Bitcoin FAQ

What is Bitcoin?

The simplest way to describe Bitcoin is that it is like cash, except it’s digital (made for the internet). Just like you hold cash in a physical wallet, you hold bitcoin in a digital wallet. You can buy bitcoin from exchanges, just like if you were to go to another country and convert your local currency to another currency. Bitcoin is actually more than just currency, but it’s first application was a system of electronic cash that is decentralized (not owned by anyone or any one government or organization). You can read the original Bitcoin whitepaper for a general idea of Bitcoin is designed to do.

What is a Bitcoin exchange?

Bitcoin exchanges are platforms where you can buy, sell, and trade bitcoins. If you go to an online exchange, and deposit fiat/local currency, you can then exchange your currency for the equivalent value in bitcoin. Some exchanges allow different payment methods like credit card, bank transfer, PayPal, and so on. We go into more details of what are Bitcoin exchanges, here.

What is a Bitcoin wallet?

A Bitcoin wallet holds your money (bitcoin) and allows you to spend and receive your bitcoin using the wallet. Wallets come in different shapes and sizes, such as web wallets, full clients that you download to your computer and use, mobile device wallets, and even hardware wallets. Depending your needs, you may want a different kind of wallet than the next person. But ultimately, most wallets are made to do two things: send and receive bitcoins securely.

How do I buy bitcoins?

Buying bitcoin is done typically through an online exchange. Although, one could also buy them from someone you know in person. This is called person-to-person, done at Bitcoin meetups or with someone you trust, or some decentralized exchanges will match up sellers by location with buyers. Buying bitcoins through exchange typically requires some sort of identity verification (this is from the fiat side of banking). Once you are a verified customer of an exchange, you can then deposit fiat money to the exchange, and purchase bitcoin. Selling bitcoin involves you putting a sell order on the exchange, for the amount you want to sell, and the exchange will match you up to a buyer for that price. To see a list of exchanges based in the U.S., visit our exchange market data page.

Who is Satoshi Nakamoto?

This is a mysterious question. The short answer is nobody knows for sure, though many speculate. Back in 2008, under the pseudonym Satoshi Nakamoto, an email was posted to a cryptography mailing list about a new electronic cash system that they designed, with properties that many for years had been trying to create, but were never successful at. Then in 2009, Satoshi Nakamoto not only continued to write about this new system called Bitcoin, but he also coded it and deployed it to the world. Since Bitcoin is open-source, anyone can read the code that goes into Bitcoin, and realize that it’s legitimate and possesses the properties that Satoshi said it has.

Who owns or controls Bitcoin?

Nobody owns Bitcoin. No company, organization, or government controls it, owns it, or can seize it. Bitcoin is open-source code, meaning anyone can read and contribute to the code base. Bitcoin is a decentralized network; there are people all over the world that contribute to Bitcoin by downloading the software and running it. The network of users communicate with each other, peer-to-peer, to process transactions and secure the network. You can contribute to the network in many ways, such as running a full node, writing/debugging code, or simply buying bitcoin and using it, which helps strengthen the economy.

How does Bitcoin work?

Bitcoin consists of two different things, a payments network (sending and receiving bitcoins) and a global public ledger. Think of an accountant at an office, they have a personal ledger (spreadsheet) they record transactions in. Bitcoin is open and viewable by everyone in the world, and what makes it amazing is this public ledger called the blockchain, which is immutable; meaning transactions in the blockchain can never be changed once verified. Through the Bitcoin network, transactions are secured and verified by Bitcoin miners through computer algorithms, using specialized computer hardware. Each transaction is included in a block, and as each block is mined, they stack up on each other making the previous block unchangeable. This creates a secure payment network with a decentralized public ledger.

How are bitcoins created?

Bitcoins are generated by a competitive and decentralized process called “mining.” This process let’s individuals be rewarded by the Bitcoin network for their services. Bitcoin miners are processing transactions and securing the network using specialized computer hardware to solve complex mathematical equations, called “proof of work,” and are collecting new bitcoins as a reward.

What makes Bitcoin so great?

Bitcoin opens the doors for many things, such as a way to transfer value to anyone in the world in seconds, for just a few cents. It’s not controlled by anyone and cannot be taken over by any government. It gives users financial freedom from banks and governments around the world. In addition, for those in countries where they are part of the unbanked, for the first time ever Bitcoin gives them a chance to be their own bank. Other applications being built on top of the Bitcoin network are smart contracts and proof-of-existence, which weren’t possible before Bitcoin was invented. With this technology, history cannot be manipulated or rewritten. Other advantages include enhanced privacy and pseudo-anonymity, which you cannot have with traditional banking systems.

What are the downsides to Bitcoin?

Right now price volatility is the main downside, as the price can fluctuate day to day. However, this is a product of a new system which isn’t widely adopted yet. Once Bitcoin becomes more mainstream, the price will stabilize. Other disadvantages are since Bitcoin is a protocol (code), there is risk of technical flaws, which can be exploited, although this is quite rare.

Can Bitcoin be regulated by states, countries, or governments?

The Bitcoin protocol itself cannot be regulated. Changes to the protocol happen by the network of users itself who create and maintain the code together. This is called consensus, which is built into the code, where a super-majority must come together to make changes in the code and it must be agreed upon. When you hear about Bitcoin regulations, you are hearing about the fiat/banking side of things, where regulators want to impose restrictions on how people buy and sell bitcoins [using fiat currency], including taxes, fines, and fees.

How does Bitcoin get it’s price?

The price of bitcoin is determined by supply and demand. When more people want to buy bitcoin than there are sellers, the price goes up – this is in part due to Bitcoin’s limited supply, which is capped to 21 million coins. Unlike traditional fiat currency where money can be printed over and over, Bitcoin has a controlled and predetermined supply, making bitcoins scarce, similar to the properties of gold.

Is Bitcoin a ponzi scheme?

A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money, or the money paid by subsequent investors, instead of from profit earned by the individuals running the business. Ponzi schemes are designed to collapse at the expense of the last investors when there is not enough new participants. Bitcoin is none of these things. Bitcoin is a protocol and network, with no single entity operating it, where there is nobody to oversee returns on investments or payoff investors.

Can Bitcoin be hacked?

No, it cannot be hacked. Bitcoin is built upon public-key cryptography, making is very secure and unhackable. When you hear about Bitcoin hacks, it’s typically a third-party service that a Bitcoin user was using which was hacked (such as a Bitcoin exchange or Bitcoin wallet).