does not belong to any jurisdiction. However, there are quite a few different legislations across many jurisdictions that can potentially cause some type of tax liability to arise eventually regardless of the medium used to generate income.
Unfortunately, the Bitcoin community has no rule over the decisions that jurisdictions make regarding Bitcoin and other virtual currencies.
How About Bitcoin Consumer Protection?
There are no limitations to what you can do with Bitcoin when compared to other forms of tender. Users are free to send and receive money as they please, but they also have an option of creating far more complex contracts through the Bitcoin network.
For example, you can have a requirement set to only proceed with the transaction once a certain amount of signatures are attached to the complex contract.
This ensures that if you are making a payment for an investment, for example, you are a bit more at ease when more investors are also signing the contract with you and making the same investment.
These conditions allow for intricate contracts that can be created to fit in with any users’ desired need. Furthermore, when these complex contracts do meet all the necessary conditions of each transaction, they are easily identifiable and can be easily looked up on the blockchain along with all the required conditions for the transaction.
This eliminates fraud, manipulation, fine print, and other forms of deceit which often arise when complex contracts are created.
Besides complex contract support, the Bitcoin network is also able to protect both the merchant and user against fraudulent chargebacks. If the customer is not willing to trust their merchant, they can always request more protection from the merchant if they deem it necessary, the choice is theirs.
How Are Bitcoins Generated?
We mentioned this process before, named “mining.” It is a competitive process which is rewarded with Bitcoins when full calculations are completed. With the help of optimized hardware, Bitcoin miners process transactions and secure the Bitcoin network in exchange for new Bitcoins.
The open source code of Bitcoin is designed in such a way that a fixed amount of coins is generated when calculations are completed, which makes mining very competitive. As more miners join the network, making profit becomes increasingly more difficult and each miner is forced to seek alternative methods of cutting down costs.
All Bitcoin nodes are cross referenced against the Bitcoin protocol, and anything that doesn’t fit the expected rules is rejected by the network. In other words, there is no way to cheat the system and generate more coins than you have mined.
Bitcoins are generated at a predictable rate, which is slowly being decreased overtime to reduce over flooding the market as technology is improving at a steady rate.
Additionally, the reward for completing blockchains is halved every time 210,000 blocks are calculated, and until there are a total of 21 million Bitcoins, at which point rewards for block calculation will stop. Once rewards for block calculations are no more, it is estimated that fees will take over as payments for ensuring transaction validity.
How Is It Possible For Bitcoins To Hold Value?
Simply put, Bitcoins hold value because they can be used as money. Just like any other currency, Bitcoin value is greatly influenced by who uses the currency, how many users are using the currency, and how much of the specific currency is in circulation.
But unlike traditional fiat currencies, Bitcoins are not susceptible to the value of gold or silver, or authorities who decide how much money to print. Bitcoins are a product of pure mathematics and raw algorithmic calculations, and are only influenced by the amount of trust that its users put into the currency and how well it adapts to being used worldwide.
The merchants, business startups, and users determine the value of Bitcoin by choosing to use Bitcoin over other currencies. Simply put, the more people who choose to use Bitcoin as a form of payment, the greater the value of each Bitcoin will be.
What Influences The Price Of Bitcoins?
Currently, the biggest factor for determining the price of each BTC is supply and demand. Because BTC is generated at a predictable rate, the demand level of Bitcoin must be constantly increasing in order to keep the price stable. If demand becomes stagnant or falls, then the price of Bitcoin will start to fall or even rapidly drop.
Bitcoin is still a new market when compared to any other fiat currency and as its use grows so will its stability. But in its current state, Bitcoin is very volatile. A reasonable purchase of Bitcoins can change the price drastically; however, as more Bitcoins are generated and as more users start to use the currency, the volatility will level out and stabilize.
Can The Value Of Bitcoins Become Worthless?
Honestly speaking, yes. There isn’t a single currency in the world that isn’t susceptible to becoming worthless. Throughout history there have been hundreds, if not thousands, of different currencies that no longer exist because they have become worthless. The most recent devalued currency is the Zimbabwe dollar.
The big difference is that Bitcoin isn’t susceptible to the same type of devaluations that most of these no longer existing currencies went through.
But Bitcoins are vulnerable to other forms of devaluation through the means of technical failure, other competing currencies that might bring something greater and even more revolutionary to the table, or even political issues which might deem it illegal to use Bitcoins worldwide.
It is always a good idea to approach any currency with the idea that it can fail if enough problems are encountered throughout its lifespan.
Although Bitcoin has proven itself to be a pretty reliable currency over the past 8 years and there is plenty of incentive and potential for Bitcoin to continue growing steadily in a positive direction, it isn’t possible to predict how successful the lifespan of Bitcoins will be.
Is Bitcoin Experiencing An Inflation Bubble?
Just because the price of a specific market is experiencing fast growth over a long period of time, by no means does this dictate an economic bubble. When investors choose to bid up the price of a commodity beyond any reasonably sustainable value amount, you experience a bubble which inevitably crashes to correct its own over-inflated price.
The Bitcoin market isn’t experiencing any type of economic bubble. Yes, the price per Bitcoin has been growing rapidly over the past 8 years, but the reason for this is thousands of people and businesses see the potential which is offered by Bitcoin.
These users understand what Bitcoin brings to the table and how beneficial this currency is for everyone who decides to use it. Yes, the prices of the currency will inevitably fluctuate to reflect the users who might lose confidence in Bitcoin.
Increased exposure and press coverage will also change the price of Bitcoins, which might be influenced by demand or fear of uncertainty. Bitcoin will behave just like any other currency, minus the government control and susceptibility to financial crime.
Isn’t Bitcoin Just Another Ponzi Scheme?
Before we go any further, let’s define what a Ponzi scheme is. A Ponzi scheme is a deceitful investment operation where the person behind the sham distributes returns to its investors from newly generated capital paid to the mastermind by other new investors, rather than from profit earned through legitimate investment.
Those who run Ponzi schemes usually coax unsuspecting investors by offering higher payout on their investment in the form of short-term payouts that are usually abnormally high.
The number one reason why Bitcoin is not a Ponzi scheme is that it is an open source and free project without a central authority. Simply put, there isn’t anyone in control of Bitcoin that could gain from a Ponzi scheme, because the whole system is run by its users and everything that goes into Bitcoin code is also controlled by its users.
Each transaction can be easily traced and verified, so if there was something strange going on the users would have noticed a long time ago.
However, it should be noted that there are several websites which pose as cryptocurrency exchanges and offer extremely high and fast payouts for simply investing BTC for a short period of time, and they are certainly scams that you should be careful to avoid.
Aren’t Early Adopters Getting More Out Of Bitcoin Than Others?
Well, yes, this is definitely true. But this is no different than saying “Aren’t people who invested into Google when it was born getting more benefits from their investment?” The answer is no big surprise.
The early investors took the risk and dedicated time to this new technology that wasn’t verified and could have flopped like so many others have in the past. At the same time, many early investors rotated through quite a few Bitcoins or invested very low sums and made very little gain in their capital.
The truth is that Bitcoin is still in its early stages and it was designed for a long lifespan. Today’s investors might be tomorrow’s early investors, and anything could happen.
Isn’t Limiting The Amount Of Bitcoin To A Fixed Amount A Bad Idea?
The wonderful thing about numbers and Bitcoin specifically is that you aren’t forced to use a non-decimal number for each transaction. You can always use a fraction of a bitcoin in nearly any denomination to complete your transaction.
So even if there are ever only going to be 21 million Bitcoins, you always have the options to step one decimal point down up to 8 decimals or even further if the need ever arises. Thus a finite number of coins become an infinite number of bits.
Is Deflationary Spiral A Problem That Bitcoin Could Face In The Future?
A deflationary spiral dictates a period of time during which prices are reduced in order to make more purchases happen to boost the economical state and recover from the deflation. The problem occurs when this doesn’t work and merchants continue decreasing the price, resulting in economic depression.
The problem with this theory is that it doesn’t hold true in all markets. One clear example is the constant fall in prices of consumer electronics, yet economic depression never occurs. Since Bitcoin has been rising in both value and size at the same time, it is yet another counterexample of this theory.
To clarify, Bitcoin was never designed to be a deflationary currency. The idea behind Bitcoin was always to be inflated during its early years and slowly stabilize at a later time. Bitcoins can’t be lost, damaged, or erased.
The only thing they are in danger of is people carelessly starting to lose their wallets without making backups, which will cause some volatility in the Bitcoin market. However, we find it hard to imagine anyone losing a wallet worth thousands of dollars. Otherwise, Bitcoin is expected to maintain its value after becoming stable.
Won’t Volatility And Speculation Become A Huge Problem For Bitcoin?
This is a bit of a catch 22 situation. In order for Bitcoin to gain stability we need a significant increase in users and businesses who want to use Bitcoin as a method of payment. On the flip side, users and businesses want stability before they are willing to invest into a new currency.
The solution to this problem is pretty simple: look at other aspects that Bitcoin offers which are not influenced by volatility. Moving money from one location to another with decreased fees and lightning speed transactions is something Bitcoin can make desirable for each user and business owner.
The best part is that each business can convert BTC to their currency of choice and successfully avoid any potential value fluctuations that BTC will experience.
Because of these unique features, which aren’t offered by any other currency, it is possible that the volatility of Bitcoin will be looked at with a grain of salt and its maturity will be accelerated by all who wish to incorporate these features in their business.
Can’t A Wealthy Person Buy All The Bitcoins?
The same could be said about any other currency, and the answer is no. Only a fraction of all Bitcoins are listed on the public market, and buying them all out will increase their price because of the supply and demand rule.
Besides, new bitcoins will be generated for decades to come, so unless this certain someone is willing to monopolize all miners and become the only Bitcoin miner in the world (which is impossible) there is no way one entity could control all of Bitcoin.
However, you do have to take into account that the Bitcoin market, just like any other market in the world, is susceptible to manipulation through significant purchases. At the given moment, even relatively small Bitcoin purchases can make the price move.
With time, it will become more and more difficult to influence the Bitcoin market, and you will need much more money to attempt to manipulate it.
If Bitcoin Is So Secure, Why Do I Have To Wait For A Confirmation?
You will be informed of a payment receipt nearly instantly when someone sends you Bitcoins. The only delay that exists is between the network and the amount of time it takes to add your transaction to the block.
Once a confirmation occurs, a consensus has been reached by everyone on the network that the Bitcoins which were sent to you were in fact sent only to you and not someone else.
Once your transaction has been included as part of a block and other blocks have been added on top, each additional block reconfirms that your transaction is valid and reduces any risk of it ever being reversed. Confirmations usually take between a few seconds and up to an hour and a half, the average number being about 12 minutes.
If you pay too low for the transaction, then the first confirmation generally take a much longer time to complete because they are put behind in line of all the other transaction with higher fees.
It is up to you to decide when your transaction is considered to be safe, but on average 5 consecutive confirmations is equivalent of waiting 5 months on a credit card transaction.
How Much Should I Pay In Fees For My Transaction?
Honestly, you don’t have to pay a single fraction of a Bitcoin and you can mark it as a free transaction. But generally these transactions can take up to a week to complete since they are left on the backburner.
Most wallets will determine the appropriate amount you need to pay for your transaction, and you will be given a chance to review the fee amount and modify it if you wish.
Many people ask why there needs to be a fee paid for transferring Bitcoins, and the answer is quite simple.
The fees are there in order to prevent potentially harmful users from attempting to flood the network with small incremental transactions in an effort to crash it, and also to pay for the miners who are dedicating their time and hardware to verify all transactions.
Keep in mind that fees and how they work are still under development by Bitcoin developers and will most likely change overtime.
What Happens If Someone Sends Bitcoins To My Wallet And I'm Offline?
Do not panic, the Bitcoins will appear in your wallet the next time your turn on your device and synchronize with the network. Whenever a transaction occurs, it is noted in the blockchain and stored on all computers which use Bitcoin software.
Once you get the updated blockchain off of one of the computers connected to the network, your transaction will be verified and the Bitcoins will show up in your wallet. You only need your wallet when you wish to spend money, otherwise you can keep it offline and all the Bitcoins will be added the next time you connect to the network.
Why Does Synchronizing Take So Long?
Synchronizing takes an extended amount of time only when the user chooses to use a full node client. These clients download and verify all network transactions that happened in the past. Some clients need this additional data to be able to calculate your spendable balance and in order to make new Bitcoin transactions.
These calculations are based on previous transactions which might take some time to download, depending on your bandwidth and processing power. There are other clients that don’t require this additional data, but it should be noted that in order for Bitcoin to remain secure and protected enough users need to be using the full node clients.
The Bitcoin community understands the value of using full node clients and there are plenty users choosing to do so.
Bitcoin is an amazing new technology which can revolutionize the world. We hope that the information we provided here is enough to give you the basic knowledge needed to determine if Bitcoin is something you are interested in.
Remember, no currency or invention is bulletproof, and while Bitcoin has made fantastic headway in the marketing and economical world, by no mean does this indicate its invulnerability to the outside world. There are plenty of factors which will influence the growth or possible decline of Bitcoin.
Remember to take as many factors into consideration as possible and always evaluate risk to the best of your ability.