As the biggest name in cryptocurrency, bitcoin has become a major phenomenon in both technology and finance, and it’s gaining more influence by the minute. Here, we’ll provide a broad guide to bitcoin, from what it is to what it’s good for, and everything in between.
In a single phrase, bitcoin is a fully decentralized cryptocurrency. What that means is that it is an encrypted form of purely digital currency that is not tied to any one bank, financial system, or economy. While it is based on some similar concepts about electronic payment methods that have existed for decades, bitcoin is the first major currency of its kind.
Insofar as they have any kind of tangible form, bitcoins are effectively blocks of data that can be used to pay for goods and services, or transferred between private users. Their value is determined purely by market demand, and impacted by the fact that there will only ever be 21 million bitcoins in circulation. This finite supply helps to give bitcoin value despite the fact that it is essentially an invented resource.
A Brief History of Bitcoin
As mentioned, bitcoin is based in part on some electronic currency concepts that have been around for some time. But bitcoin itself first emerged when someone going by the name Satoshi Nakamoto authored a whitepaper about it late in 2008. Nakamoto released it as functioning open-source software soon thereafter, in January 2009, and bitcoin became a tradable asset.
Since then, bitcoin’s advancement and evolution have been gradual but fascinating. Through the spring of 2011, a single bitcoin was still worth less than $1. By the fall of 2013, it had spiked to nearly $1,000 for the first time. This would remain a high point during a few years of volatility and uncertainty, until early 2017 when bitcoin launched past the $1,000 mark and kept climbing. As of October 2017, it had reached a new all-time high of just over $5,800.
Throughout this brief history, we have seen a steadily expanding list of companies working alongside bitcoin, as well as merchants accepting it as payment. There are now numerous bitcoin exchanges, wallets, and reference points designed to assist those who wish to use the cryptocurrency, and more merchants both online and through brick-and-mortar stores are allowing bitcoin payments.
How Bitcoin Works
Generally speaking, cryptocurrency works a little bit differently than many people might expect. As mentioned, you can think of cryptocurrency coins as blocks of data rather than as tangible forms of wealth. Here, we’ll cover how the bitcoin system specifically operates.
Bitcoins come into existence when they are “mined.” This is a process conducted by individuals or groups of individuals and has to do with verifying bitcoin transactions through complex computation and mathematics. Miners are rewarded with bitcoins, which can thereafter be in circulation.
When you take possession of bitcoins, what you’re actually doing is gaining access to them. In other words, they already exist in a semi-public space online. What you gain is a “private key” that allows you to access the public address of a store of bitcoin and determine what to do with it. Through this process, you can use bitcoins to pay for goods and services online or even at some participating brick-and-mortar retailers. You can also use bitcoins for peer-to-peer transfers, and you can sell them back to an exchange (which speaks to the idea of investment, covered below).
How You Can Use Bitcoin
We just covered how bitcoin can be used conceptually. But how can you actually go about purchasing and making use of this digital currency? The simple answer is that you need to familiarize yourself with bitcoin wallets and learn where and how to use them.
A bitcoin wallet is absolutely essential if you’d like to use bitcoins, whether as functional day-to-day currency or as an investment. Because cryptocurrency has no physical form, it is only through these wallets that you can store it (or more accurately protect your access to it). Bitcoin wallets come in three distinct forms—paper, software, and hardware—each with pros, cons, and different features.
Your decision regarding which type of wallet to use will depend mostly on how you value security and convenience. Whichever option you choose will serve as your private store of bitcoin keys and addresses.
To use bitcoin in a transaction, you will essentially facilitate a transfer of bitcoin by way of this data. Using your private key, you will access your bitcoin, input a recipient address, and okay a transfer of a given amount. The transaction will then be confirmed and recorded on the blockchain.
What is the Blockchain?
We just mentioned the blockchain, and while it has sort of become its own broader technological concept over the years, it’s essential to understanding what makes bitcoin work. It’s easy to think about cryptocurrency as existing primarily for the convenience that comes with electronic money transfers. But really, one of the core points of cryptocurrency is that it is not beholden to any single financial system, government, or bank. In other words, it is not up to a given institution to monitor, verify, or approve transfers of funds.
But because someone still has to be in charge of these things, the blockchain was invented. Typically described as a “public ledger,” this is quite literally a list of all bitcoin transactions that have ever occurred. While the identities of participating parties are protected, amounts and bitcoin addresses are laid out for all to see. This ensures that people cannot conduct fraudulent transactions, by trying to use the same bitcoin multiple times for instance.
Transactions are verified by miners in “blocks” (each one including many transactions), before those blocks are added to the chain. It’s a revolutionary system of transparency that serves as a foundational aspect of modern cryptocurrency, and which is also being adopted in other industries around the world (such as the diamond trade, for instance).
A Growing Trend Toward Investment
The idea of investment is one that appears to have gotten more popular as bitcoin has gained value, so it’s worth exploring as you seek to gain a comprehensive understanding of the leading cryptocurrency. While seemingly intended as an alternative to mainstream money—some have predicted that bitcoin is the “currency of the future”—bitcoin may ultimately prove to be most useful as a commodity.
That is to say, more people may prefer to buy, hold, and sell bitcoin as an investment asset, rather than attempt to use it in regular transactions. In this regard, bitcoin is drawing more comparisons to other popular commodities such as gold or crude oil.
This doesn’t mean that you need to look at it one way or the other. There are now many online and in-person merchants that accept bitcoin as a currency, and if the idea of cryptocurrency is appealing, you can certainly still use it this way. But it’s also important to recognize that bitcoin appears to be trending toward being viewed as a commodity.
The introduction of modern cryptocurrencies in 2008 has led to a lot of exciting products, technologies, and emerging currencies. But bitcoin—a fully digital currency operating on the blockchain—remains the leader in this category. While somewhat volatile and unpredictable, it has also become a fascinating and groundbreaking resource.
Why Would Someone Use Bitcoin?
As bitcoin has gained value and popularity over the past few years, more and more people have become familiar with it. And now that bitcoin has gained a bigger place in modern society, it’s important to learn what it is and how it works. Even then, however, one important question follows: why use it at all?
Early on, bitcoin proponents would have answered that you should use it because it’s on its way to replacing traditional currency. Others would have argued that you shouldn’t use it at all, because it was nothing more than a passing fad. It’s clear that neither extreme is particularly fair or accurate. Bitcoin is probably not on its way to replacing traditional currency (at least, not any time soon), and it’s not a passing fad, either. There are specific reasons why you might consider using it, and we’re diving into them here.
Privacy and Security
Privacy and security are perhaps the two bitcoin benefits you’ll see mentioned most frequently. When you make an online transaction with bitcoin, you are effectively revealing no personal information. While the address of your bitcoin is made public during the transaction—as is the amount being transferred—this information cannot be used to hurt you, nor to dig up anymore about your identity.
Comparing this to credit card payments, it’s easy to see the appeal. While we all like to hope that we’ll never have issues with hacked or stolen payment or personal information, this kind of thing happens fairly frequently on the internet. Bitcoin can effectively be used as a more private and secure alternative.
Efficiency isn’t a particularly big deal when you think about in-person payments. While there are some brick-and-mortar merchants that accept bitcoin via point-of-sale machines or apps, the process isn’t necessarily any quicker than any other method of payment.
However, online bitcoin transactions are processed more quickly than a lot of payments based on direct credit card information or third-party services like PayPal. Some merchants will actually accept “zero-confirmation” payments, which can be processed almost immediately (and in which the merchant takes on some level of risk). But even in more ordinary scenarios, bitcoin transfers usually take just 10 minutes to be confirmed.
Another reason that some people are turning to bitcoin is that they find they have more complete and direct control over their wealth. When you keep your money in a bank, there is always the risk that some financial tragedy could befall said bank. When you invest in the stock market, you’re always at risk of a crash. And even if you keep a store of wealth in a system like PayPal, there is some risk of a hack or crash. With bitcoin, you can rest assured that your money is stored in an encrypted, decentralized network that’s effectively immune to the aforementioned issues.
Convenience Across Borders
The idea of convenience across borders works in two ways. For one thing, using bitcoin can theoretically free you from the hassle of exchanging currency when you travel. This requires that the places you visit in a foreign country accept bitcoin of course, and that’s not always the case. In theory, however, bitcoin could certainly become a preferred currency for travelers. Additionally, sending money overseas is far more affordable with bitcoin, because transaction fees are minimal compared to just about every other option.
Bitcoin is not subject to inflation, because we already know that there is a finite supply of it. There will only ever be 21 million bitcoins in circulation. Given that inflation is caused in part by the printing of additional currency, it won’t be a problem with bitcoin. This is not to say that there aren’t other factors that could impact the value of bitcoin, because it’s proven to be a pretty volatile commodity during its first several years in circulation. However, inflation specifically shouldn’t be a concern.
Fitting The Future
Some also like the idea of switching to bitcoin because it fits with a future that’s already starting to settle in around us. Slowly but surely, we are changing the way we pay for goods and services, moving largely away from cash and at least partially away from credit and debit cards, in favor of phone-based payment methods. This is a transition that’s happening with or without bitcoin, and it’s probable that in the near future most of us will be using mobile devices to pay for things, using Apple or Google programs, apps compatible with our banks, PayPal, etc.
Bitcoin, in some respects, is a more direct form of money transfer than any of these. Rather than involving your bank account, a third-party program, and a merchant, bitcoin directly transfers your money to the merchant.
As you can tell, none of these potential benefits makes it absolutely necessary to switch to bitcoin. Some may not even relate to you or your concerns. But broadly speaking, these are the reasons that many people do decide to use bitcoin.
How to Buy Bitcoin
The process of purchasing bitcoin can seem a little bit complex at first, even if you’re fairly familiar with the underlying concepts. At this point in time, bitcoin can be considered a mainstream technology and a prominent form of digital currency, and as such it’s being used by more people every day. And with bitcoin growing more viable both as a currency and as a commodity for investment, it’s increasingly important for those who are interested to learn the ins and outs of how to buy and manage the cryptocurrency.
Below, we’ll outline the process of buying bitcoin to clear up any lingering confusion on the matter. The process, in the end, is actually simpler than it may seem.
Choose a Wallet
As you may well know, a wallet is not just a convenience or a recommended tool where bitcoin is concerned. Rather, it’s a necessity. You won’t be able to maintain a store of bitcoins without one, though it should be mentioned that bitcoin wallets come in many forms. These include paper, hardware, and software wallets, with software wallets existing in numerous forms (online, on desktops, and in app form). Each option comes with pros and cons relating to security and convenience.
If you’re just getting started and looking to acquire bitcoins, a software wallet may be the most convenient option. While this type of wallet—a “hot wallet” connected to the internet—carries some concerns that “cold wallets” don’t, they’re also the most efficient tools for acquisition. In some cases, a given software wallet will even come with its own included exchange. At any rate, you’ll need to select a wallet before you do anything else. With your wallet, you can generate your own public bitcoin address (or addresses), which is essential to buying coins.
Choose an Exchange
If your wallet does not include its own exchange, or if you opt for a paper or hardware wallet, you’ll next have to select an exchange. There are a lot of different options out there, with Coinbase and Binance being the best-known of the bunch.
You’ll want to do a little bit of research before choosing one. Some smaller or lesser-known exchanges aren’t necessarily trustworthy, and others involve steeper transaction fees when you make a purchase. You will also want to check on which payment methods are accepted at an exchange (as in, which service or format you can use to give them money in exchange for bitcoin). With these considerations in mind, you can find a service through which you’ll actually end up buying your cryptocurrency.
Select a Payment Method and Make Your Purchase
This part is fairly self-explanatory. As mentioned, it’s recommended to research available payment methods before deciding on an exchange, so you’ll presumably already know what you’re going to use. Then, it’s as simple as plugging in your information (be it credit card information, a PayPal account, etc.) and making a purchase. There are two more things to keep in mind though.
- One is that you probably won’t be buying a bitcoin, unless you’re ready to make a considerable investment. Bitcoins are worth thousands of U.S. dollars at the time of writing (November 2017), which means the majority of transactions actually involve fractions of individual coins. The numbers can look a little bit weird, but keep in mind you’ll probably be buying a quantity represented by an extended string of decimals.
- The other thing to keep in mind is that you probably won’t automatically receive your bitcoin on your address. More accurately, when you make a purchase, you’ll be reserving your bitcoin on the exchange (where it is automatically stored for you).
Transfer Funds to Your Address (If Necessary)
If you face the situation just described, in which an exchange holds your bitcoin for you after a purchase, you’ll need to direct the exchange to send you the coins on your own address. This service will be offered, but it can take several minutes (or sometimes longer) for the exchange to take place. The end result, however, will be that the amount of bitcoin you purchased will be credited to your address, and you’ll receive the private keys required to make use of it. Just as a refresher, bitcoin hosted at a given address cannot be accessed or used without the coinciding private keys.
Protect Your Private Keys
As a final reminder, you’re also responsible for keeping your private keys safe once you’ve actually purchased bitcoin. This is largely the purpose of a wallet, though different wallets do it in different ways. Just remember that without access to your private keys, the bitcoin you bought is essentially useless; and should others gain access to your private keys, they can get their hands on them.
By following these simple steps, you’ll be able to buy and store bitcoin to use how you please.
How to Spend Bitcoin
It’s getting more common to look at bitcoin and other cryptocurrencies as commodities. In large part, because bitcoin’s price has soared throughout 2017, the idea of investing in cryptocurrency can look quite appealing. Even so, bitcoin remains an increasingly functional currency, and many are still interested in spending it to pay for goods and services. This is ultimately a fairly straightforward practice, but it’s something even those who are well versed in cryptocurrency should read up on.
Why Use Bitcoin?
Before we talk about the details of how and where to spend bitcoin, it’s worth addressing the most basic question involved: why bother? Some of the answers to this question can be found in our basic guide to Bitcoin, but to answer briefly, there are three main reasons that come to mind.
- We’re moving toward digital financial transactions anyway, and storing money as bitcoins is more secure than leaving money in, say, a PayPal account.
- People like the transparency of the blockchain, which makes transactions straightforward and helps to avoid disputes and fraud.
- Some are simply interested in bitcoin because they view it as the way of the future.
There are additional reasons an individual might want to spend bitcoin. For instance, some may think of it as a better option than exchanging currency when traveling abroad, and others may just be curious to try something new! But the three reasons outlined above cover the most common and perhaps most logical reasons to use bitcoin as a functional currency.
Conducting a Bitcoin Transaction
Provided you have a stash of bitcoin and a bitcoin wallet to store it in, conducting a transaction is a fairly easy process. You only need three things to make it happen, and they should be readily available: your own bitcoin address, your private key, and the address of the individual or merchant you’re making a purchase from.
Your own address is effectively your bitcoin bank account, in that it holds your store of bitcoins, but only you can access it. It’s a little bit different because your address is public knowledge, so others can “see” it on the blockchain. However, in terms of practical usage, it’s more or less like a digital account. Your key is essentially a string of code that allows you to access that address and approve transactions with the bitcoins inside—or with fractions of bitcoins (because an individual bitcoin at the time of this writing can be worth more than $6,000).
To conduct a transaction through an exchange, you will have to design a message that includes an input (the address that you originally received the related bitcoin from), the amount of the transaction, and the recipient address. You then effectively sign off on this message, and thus the transaction, with your private key. Once you have done this, the transaction goes public, where miners can verify it and approve its addition to the blockchain. At that point, the recipient address will be credited with the bitcoin you sent, and the transaction will be complete.
This process is the functional answer to the question of how, literally, to spend bitcoins. This process works not only when you are buying goods or services from a merchant that accepts bitcoin payments, but also if you’re simply conducting a peer-to-peer money transfer.
A verified transaction won’t show up immediately. While some alternative cryptocurrencies have taken steps to speed up the verification process, bitcoin mining can take 10 minutes or a bit longer. This is worth keeping in mind so you don’t worry if a purchase doesn’t immediately show up. The only potential inconvenience is if you’re making a purchase at an in-person merchant, in which case you may be asked to wait until the confirmation process is completed.
Matching Amounts Received and Spent
You may not consider this issue in advance, but it can be puzzling when you’re actually making a purchase—particularly if it’s your first. We mentioned that one of the required elements to a transaction message is the “input,” which is to say the address you received a quantity of bitcoin from. But that amount is very unlikely to exactly match the purchase you want to make, and unfortunately, you can’t simply break it down and use only a portion of it.
What happens in this instance is that the exchange and wallet will effectively generate change. While you will technically “send” the full amount of bitcoin from a previous input, only the amount required for the new transaction will actually go to the recipient. The remainder will be put into an automatically generated address that you will have the private key to (and which you can then use in any future transaction).
Where to Spend Bitcoin
This is the biggest question for a lot of people who are interested in bitcoin, and unfortunately, it’s also the hardest one to answer. The good news is that it’s difficult to answer because the list of merchants accepting bitcoin is always changing and expanding. You’ll see a lot of lists of major online retailers and services that are accepting bitcoin—from Target and Overstock to OKCupid and Expedia—but it’s best to simply conduct a search for participating merchants, either online or in your immediate area. That way you’ll find a list of relevant stores suited to your own needs.
Gift Cards and Debit Cards
One more thing to keep in mind is that there are companies that provide workarounds for the fact that not all stores accept bitcoin as a currency. There are various platforms online at which you can use bitcoin to purchase a gift card to a store, effectively funding your eventual purchase with bitcoin even if you’re not using it directly.
Even handier is the idea of a bitcoin debit card, which has become a reality. You can purchase a card that works anywhere you can pay with a debit card (which is just about everywhere these days), and then you will fund that debit card from your bitcoin addresses. This may be the most effective way to turn bitcoin into an everyday currency at the moment. You get to store your wealth as bitcoin without missing out on the convenience of more conventional payment methods.
What is a Bitcoin Wallet?
For those who aren’t particularly familiar with the ins and outs of bitcoin usage, the idea of a bitcoin wallet can be a puzzling one. After all, one of the first things you learn if you research bitcoin (or any cryptocurrency for that matter) is that there are no physical bitcoins. It’s a currency that exists entirely digitally, and thus, in a physical sense, it cannot be stored. That leaves us with the important questions: what is a bitcoin wallet and how does it work?
A bitcoin wallet is not something that stores bitcoins, strictly speaking, because they cannot be stored. Rather, it is a device or program (or even a piece of paper, but more on that below) that stores the private keys that allow you to access your store of bitcoins. More broadly speaking, a bitcoin wallet allows you to keep track of your bitcoin balance and conduct transactions with other users. In some cases, it can also connect to a cryptocurrency exchange, such that you can monitor changing prices and acquire more bitcoins directly from the exchange. But how exactly does a wallet work?
In a phrase, it keeps your private keys safe. Your private keys are essentially strings of code that generate your bitcoin addresses and give you access to them; without them, you cannot conduct transactions. But methods for protecting this information vary between three different types of bitcoin wallet: paper, hardware, and software.
While they might sound simple in relation to cutting-edge, tech-based currency, paper wallets are exactly what they sound like. They’re simply pieces of paper upon which you can print your private key and address information, such that you alone have access to them.
The pros and cons of paper wallets are actually quite clear. On the plus side, this kind of option is what’s known as “cold storage,” which basically means it is not connected to the internet (and is thus not susceptible to hacking or corruption). In that sense, some might consider a paper wallet to be the most secure way to store bitcoins.
However, the negatives are simply that paper wallets can be easily lost or damaged, and they also don’t offer any kind of direct facilitation of transactions. If you do opt for a paper wallet, it’s recommended that you print off several copies and keep them in a physically secure location, so that if something does happen to one slip of paper, you don’t lose your information forever.
Hardware wallets are also cold storage options. While they do need to be connected to computers or mobile devices in order to facilitate transactions, the information you store on them exists entirely offline. These wallets are even capable of generating your private keys independently during a transaction. So for instance, if you’re plugged into a computer to receive a payment in bitcoins, the device itself will generate the private key you need to access your new acquisitions.
As for what they actually are, hardware wallets are small, offline devices that are about the size of USB sticks or car remotes on key chains. The best of them—devices like TREZOR, the Ledger Nano S, and KeepKey—have small display screens and are generally very convenient to use. Some ultimately consider these to be the most secure bitcoin wallets available. However, there is some of the same risk you have with paper wallets, in that they can easily be misplaced or damaged (though their contents can be backed up).
Software wallets are what we call “hot” wallet options, which is to say they’re connected to the internet. This makes them perhaps the most popular and convenient options, but unfortunately the most vulnerable as well. Though software wallet providers are constantly advertising various security and encryption features, hacking is always at least a minor concern, whereas it’s a non-factor with hardware or paper wallets.
Software wallets actually come in multiple forms, some of which blend together at times. Basically, they can exist either online, as desktop programs downloaded from the internet, or as mobile apps. Some providers have also engineered wallets that are accessible through all of these different means at once. These types of wallets are valued for their convenience and accessibility, as well as for the fact that many of them offer additional features such as live price monitoring, recommendations, and educational content. You can generally think of them as full-fledged apps designed to help you monitor every aspect of your bitcoin ownership and interest.
That covers all of the main types of bitcoin wallets and the basics of how each type is used and perceived. Particularly where software wallets are concerned, there is plenty more to learn, as there are virtually innumerable wallets competing in the space. But the most important thing to remember if you’re looking for your own wallet is that in the end, you’re storing data, rather than actual currency. Keeping this in mind may help you determine which sort of wallet you prefer and why.
Guide to Mining Bitcoin
As the bitcoin craze takes hold of the Fintech space, more people are looking for ways they can get in on the action. While there has long been interested from those wishing to own and invest in this cryptocurrency, there are other ways to participate in bitcoin’s boom.
One of the ways is to mine cryptocurrency. Mining bitcoin is not for the faint of heart, though. Not only is it extremely complicated, but it can also wreak havoc on one’s finances because it is significantly expensive to do.
However, for those with the interest, drive, patience, smarts, and money, bitcoin mining can be quite rewarding.
Here, we’ll discuss some of the many facets of bitcoin mining. Through the use of the pointers we include, you’ll be well on your way to determining if this is something you’d like to do.
The Infamous Satoshi Nakamoto
[image of “Nakamoto”]
The idea behind bitcoin and mining comes from someone who has become known as Satoshi Nakamoto. No one has stepped forward and claimed that he or she is this person, leaving theorists to come up with their own ideas. These ideas have included this person not even existing, and the name Satoshi Nakamoto actually representing a team of people.
No matter, what was developed has disrupted the Fintech space. Bitcoin, and the subsequent technology that underpins it (the blockchain), have impacted the way people invest, buy things, and even enter into contracts.
It is thought that this Nakamoto person, or team, mined roughly one million bitcoins beginning in 2009. A white paper was crafted that created the codes for bitcoin that laid the path for the many other cryptocurrencies that make up the space.
The entire point of bitcoin was to develop a peer-to-peer electronic cash system. The goal was to create a system that allows online payments to be sent directly from one party to another without going through a third party, such as a bank.
Why Mine Bitcoin?
So why would anyone want to get into bitcoin mining given the costs and other issues that come with the chore? Like most things, it’s about the money. Mining bitcoins can be potentially very lucrative.
When Nakamoto wrote the code for bitcoin, he specified that no more than 21 million bitcoins would ever be in circulation. Given the finite nature of the cryptocurrency, it was believed that people needed the incentive to mine. The solution was to reward miners for each block they mined.
For their efforts, miners are paid transaction fees and are rewarded with subsidies. The purpose of these offerings, called block rewards, is twofold:
- It allows for the decentralized dissemination of new coins
- It incentivizes miners to provide the necessary security to protect the generated bitcoins
[image of someone mining]
Mining for Bitcoins
One of the best ways to think of bitcoin mining is to think of it like gold mining. This is a fair comparison because the concept is the same. While with gold mining the search is for gold, with bitcoin mining, the search is for bitcoins.
In the white paper for bitcoin, it is stated that the steady addition of a constant amount of new coins is analogous to gold miners expending resources to introduce gold into circulation. In the case of bitcoin mining, it is the central processing unit time and electricity that is expended.
The bitcoin mining process entails securing and verifying transactions between parties. For example, let a man by the name of Charles finds a stove for sale through an online ad. He wants to buy it with bitcoin. The seller is uncomfortable with taking Charles’s word for it that his bitcoins are legitimate.
Enter the miners. They have taken the technical steps outlined for bitcoin, enabling them to verify bitcoin transactions. When they verify the transactions, they are also verifying many others and adding them in blocks to the public ledger called the blockchain.
The onus is on the bitcoin miners to secure these blocks, which essentially build on top of each other to form the blockchain. Remember, the purpose of the blockchain is to confirm that the transactions that have been added to it are real and that the bitcoins have not been already spent.
As part of the mining process, new bitcoins are released.
Hashing and Proof-of-Work
Because the mining process is a peer-to-peer computer process involving no centralized government, securing the network is of the utmost importance. A key component to such a system’s security is the implementation of ways to prevent double spending as mentioned above.
To the rescue is a task called hashing, which allows miners to create a hash from the transaction. The term hashing refers to the speed at which a person mines bitcoins, and it is literally measured in hashes per second. Miners run an algorithm called Secure Hash Algorithm, or SHA-256, to validate bitcoin transactions and add security to the blockchain.
These hashes are added to the block, and can be viewed as setting the standard for the next block of transactions that will be added. The miner’s charge is to create a new block that includes current transactions in addition to the new hash. The goal is to beat other miners to the punch, and they are rewarded for their tenacity.
What Equipment is Needed?
[image of mining rig]
While many think that all they need to mine bitcoins is their computer’s central processing unit, or CPU, that is no longer the case at all. Maybe CPUs sufficed back when Nakamoto was mining bitcoin, but they would be useless today in mining the crypto.
That’s because of the amount of speed that’s needed to mine coins at the levels required now. Next up were graphical processing units, or GPUs. They became popular among miners because of their ability to hash up to 100 times faster, and consume less energy. The mining tools of choice now are custom bitcoin ASIC chips.
And then, there are options that require little to no hardware. Bitcoin cloud mining is growing in popularity because it makes the process easier. However, miners may risk not being able to provide the security needed because they don’t own the hardware behind the cloud service.
Many are finding it easier to not go about mining bitcoins alone. Instead, they are choosing to join mining pools. These pools can be made up of people from all over the world. Simply put, members of these groups pool the power of their computers together, creating a supercomputer of sorts to mine bitcoins.
There are even sites that allow miners to receive percentages of bitcoins when they add their computer power to the group. With pools, the faster your computer can mine and the more power it is contributing to the pool, the larger the percentage of bitcoins you could potentially receive. It’s up to the operator of the pool, so be sure to find out such information before joining.
When it comes to the earnings miners can potentially reap, there are no guarantees. Hefty utility bills stemming from powering their systems could easily eat away at these earnings.
The reward of being in on this cutting-edge movement would speak volumes if you want to grow your career in the space. If nothing else, becoming a miner puts you in an elite crowd that has the potential to handedly reshape finances and economies throughout the world.
Where is Bitcoin Legal?
The question of bitcoin’s legality around the world can be a tricky one to answer. For one thing, bitcoin is still something of an emerging technology (not to mention currency), and many governments and financial systems have not yet determined how to handle it. Additionally, bitcoin legality is not binary. There are strict policies in some countries that regulate bitcoin without making it expressly illegal. And on top of these factors, bitcoin also hasn’t fully emerged in a meaningful way in every country. All in all, it’s a fairly complicated picture.
Below, we’ll provide an overview that clarifies bitcoin’s legal status around the world, at least in regions and countries in which there are specific policies toward cryptocurrency usage.
Where Is Bitcoin Illegal?
There are only a few countries in which bitcoin usage is fully illegal, and in some of them it’s difficult to tell how strict the regulation is. The list is as follows:
- Bangladesh – Bitcoin usage is considered a violation of anti-money laundering laws and can result in jail time.
- Bolivia – All bitcoin activity has been banned in Bolivia since 2014. In 2017, the country arrested what it called a group of “cryptocurrency promoters.”
- Ecuador – Ecuador has banned bitcoin as well as other cryptocurrencies. This is interesting for two reasons: it’s one of the fairly few countries to specifically include other cryptocurrencies in regulation (though most laws and regulations relating to bitcoin can be applied to altcoins), and the reason for the ban was that Ecuador sought to establish its own natural digital currency system.
- Kyrgyzstan – The government of Kyrgyzstan made clear that bitcoin use would be considered a violation of state law in 2014.
- Nepal – Bitcoin was made illegal in Nepal in August 2017.
As mentioned, not every country makes its policy toward bitcoin particularly clear. But at this time, these appear to be the only four countries that have expressly forbidden any and all bitcoin-related practices.
Countries With Strict Regulations or Cautions
“Strict regulation” cannot be precisely defined, so the specific policies that land a country in this category vary. However, there are places in which bitcoin has been or may become illegal, as well as those in which there are very tight restrictions on usage.
- Algeria – As of November 2017, Algeria does not prohibit the bitcoin-related activity. However, it is believed that the country will be outlawing cryptocurrency as soon as 2018.
- Namibia – Some might say that as of September 2017, bitcoin is illegal in Namibia. What appears to be more accurate is that exchanges are outlawed and merchants are forbidden from accepting bitcoin as legal tender. However, actual possession of bitcoin doesn’t seem to be illegal at this time.
- Jordan – Jordan has not done anything to prohibit the use of bitcoin between individuals and private merchants. However, the country’s central bank did publish a paper specifically warning the public not to use cryptocurrency. This goes slightly further than many other nations that have merely warned their citizens of potential risks.
- Lebanon – Lebanon has handled bitcoin in much the same manner as Jordan.
- China – In 2016 and early 2017, China was looked at as a major adopter of cryptocurrencies. However, there has been a clear effort to minimize its spread and usage. While bitcoin use is still legal, some exchanges have been frozen amidst an effort to dissuade the public from trading cryptocurrency.
- Malaysia – There is no issue with bitcoin usage in Malaysia, but it is believed that a cryptocurrency ban could be put in place before the end of 2017.
- Iceland – Iceland’s bitcoin position is curious. Trading in bitcoin is thought to be illegal under the Foreign Exchange Act, but owning and mining bitcoins are not actually illegal practices.
This covers the countries that are known to be the most strict about bitcoin usage, without actually banning it. This should provide some idea of what type of regulation can be in place in such countries in general.
Bitcoin in Major Western Economies
The European Union and the G7 represent many of the world’s most developed and influential financial systems. As such, they can be particularly interesting to many who are interested in the general development of bitcoin regulation worldwide. And in both unions, bitcoin is considered to be legal, at least in the sense that it can be freely traded and used. There are some complex tax issues that can be associated with bitcoin trading, but these vary from one country to another and do not affect legality.
Broadly speaking, bitcoin trading and usage are legal in:
- The European Union (Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the UK)
- The G7 (United States, Japan, Canada, and various aforementioned EU partners)
This more or less concludes a broad overview of bitcoin’s legal status in the world. Though there are plenty of countries not mentioned here, the above categories cover the most influential economic systems, the countries in which strict regulation is in place, and the countries in which bitcoin is actually illegal.
If you’re exploring bitcoin’s legal status around the world, there are two more points to keep in mind. The first is that when you read that bitcoin is “not legal currency,” what it usually means is that bitcoin cannot be used in an official capacity (as in a government-related payment). This does not mean bitcoin is illegal. The second point is that many countries’ official positions include language about persecuting crimes related to bitcoin. This is in reference to issues like money laundering, but says nothing of the actual legality of bitcoin.
What Is SegWit2x?
If you follow bitcoin news or cryptocurrency in general, you have likely come across the term “SegWit2x.” It’s the sort of term that could easily be brushed aside as obscure tech jargon—probably because it looks more like somebody’s security password than an actual word. But if you own bitcoin or care about its evolution, it’s important to develop an understanding of SegWit2x.
SegWit2x is a proposal for a new hard fork in the bitcoin protocol. Following a hard fork, the version of the bitcoin blockchain that existed before it can continue to exist. However, a separate and incompatible chain is also established according to the new protocol, with the assumption being that most “node” operators (who make up the network of computers that allows bitcoin to function) will migrate to the new protocol. Typically, this occurs to fix a problem that becomes apparent in the existing protocol.
In this specific case, the proposed SegWit2x change has to do with the storage size of the individual blocks in the bitcoin blockchain. Currently, blocks are 1 MB in size. SegWit2x would establish a new protocol changing the size to 2 MB, so at least in definition, it is a fairly straightforward proposal.
Benefits of 2 MB Blocks
It stands to reason that those in the bitcoin community who are in favor of SegWit2x see a benefit to 2 MB blocks. So, what is the benefit exactly? You can begin to understand the change by reading up on bitcoin cash, a previous hard fork from bitcoin that sought to establish a currency that’s friendlier for peer-to-peer transactions. Bitcoin cash increased block sizes from 1 MB to 8 MB in an effort to make the processing of transactions more efficient.
Bitcoin transactions somewhat infamously take about 10 minutes to be fully processed with confirmations occurring on 1 MB blocks. Larger blocks increase the number of transactions that can be processed per second, which naturally means that 2 MB blocks would bring about an increase in efficiency. Proponents of SegWit2x argue for its necessity in competing with a growing list of bitcoin alternatives (including bitcoin cash) that are viewed as being handier for transactional use. To uphold bitcoin’s utility as digital money, rather than just as an investment commodity, they argue that SegWit2x is a necessary change.
[Insert image of blocks/blockchain depicting block sizes]
The Arguments Against SegWit2x
SegWit2x may be a necessary change in the eyes of many in the bitcoin community, but it isn’t without opposition.
Those who oppose SegWit2x appear to largely worry that it is too disruptive. Like other hard forks that have occurred, this would involve the introduction of the new bitcoin software, which would need to be adopted by any node whose operators still wanted to be part of the network. While bitcoin cash functioned similarly, it was presented more as an alternative—such that both networks could continue to function independently. In this case, the SegWit2x hard fork technically operates the same way, but it would represent more of an advance than an alternative.
There is also less incentive to accept this change because the hard fork wouldn’t result in, for lack of a better phrase, “free money.” When bitcoin forked to bitcoin cash, the new network was effectively populated with replicated currency. If you owned bitcoin, you suddenly owned the same amount of bitcoin cash. That doesn’t mean stores of wealth were doubled, because bitcoin cash is worth substantially less—but it was still a nice perk for bitcoin owners and network operators.
There is also a philosophical divide between those in favor of SegWit2x and those opposed to it. As mentioned, proponents want to make sure that bitcoin can continue to function as a competitive digital currency. Those opposed to the hard fork argue that bitcoin is more about storing value than making payments and peer-to-peer transactions. While they don’t want transactions to be difficult or impossible and may be open to future improvements in these areas, they prefer to embrace the idea that bitcoin is, for all intents and purposes, a commodity.
The Status of SegWit2x
Despite being a hot topic of conversation for many months, SegWit2x is stalled (and some might even say defeated). While there is no official democratic system in place, a hard fork generally requires a high degree of consensus within the bitcoin network, and in this instance the network failed to agree upon the hard fork.
In early November 2017, those behind the intended SegWit2x fork called it off, suggesting that they were unable to reach a consensus in the bitcoin community. This was surprising particularly given that some of the biggest names in bitcoin were on the side supporting the change. However, it also appears to be something of a victory for the very concept of bitcoin as a decentralized system governed by consensus rather than by any central decision-maker.
Interestingly, the bitcoin price soared as a result of SegWit2x’s being called off. This isn’t necessarily significant given bitcoin’s general volatile nature around the time of this decision, but it does indicate some enthusiasm on the behalf of average bitcoin users (who were believed to be largely attached the opposition, on the ground that transaction fees may have risen under SegWit2x).
Does SegWit2x Have a Future?
In a word, yes. This is a hard fork that could still happen in the future. The language of the failure is worth pointing out, because SegWit2x leaders announced they had “suspended,” rather than cancelled their project. This clearly leaves the door open for a renewed effort in the future.
For now, the failure of the bitcoin network to adopt SegWit2x is being viewed largely as a choice of direction. By rejecting the hard fork, the community is seen as having embraced bitcoin’s status as a digital commodity or, as people sometimes refer to it in a strictly non-literal sense, “digital gold.” However, SegWit2x (or another hard fork like it) could still happen.