Understanding Bitcoin

• Bitcoin essentials
• Bitcoin is a digital, decentralized cryptocurrency

What is Bitcoin?

• Bitcoin is the first and most widely recognized cryptocurrency
• It enables peer-to-peer exchange of value in the digital realm
• This occurs through a decentralized protocol, cryptography, and a mechanism to achieve global consensus
• The consensus is based on public transaction ledger called a 'blockchain'
• Bitcoin is a form of digital money that exists independently of any government, state, or financial institution
• It can be transferred globally without the need for a centralized intermediary
• It has a known monetary policy that arguably cannot be altered

Bitcoin in depth

• At a deeper level, Bitcoin is a political, philosophical, and economic system
• This is due to the technical features it integrates
• The technical features include the diversity of participants and stakeholders
• Process for making changes to the protocol
• Bitcoin refers to the Bitcoin software protocol and the monetary unit
• The ticker symbol for Bitcoin is BTC

Bitcoin Uses

• Transactions occur outside the traditional financial system
• It can be used for international payments that are settled faster, more securely with lower transaction fees
• Settling small-value transactions is a use of Bitcoin
• 1 Satoshi equals .00000001 BTC
• Bitcoin is also used as a store of value
• Emerging uses include; Legal tender, Medium of exchange, and Unit of measure

Bitcoin Basic Features

• Decentralized
• Distributed
• Transparent
• Peer-to-peer
• Permissionless
• Pseudonymous
• Censorship resistant
• Public

Bitcoin Economic Features

• Fixed supply of 21 million coins
• Incentive-driven by Proof of Work
• Disinflationary:
  • The rate new bitcoins are added to the circulating supply gradually decreases along a defined schedule built into the code
  • The issuance rate is cut in half every 4 years
  • The next “halving” will be in 2024

Factors that influence the value of Bitcoin

• Scarcity
• Demand
• Production costs
• Competition from other cryptocurrencies
• Regulation
• Institutional involvement

Mining Bitcoin

• Bitcoin mining involves the process of keeping records on the Bitcoin blockchain
• The participants in this process are called 'miners'
• The miners keep the blockchain ledger complete by grouping transactions into a 'block'
• The block is verified by nodes on the Bitcoin network

Bitcoin Mining Explained

• To make a new block the network creates a hash for the block of transactions
• Miners start generating hashes using mining software
• Other miners and security nodes check that the block is correct
• The first miner to generate a hash attaches the block to their copy of the blockchain
• The miner then receives block rewards
• After a block is mined, the miner applies a mathematical formula known as an "SHA-256 cryptographic hash" of the previous block
• Once the formula is solved, the new transactions are added to the blockchain as a block
• The block is formally circulated throughout the network for verification
• Once this is complete, the miner gets rewarded with 12.5 Bitcoins

How miners earn money

• Miners earn money through transaction fees
• Every time bitcoins are transferred from one wallet's address to another, the sender incurs a fee
• These fees are paid to miners who collect various transactions to include in new blocks
• Miners can secure a mining subsidy
• A reward is paid to the miner who first successfully adds the next block to the network
• Every time a new Bitcoin block is mined roughly every 10 minutes, the fees from all the transactions in any particular block are claimed by whoever mined the block

What happens when all 21m have been mined?

• Final coins will be minted around 2140
• Once the circulating supply reaches its maximum, Bitcoin miners will no longer receive block rewards
• Miners will be rewarded with transaction fees instead of block rewards as long as there are no major protocol changes to Bitcoin

BTC ETFs (Exchange-Traded Funds) Definition

• Bitcoin ETFs, or Exchange-Traded Funds, are investment vehicles that allow investors to gain exposure to Bitcoin's price movements
• This occurs without directly owning or managing the cryptocurrency itself
• These funds trade on traditional stock exchanges, making them more accessible to a broader range of investors
• This includes those who may be unfamiliar with cryptocurrency exchanges or wallets

Types of Bitcoin ETFs

• Spot Bitcoin ETFs: These funds directly hold Bitcoin as their underlying asset
  • They purchase and store Bitcoin in secure digital vaults managed by registered custodians
  • The value of these ETFs closely mirrors the actual market price of Bitcoin
• Bitcoin Futures ETFs: Instead of holding Bitcoin directly, these funds invest in Bitcoin futures contracts
  • They aim to track Bitcoin's price movements through derivatives rather than owning the cryptocurrency itself

How Bitcoin ETFs work

• The fund purchases Bitcoin (for spot ETFs) or Bitcoin futures contracts (for futures ETFs)
• In return, shares of the fund are issued and traded on stock exchanges
• The price of these shares generally reflects the current market value of Bitcoin
• Investors can buy and sell these shares through regular brokerage accounts during standard market hours

Bitcoin ETFs advantages and disadvantages

• Accessibility: Traditional investment accounts allow investors to gain exposure to Bitcoin without setting up cryptocurrency wallets or using crypto exchanges
• Regulation: Bitcoin ETFs are regulated by financial authorities like the SEC, potentially offering more investor protection
• Simplicity: Eliminates the need for investors to manage private keys or deal with the technical aspects of cryptocurrency storage
• Diversification: Some Bitcoin ETFs may include other assets, allowing for portfolio diversification
• Fees: Bitcoin ETFs incur management fees that can fluctuate between funds
• Trading hours: Unlike the 24/7 cryptocurrency market, ETFs are restricted to stock exchange trading hours
• Indirect ownership: Investors do not directly own Bitcoin when investing in these ETFs

Wrapped BTC

• Wrapped Bitcoin (wBTC) is an ERC-20 token on the Ethereum blockchain that represents Bitcoin in a 1:1 ratio
• It brings Bitcoin's liquidity and functionality to the Ethereum ecosystem
• It allows BTC holders to participate in Ethereum-based decentralized finance (DeFi) applications

Getting and Keeping Bitcoin

• Buying Bitcoin is possible with Central Exchanges like Binance, Coinbase, and Kraken
• Buying Bitcoin is also possible with Decentralized exchanges like Uniswap, Quickswap, and SushiSwap
• Decentralized exchanges facilitate trading between individuals without taking control of their coins
• Keeping Bitcoin:
  • On the exchange
  • In Wallets: Hot Storage and Cold Storage

Explore Bitcoin's foundational technology, key characteristics, and influence factors. Learn about blockchain, transaction security, and the role of miners in this cryptocurrency system.