Updated on July 23, 2024
What is Bitcoin? You must have heard of Bitcoin. It is the most famous cryptocurrency ever. It entered the subconscious of investors in 2009 as the very first cryptocurrency. But how does it actually work? Is it worth investing in? And how can bitcoin be traded? Here’s everything you needed to know about Bitcoin in one place. We will explain what determines its value and what transactions you can make with Bitcoin. We will also clarify important concepts such as block and blockchain. So let’s get to it.
What is bitcoin
Bitcoin is one of the digital currencies. Even the very first one. And that is probably why it is also the most famous and important among cryptocurrencies. According to market capitalization, it is even the largest cryptocurrency network ever. And although there are hundreds of other digital currencies today, collectively called altcoins, Bitcoin is still the gateway to the world of cryptocurrency trading. So who today does not own any Bitcoin, or at least part of it, as if he does not even trade in cryptocurrencies.
What is cryptocurrency
To understand Bitcoin, however, we must first clarify the most basic. What exactly is cryptocurrency? Simply put, it is a digital currency. It exists only virtually. So we can make various transactions with it, similar to how we do with our money in a bank account. But we cannot come to the bank and demand their withdrawal. Simply because they would have nothing to give us. Cryptocurrencies exist only in the virtual world. And only there we can deal with them as we like.
And in something else, it differs from ordinary currency. The value of Bitcoin is not influenced by any central authority, as is the case with regular currency. With the currencies of individual countries, we are used to the fact that a specific financial market is supervised by one authority. So, for example, as far as the Czech crown is concerned, the Czech National Bank is in charge. It has several tools that can influence the Czech financial market. For example, the base interest rate.
With Bitcoin, but also with other cryptocurrencies, it is exactly the opposite. Their market is decentralized. This means that the value of Bitcoin is only affected by the ratio between supply and demand. And it is often a reflection of events from the economic and political world. So let’s not look for any specific regulatory body for bitcoin.
Likewise, bitcoins are not issued by any central institution. They are primarily created by mining. However, Bitcoin mining is limited. Only a total of 21 million can be mined. As soon as the number of existing, i.e. mined, bitcoins is reached, miners will not be able to access any more. The estimated time when this situation will occur is the year 2140.
Block a blockchain
An important term associated with Bitcoin is blockchain. It is precisely on this principle that cryptocurrencies work. It is a currency that uses cryptography for its security. Although it is not the official currency of any country, countless Bitcoin transactions take place daily. Perhaps precisely because it lacks a regulatory body. These transactions need to be secured somehow. This is in case someone wants to manipulate these transactions.
All transactions that are made with Bitcoin are recorded in a public ledger called the blockchain. Public because the book is publicly available. Officially, all these transactions should be absolutely anonymous. However, this anonymity is only apparent. Precisely because all transactions are traceable here, albeit anonymously, your ID is also traceable here. And precisely on its basis, it is not so difficult to find out who carried out the given transaction.
This blockchain uses a very sophisticated system to encrypt these transactions into blocks so that it is impossible to hack into it and somehow manipulate bitcoin transfers. And it’s really a pain in the ass for hackers. It’s a really intricate web. Blockchain consists of individual parts, which are called blocks. They are individual parts of the structure of the entire blockchain, or public ledger.
Blocks and its elements
One block includes transactions that were recorded at a given time. Each new block is created for newly entered Bitcoin transactions that have not yet been verified. After they are verified, the block is closed and a new block is opened again for newly created transactions. And so on and on. What is interesting is that this verification of individual payments, which are subsequently composed into these blocks, takes place during Bitcoin mining itself. But more on that later.
Each such block is defined by various information, which at the same time contains data about the transactions stored in it. Each block has its own specific information. Among other things, it is formed based on the value of the transactions, the number of transactions stored in the block and also the number that defines the transaction as a transaction with a certain type of cryptocurrency.
Blockchain and mining
Bitcoin miners actually earn Bitcoin for helping to verify the transactions of individual blocks. Or rather, the computer does it for them. For this kind of Bitcoin mining, you need a quality device that is capable of such a thing. And a lot of energy too. So if you are going to mine Bitcoin, you don’t need to travel to any mine. Bitcoin is a virtual currency. And it is also mined in the virtual world.
And how does it actually go? The task of the miners, or rather their computers, is to solve a complex mathematical problem. Their goal is to add a numerical code, which is called a nonce, to each block. They come up with these codes themselves. Well, the nonce must then be converted to a hash based on the list of transactions in the block. That’s their math problem. If the hash matches, the blocks are locked, the miners get their reward in bitcoins and start solving a new math problem. If not, they change the nonce number and calculate the resulting hash until they succeed.
This hash is calculated by the technician based on algorithms and they repeat this calculation operation millions of times per second. This is precisely how Bitcoin’s public ledger is secured. It is therefore a sophisticated system where miners simultaneously help to encrypt individual transactions in a block, and thus the blockchain itself. However, due to the need for high-quality hardware and a lot of energy, bitcoin mining is mainly the domain of larger companies today.
This decentralized system, where different users from different places around the world participate in the entire cycle, is called peer-to-peer. In this case, there is no need for any third party to handle these transactions. As is the case, for example, in the case of a bank with which we conduct transactions with one of the national currencies. Bitcoin payments are thus made almost immediately. But as we already mentioned, the number of bitcoins is limited. Once all 21 million Bitcoins have been mined, miners will be compensated for their work on a fee-only basis.
The origin of bitcoin
So, as you already know, Bitcoin started functioning as the very first cryptocurrency in 2009. And it can be said with exaggeration that it is a kind of forefather of newly created cryptocurrencies. There are hundreds of them on the market today. To distinguish them from the original, i.e. Bitcoin, we collectively call them altcoins. And even though it wasn’t that long ago that Bitcoin saw the light of day, today it is quite behind compared to its followers. Especially in speed. Therefore, it cannot handle as many transactions in a certain period of time as other, more modern cryptocurrencies.
Since its inception in 2009, Bitcoin has seen a huge boom. Its value rose very quickly and has already experienced several economic cycles. That is, a sharp increase from its initial beginning to various dips and subsequent growths caused by many events on the economic market. To predict the development of the price of Bitcoin, it is therefore appropriate to follow the events in the world. It will probably have an influence on the development of Bitcoin.
Founder and Predecessors
So how did it all begin? The Bitcoin.org website was created already in 2008, when the arrival of Bitcoin was also announced. However, Bitcoin mining was officially started only in 2009. Specifically, on January 9, 2009. But to this day, no one knows who is behind it all. The domain is protected, so it is impossible to find out who actually registered it. He is known only by the pseudonym Satoshi Nakamoto. It is about a person, or a group of people, who came up with the invention of Bitcoin. But everyone can only guess who it really is. Satoshi Nakamoto successfully hides his identity. Probably to keep yourself safe.
Whoever it is, it is certain that it had its predecessors. Even Bitcoin did not fall directly from the sky, although it may seem that way due to the mystery of its originator. One of the first was undoubtedly David Chum, who already came up with the idea of DigiCash in 1989. We can also include the ideas of other personalities among them. For example B-money, e-Gold and Bit Gold. Some of these and other ideas are also referenced in the Bitcoin white paper itself.
Bitcoin price development
At first it was no big deal. People did not pay much attention to the emergence of virtual currency. They didn’t have too much hope for Bitcoin either. At first it was more about curiosity than investment and preserving the value of savings. The first boom came in 2011, when its first successor, Litecoin, was created at the same time. By then, the price of Bitcoin was roughly 30 cents. That changed just in 2011, when its price rose to $31. Subsequently, it fluctuated in various ways. It rose and fell even at the price of $5.
The upheaval occurred in 2013 when the Bitcoin network faced numerous hacking attacks. By then, it had already paid off for the hackers. The price of a single bitcoin rose to $1,000. Exchanges have faced these attacks, but so have other Bitcoin owners. A major hacker attack was also recorded in 2014, when the MT exchange office was robbed. Gox . She announced that she had lost approximately 850,000 bitcoins.
Naturally, these hacks drove down the price of Bitcoin. However, we have seen a gradual growth in the following years until now. Of course with various dips. Its value was also boosted by increased public attention in 2017, when its price once again exceeded $1,000. In short, Bitcoin is characterized by rapid growth and decline. Its current price is approximately 40,476 US dollars.
How Bitcoin Works
Bitcoin is used both for various transactions and also as a tradable asset for investors. It is a currency that is not tied to a specific country. It is therefore possible to carry out cross-border transactions with it, or on the basis of it they can convert the currencies of one country into the currency of another country. You can even pay for some services with Bitcoin. And there are more and more of them. Among the first was a pizzeria where you paid roughly 10,000 bitcoins for one pizza. However, it was the very beginning of Bitcoin. Its price then cannot be compared with today’s.
Account and transfers
Anyone who wants to interact with Bitcoin in any way must first set up a Bitcoin wallet. That is, a virtual wallet where virtual currency is stored. You can either get it from your broker or from some other company that provides such services. Not every broker has such a virtual wallet available. And since it, like Bitcoin, is digital only, you have to create your own original key for it. So that no one breaks into it.
This key consists of 34 randomly arranged characters. They do not reveal any of your personal data. At the same time, only you know this key. Therefore, be careful to keep it in a safe place. Without entering this password, you cannot access your virtual wallet and you cannot access your bitcoins. Likewise, you will not be able to conduct any transactions with them. You can create as many of these accounts as you want. It works in much the same way as bank accounts. The difference is that while you can withdraw the classic currency from an ATM, the digital one always exists only in digital form in your virtual wallet.
If you make any transaction with Bitcoin, it will be recorded on the blockchain. And this should take place completely anonymously. But we already talked about how it is with that anonymity. Currently, all transactions are carried out free of charge and at high speed without the use of a third party. However, you can give miners an arbitrary fee to incentivize them to check and verify your transfer. At the moment, their biggest motivation is primarily bitcoin mining. But that will change with his exhaustion. This is probably why fees will be necessary in the future for closing individual blocks, and therefore for carrying out transactions.
Bitcoin trading
In addition to the payments that can be made using Bitcoin today, this cryptocurrency is also very popular with investors. They have high hopes for him due to his gradual growth. And you can trade not only with bitcoins, but also with any other virtual currency. So just buy a virtual wallet, buy bitcoin and watch its price development.
Of course, it’s not that simple. You should be well versed in the market and know how the Bitcoin price is currently developing. It’s never good to just guess in trading. It doesn’t have to be worth it. And not only for Bitcoin, but also for all other tradable assets. In addition, cryptocurrencies are known for their sharp price fluctuations.
Where to buy bitcoin
There are many ways to acquire Bitcoin. We have already talked about one of them. It is their mining. But the truth is that Bitcoin mining is disadvantageous for individuals. So if you want to mine, try something other than Bitcoin. Today, for understandable reasons, mainly larger companies focus on it. Another option is to buy bitcoin. And here you can choose how to do it.
You can buy it from some institution. For example, from the bank. Or from an online broker. We will return to those in a moment. Another institution that can provide you with Bitcoin is a cryptocurrency exchange or money exchange. However, you can also buy them from any other person. But in that case, choose someone you really trust. And other, but not so advantageous ways, are purchases directly in a virtual wallet or in bitcoin machines.
How to choose the right broker
Bitcoin trading is usually done through banks or brokers. That is, online brokers. This is because it is the most advantageous way to acquire Bitcoin. I mean, mostly. You must first create an account with an online broker. In this case, however, be careful with which broker you open your account. You will find many of them on the market. And in many cases they are scammers. Therefore, choose carefully before you decide on a particular one. Reviews on various websites, as well as feedback from their clients, will help you with this.
In order not to buy a rabbit in a bag, try a demo account first. A free demo account, where you can try out the services of individual brokers, is now standard. On the one hand, you will try out the platform through which you can trade with the broker, and on the other hand, you will try yourself. More specifically, how well you can predict market developments. If you are successful on the demo account, you can start trading for real. But on the assumption that a specific broker will suit you.
When choosing, check, among other things, whether your chosen broker is regulated in some way. We really do not recommend putting your finances in the hands of an unregulated broker. It could happen that you will not see your money again. Also, watch out for fees. Each broker has different fees. At the same time, their amount also changes. So find the one that is most convenient for you. It is ideal to find a safe, proven broker who is not a complete newcomer to the market. You can learn something about him.
Bitcoin CFD trading
If you are more of a speculator and you are not much used to long-term trades, you do not need to trade with real bitcoins. Just trade their CFD contracts. In that case, bitcoins are only the underlying asset and you are trading precisely through speculation. More precisely, you are speculating on the rise or fall of the price of Bitcoin. Depending on how your estimate turns out, you pay the difference between the buying and selling price of Bitcoin, or the broker pays you.
In reality, it goes like this. You have analyzed the market and found that the price of Bitcoin should rise in the foreseeable future. Then you close a deal with the broker, when you both undertake to pay the difference between the prices to the other. If you guessed correctly, the broker will pay you extra. And you will earn from it. Otherwise, you lose money and you have to pay the broker.
When trading CFD contracts, not only Bitcoin, but also any other asset, you have to take into account that you are trading with financial leverage. This means that you do not need to have the entire amount available to make a trade. Just a part is enough. The rest will be paid by the broker. Subsequently, your profit will multiply depending on which leverage you use. But beware that your loss will be multiplied in the same way. Therefore, leverage is limited with regulated brokers. Especially if you are a beginner investor, don’t gamble with too much leverage. Professional brokers then have the advantage with some brokers that they can request an increase in leverage.
Bitcoin and taxes
Note that, like other tradable assets, Bitcoin is also subject to income tax. However, this applies to you only if you make a transaction related to Bitcoin that year. In that case, you must state this fact in your tax return. And pay at the same time. Laws have not yet been sufficient to respond to the emergence of cryptocurrencies with any special law. So it is simply income tax.
You get the tax base by deducting all the costs for which you acquired the bitcoin from your income when exchanging it. So this is a net profit from the Bitcoin exchange. It does not matter at all how you acquired your bitcoin. Whether you inherited it, received it as a gift, bought it or mined it.
As employees and self-employed, you pay 15% of this tax base. However, if your profit exceeds the threshold of CZK 1,867,728, this tax is increased to 23%. However, you should know that you can also take advantage of the taxpayer’s discount when paying income tax from bitcoins. The situation is a little different for companies that are engaged in bitcoin mining. VAT is also added to this income tax. Just like any other VAT payer.
Bitcoin – Summary
So to sum it up. Bitcoin is one of the virtual currencies. It is the original on the market that first appeared in 2009. And many other cryptocurrencies followed it. It is a currency that transcends national borders without any regulatory body. It is driven only by supply and demand. Therein lies its advantage. It is suitable for cross-border transactions and also for exchanging currencies of individual countries. Bitcoin is also one of the investment tools. And a very popular one.
Compared to altcoins, i.e. other cryptocurrencies, it is considered slow and outdated. Even though it has only been on the market for 13 years. Newly created cryptocurrencies use more modern technologies that allow for faster transfers. Still, it is the largest cryptocurrency network ever by market capitalization. So we can consider Bitcoin as a gateway to the world of cryptocurrencies.
We remind you to explore all options before you start trading Bitcoin. See which of the Bitcoin acquisition options is the most beneficial for you. At the same time, think about whether it is better for you to invest in real bitcoins or only in their CFD contracts. Also, look around for the right broker that will suit you best. And last but not least, familiarize yourself with the market first. This is so that you can be confident in your transactions.
