What is bitcoin and why is it important?
Bitcoin is a cryptocurrency. As such, it can be used like any currency (e.g. U.S. dollars or gold) as an investment, as a store of value, to make payments, and to send or receive money.
Because it is a digital currency, bitcoin is pretty much like email for money. The same way anyone can create an email address to send and receive messages, anyone can create a bitcoin wallet to hold, send and receive money with just a smartphone and a data or internet connection.
Where financial systems were previously clunky, slow, and expensive to use, bitcoin provides a common language that computers can use to transfer money quickly and securely, and at a potentially much lower cost because it is a system with no intermediaries or banks.
What can I do with bitcoin?
When bitcoin was first invented, its creator Satoshi Nakamoto envisioned one use for the technology: electronic payments. Since then, people have figured out how to use bitcoin’s technology for a variety of uses. Here are some ways that you can use bitcoin today:
As a purely digital currency, bitcoin is borderless. Because it’s available nearly everywhere, you can send money halfway around the world just as easily as you send it across the country.
Similar to buying gold or stocks, some people like to buy bitcoin as an investment in hopes that its value will go up. Historically, the price of bitcoin has been very volatile but overall, as mining has become more difficult and buying has become easier and more popular, the price has gone up over time.
Over 100,000 online merchants accept bitcoin payments today!
An increasing number of local businesses also accept bitcoin. Use coinmap.org to find a business in your area.
In addition to the many online merchants who accept bitcoin for e-commerce payments, there are also many nonprofits that accept bitcoin donations.
Tipping is a way to send (usually) small amounts of money as appreciation for someone else’s work. Some online content creators, for example, will leave their bitcoin address or QR code at the end of their articles and can send bitcoin directly to their wallet.
Like email, bitcoin is a protocol. Where email is a protocol for sending messages over the internet, bitcoin is a protocol for sending money over the internet. The bitcoin protocol defines the rules of a payment network, called bitcoin, that uses a currency, also called bitcoin, to pay computers around the world for securing the network. The software that implements the bitcoin protocol uses a special branch of mathematics called cryptography to ensure the security of every bitcoin transaction.
The rules of the bitcoin protocol include the requirement that a user cannot send the same bitcoin more than once and a user cannot send bitcoin from an address for which they do not possess the private key. If a user tries to create a transaction that breaks the rules of the bitcoin protocol, it will automatically be rejected by the rest of the bitcoin network.
Note: this is a simplified explanation of how bitcoin works. You can learn more about the technical details of how bitcoin works in the bitcoin whitepaper and the bitcoin wiki.
Bitcoin ownership is secured by a special code called a cryptographic key pair. Each key pair is made of two keys: a public key and a
private key. The public key is transformed into a “bitcoin address” that is used to receive bitcoin transactions. The private key is used to make a digital signature that sends bitcoin from one address to another.
A bitcoin address looks like this:
Bitcoin addresses are often turned into QR codes so they can easily be scanned by a smartphone camera:
(Note: bitcoin sent to that address cannot be spent, so don’t try it unless you like throwing away money!)
Like an email address, a bitcoin address can be shared with anyone that the owner wants to receive a bitcoin payment from. Private keys, on the other hand, should not be shared. Anyone who possesses the private key to a bitcoin address can spend the bitcoin sent to that address.
Bitcoin wallets are software applications that implement the rules of the bitcoin protocol to ensure that users can easily and securely send and receive bitcoin transactions. Bitcoin wallets also show information about each transaction that is relevant to the wallet, including transactions sent and received by the wallet.
To receive payments, a wallet will usually generate a new address for each transaction. To send payments, the wallet will digitally sign transactions with the correct private keys and broadcast transactions to the bitcoin network. Once a transaction is confirmed by the network, the wallet will no longer be able to spend the same bitcoins used in the transaction again.
The bitcoin network
The bitcoin network is made up of thousands of computers around the world called “bitcoin nodes” and “bitcoin miners.” Bitcoin is an open network, meaning anyone can run bitcoin software to become a bitcoin node or a bitcoin miner.
Bitcoin nodes set and enforce the rules of the bitcoin protocol, and bitcoin miners process transactions and add them into “blocks” that are confirmed by bitcoin nodes. The bitcoin protocol is designed to ensure that new blocks are created and confirmed approximately every ten minutes.
To secure each block of bitcoin transactions, bitcoin miners must use their computing power to solve a unique math problem provided by the bitcoin software. If a bitcoin miner can solve the math problem before any other bitcoin miner, they will win a “block reward” that consists of all the fees paid by each transaction included in their block, as well as newly generated bitcoin.
Bitcoin miners have a strong incentive to produce blocks that follow the rules of the bitcoin protocol. If a bitcoin miner produces a block that does not follow the rules of the bitcoin protocol, then bitcoin nodes will reject the block and the miner will lose out on their chance to win the block reward.
Where to buy bitcoin
Bitcoin exchanges are companies that create a live market for buying and selling bitcoin. Customers will deposit bitcoin or fiat currency into their accounts and then place different order types that are recorded on an order book managed by the exchange. Some exchanges offer simple limit orders, while others offer advanced order types such as stop-loss orders and margin trading.
Having an account with a bitcoin exchange is like having a seat on the NYSE. Bitcoin exchanges are great for day traders and institutional traders who trade bitcoin full time. They often require advanced knowledge of financial markets to use correctly.
Bitcoin brokers are individuals and companies that take buy and sell orders and execute those orders on an exchange on behalf of their customers. The broker will often receive a fee for their service and the customer will receive the bitcoin they placed an order for in exchange.
If having an account at a bitcoin exchange is like having a seat at the NYSE, then doing business with a bitcoin broker is like having an e*Trade or Charles Schwab account. The advantage of using a broker is simplicity. The customer asks for a quote, places an order, and receives what they asked for, and the broker removes the complexity of dealing with an exchange.
Bitcoin OTC markets are “off-the-books” decentralized exchanges that occur through face-to-face meetings and remote trades. In a face-to-face exchange, the buyer and seller will meet at a designated time and place and exchange cash for bitcoin at an agreed-upon rate. In remote exchanges, the trade is coordinated by telephone, email, or another remote communication method. After a price is agreed upon between buyer and seller, the buyer will send an electronic funds transfer to the seller and the seller will send the bitcoin to the buyer’s bitcoin address.
OTC markets are most useful for either buying bitcoin with cash or purchasing large blocks of bitcoin at a guaranteed price. These trades protect against “slippage” that can occur when purchasing large amounts of bitcoin on an exchange.
Abra is a bitcoin-based digital wallet app that lives on your smartphone. It is the easiest way to buy, sell, store, send and receive bitcoin from anywhere in the world. It’s similar to a brokerage, but it’s also a wallet. Abra supports bitcoin as well as over 50 global currencies which means you can convert in and out of bitcoin or any available currency, easily. You can also send bitcoin to anyone who has a bitcoin or an Abra wallet and receive bitcoin or money.
Aside from being easy to use, fast, and flexible, one of the advantages of Abra is that the company uses peer-to-peer technology, so your money goes directly from you to your recipient with no middleman, allowing for your transactions to be very quick and inexpensive.
How to store
When you think about buying bitcoin, you will also need to think about a place to store them. Bitcoin is usually stored in “wallets.” Bitcoin wallets use special codes called private keys to authorize transactions. Anyone who has the private key to a bitcoin wallet can authorize transfers to other wallets. Hence, it is very important to keep the private keys to your wallet safe and secure.
Bitcoin wallets can be offline (also known as cold storage) or digital wallets. Additionally, they can be custodial or non-custodial. When using a custodial wallet, you are entrusting a third party to hold your private key. When using a non-custodial wallet, you are the only one to have the key to your wallet.
Here are some examples of the most common types of bitcoin wallets:
Offline Cold storage
Bitcoin buying services can support one or more wallets. When you buy bitcoin with the Abra app, you will automatically create a non-custodial mobile bitcoin wallet, which means that only you have the key to your wallet, so you are in control of your funds at all times.