10 Questions Everyone is Asking about Bitcoin

The first Bitcoin was created — or mined — on January 3rd, 2009 by a person or group using the pseudonym Satoshi Nakamoto. To this day, nobody knows who they are. A month prior, they wrote the Bitcoin Whitepaper.

It was titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” and as you’ve guessed, it explained how Bitcoin works. Mr or Mrs. Nakamoto disappeared in 2010, sharing in an email thread that they’d “moved on to other things.”

Although Satoshi disappeared, the Bitcoin blockchain has since grown massively. Its users now number in the millions, while the price has gone up from less than a cent to thousands of dollars.

Blockchains are giant public ledgers that record all transactions in a transparent and secure manner. Blockchains are sometimes referred to as “distributed ledger technology.” In essence, when you transact on the blockchain, your transaction (or “tx”) is bundled into blocks, then added to the blockchain.

Miners, who are part of the Bitcoin network, add (or mine) new transactions and include them in new blocks. Miners use specialized computers to participate in the blockchain lottery, which takes place roughly every 10 minutes. Once a block is found and verified, miners are rewarded with new Bitcoins, and the block is added to the blockchain.

Currently, miners earn 6.15 Bitcoin (over $150,000) per block, and this reward is programmatically halved every four years in “the halving.” You might have heard of Bitcoin nodes before. Bitcoin nodes are simple to download and set up.

Nodes maintain a copy of the blockchain, and crucially, they’re the Bitcoin watchdogs: they validate new blocks. Together, miners and nodes ensure the security and integrity of the Bitcoin network — and they’ve done a pretty good job for the past decade.

In brief, the value of Bitcoin is determined by supply and demand, much like commodities or currencies like gold or real estate. In this arena, Bitcoin’s price is influenced by liquidity, regulatory developments, and technological advancements. There is no central bank or government propping up the supply or the bank stock.

As a result, Bitcoin’s price is volatile. You have been warned. Trading activities, news and sentiment can whipsaw the price of Bitcoin in minutes, causing 10% price crashes and rocket ship bull runs.

As a newbie, it’s a bit easier to focus on the total market capitalization of Bitcoin, which is the value of all the Bitcoins in the world. Right now, there are roughly 19 million Bitcoins, valued at 600 Billion dollars.

The price per BTC is usually quoted in US dollars (USD) or other major currencies. Today, one Bitcoin is worth just shy of $30,000 — but don’t worry, you can buy small fractions of a Bitcoin, named “Satoshis” after Bitcoin’s founder. One Satoshi is worth a fraction of a cent, so fill your boots!

To store Bitcoin, you need a digital wallet that contains your private keys that “unlock” the Bitcoin. There are two types of wallet: hot and cold. The temperature refers to access to the internet.

Let me explain: a hot wallet is a software-based wallet installed on your computer or phone. A hardware wallet is a next-level security solution because it stores your private keys offline.

Your keys never “see” the internet, making it unhackable. It’s essential to secure your private keys to keep your Bitcoin safe. Why? One day, a Bitcoin could be hundreds of thousands or maybe millions of dollars.

Bitcoin’s transaction fees and processing times may vary, making it less convenient for small purchases or time-sensitive transactions. That’s what the Lightning Network is for.

The Lightning Network is a payment solution built on Bitcoin. The country of El Salvador adopted Bitcoin as legal tender in 2021, and thousands of merchants across the country accept Bitcoin over Lightning. I verified this firsthand when I traveled in El Salvador for three weeks in 2022, living off of Bitcoin.

That said, Bitcoin the “investment” is up for discussion. Since 2019, the OG of crypto has appreciated astronomically in price, and some of the OG adopters got really, extremely wealthy. Nonetheless, what goes up must sometimes go down. The Bitcoin price sometimes experiences 70% drops, or drawdowns, adding to its volatility.

So, what’s the best way to stomach the volatility? A solid starting strategy is to buy a little bit of Bitcoin over a long period, say $10 a week for a year, to learn more and understand Bitcoin. Once you have skin in the game, the volatility is a breeze.

The US considers Bitcoin a “capital asset,” so any profits or losses from buying and selling are subject to capital gains tax. In some other countries, using Bitcoin to buy things could be a taxable event, so watch out.

It’s important to consult a tax advisor or professional where you are for specific guidance on using Bitcoin. As for Bitcoin-friendly countries, they include Switzerland, Portugal, and El Salvador.

In most countries around the globe, Bitcoin is legal and can be used for transactions, trading, and investment purposes. However, some countries, such as Algeria, for example, hate Bitcoin and have outright banned the use of crypto.

However, I pay a customer of mine in Bitcoin from time to time, and guess where he lives? Algeria. It’s very hard to ban Bitcoin and to enforce a ban on Bitcoin. It’s a bit like trying to ban the internet.

That said, it’s still important to understand and follow local regulations and laws regarding Bitcoin. It’s not a great idea to break the law by buying or spending some Bitcoin. It’s not a great idea to break the law, period!

Ultimately, it depends on how well you protect your private keys. It’s crucial to follow best practices to safeguard your assets. This includes using strong, unique passwords, enabling two-factor authentication (2FA), and keeping your private keys offline.

Hacking incidents and scams have occurred within the cryptocurrency ecosystem, but Bitcoin is to some extent separate from crypto. Your best foot forward is to use a hardware wallet like a Trezor, BitBox, or ColdCard.

Bitcoin mining requires a good chunk of energy to mine new blocks. This process is called Proof-of-Work (PoW). PoW energy consumption has concerned some climate activists due to its environmental impact.

Fortunately, a significant chunk of Bitcoin mining activities rely on renewable energy sources such as hydropower — plus, the network doesn’t actually use a great deal of energy.

Estimates from the Cambridge Bitcoin Electricity Consumption Index (CBECI) show that Bitcoin’s energy consumption is a rounding error on world energy consumption. That is to say, Bitcoin uses less than 0.5% of world energy.

Critics would argue that Bitcoin mining is still energy-intensive and it can contribute to global carbon emissions and climate change. Why burn energy to mine Bitcoin when we could be using that energy to power homes? Or better still, not use the energy at all?

Bitcoin advocates argue that the energy use verifies how secure the network is, and say that Bitcoin mining could enable the buildout of more and more renewable energy.

For example, Bitcoin mining has helped to mitigate flare gas in the USA; it ensures the viability of renewable energy projects around the world and it’s even helped to electrify rural parts of East Africa. (Check the work of Gridless to learn more).

It could also be argued that Bitcoin helps those in poverty and persecuted minorities in areas where fiat currency is unavailable or unreliable. Bitcoin is a tool for freedom, and it’s helped thousands of people living in authoritarian regimes to save, transact, and improve their lives.

Moreover, when Bitcoin was first mined, it had no value whatsoever for the first three months! Its unique creation separates it from other tokens, which were mostly created on the promise of the asset gaining in value. Plus, it’s well and truly decentralized with no single point or points of failure.

Conclusion

Bitcoin is here to stay. The world’s largest coin has already had a phenomenal impact on the financial landscape, and it will continue to spark curiosity, debate, and maybe even profits.

As a result, understanding the origin of Bitcoin, as well as how it works is essential for anyone interested in the future of digital currencies and money.

Thankfully, having explored these 10 questions, you now have a rock-solid foundation to further your knowledge. You’re now in a strong position to make informed decisions on your Bitcoin journey.