Bitcoin ATM is seen in Krakow, Poland on January 22, 2021. (Photo by Beata Zawrzel/NurPhoto via Getty Images)
Cover Bitcoin ATM in Krakow, Poland (Photo: Beata Zawrzel/NurPhoto via Getty Images)

After Tesla announced that it bought US$1.5 billion worth of Bitcoin, you might be wondering what Bitcoin is? Here, we round up five of the most important things to know

Tesla recently bought US$1.5 billion worth of Bitcoin, citing "more flexibility to diversity and maximise returns" of their cash. The company also said it will start accepting payments in Bitcoin for its products, making Tesla the first automaker to do so. The move towards Bitcoin is a huge investment for Tesla which had more than US$19 billion in cash at the end of 2020, with founder Elon Musk's own net worth skyrocketing.

But perhaps the move shouldn't come as a surprise to many as the electric car kingpin has been tweeting positive messages about cryptocurrencies including Bitcoin and Dogecoin as well as briefly adding hashtag #bitcoin to his Twitter bio. Prices for Bitcoin and Dogecoin hit the roof following Musk's tweets and again following Tesla's Bitcoin investment. After that, Musk also joined Clubhouse and said that he's a supporter of Bitcoin.

You may be wondering what's all the fuss about cryptocurrencies and why Musk has been over the moon about it. To help you understand the matter a little bit more, we compiled a beginner's guide and listed five of the most important things you should know about Bitcoin.

(Related: Should You Invest In Bitcoin And Cryptocurrency?)

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1. What is Bitcoin?

Bitcoin is a decentralised form of digital currency. This means two things: there are no coins to mint or bills to print and there are no government or financial institutions that control it. In fact, most of the people who own Bitcoins in their system are anonymous with no identifying features, such as account numbers, name, social security numbers, connected to them.

But the defining feature of Bitcoin is its use of blockchain technology which in layman's terms is a digital record of transactions. Its name comes from its structure where individual records called blocks are linked together in a single list called a chain. This technology is used to record transactions from cryptocurrencies such as Bitcoin.

Bitcoin also uses encryption keys to connect its buyers and sellers. Just like and diamonds, Bitcoins needs to get "mined."

(Related: 5 Cryptocurrencies To Know About (That Isn't Bitcoin))

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2. How did Bitcoin start?

Like many others, Bitcoin was created as a cryptocurrency, which is essentially a digital asset that's secured with cryptography which can be exchanged. Many other cryptocurrencies have followed Bitcoin's footsteps but never really become as developed. An anonymous Satoshi Nakamoto is said to be the creator of Bitcoin but no one knows if that's a person or a group, it may perhaps simply be an alias. The creator wanted to make a new kind of electronic cash system that was decentralised.

In 2010, the first Bitcoin transaction happened when someone purchased two pizzas for 10,000 Bitcoins. If that was compared to today's value, those 10,000 Bitcoins would be worth more than US$100 million. The following year, creator Nakamoto shared Bitcoin's source code and domains with the community but was not heard from since.

(Related: You Can Only Purchase This Luxury Hublot Big Bang With Bitcoin)

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Above Photo: Unsplash.com

3. Why do you "mine" Bitcoins?

As mentioned earlier, mining is an important part of Bitcoin. But people aren't actually the ones who have to "mine" Bitcoin but rather, computers mine them to make more of them. At present, there are about 16 million Bitcoins, leaving only 5 million more to mine. Bitcoin developers capped the quantity that can be mined to 21 million.

By mining, Bitcoins are divided into smaller parts with the smallest fraction, called "Satoshi", after the founder, being one hundred millionths of a Bitcoin. Computers do the job but the process is really akin to solving a complicated mathematical problem with a 64-digit solution that just keeps getting harder and harder over time to compensate for the growing power of the computer. Once a problem is solved, one block of the Bitcoin is processed which in turn allows the miner to get a new Bitcoin.

In order to receive the mined Bitcoin, the user needs to establish a Bitcoin address, acting as a virtual mailbox. But as with everything Bitcoin-related, the user's identity is not attached to the mailbox, making the user anonymous.

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BARCELONA, SPAIN - JANUARY 29: A Bitcoin ATM machine, to buy or sell cryptocurrencies, is placed within a safety cage on January 29, 2021 in Barcelona, Spain. The European Union Agency for Law Enforcement Cooperation (Europol) and local law enforcement busted an allegedly fraudulent scam posing as a firm that specialized in cryptocurrency and foreign exchange investment training out of Andorra. (Photo by Cesc Maymo/Getty Images)
Above Bitcoin ATM machine, to buy or sell cryptocurrency in Barcelona, Spain (Image: Cesc Maymo/Getty Images)

4. What exactly are Bitcoins used for and how do you earn them?

Besides mining, you can earn Bitcoins through other means. They can be accepted as a form of payment as long as the system accepts them. To do this, you need to set up a Bitcoin wallet which is as hassle-free as setting up a PayPal account. By having a Bitcoin wallet, you can track your payments and digital money. Only certain providers such as Coinbase have them but they're also free of charge.

You can also earn Bitcoins through trading or exchanges which allow people to buy or sell Bitcoins. The largest Bitcoin exchange, Mt. Gox, based in Japan launched in July 2010. By 2013, it was handling over 70 per cent of all Bitcoin transactions.

As a digital currency, Bitcoins can also be sent to each other using mobile apps or computers, similar to the way we send cash digitally. Unlike actual currency though, the value of Bitcoins depends on how much people are willing to exchange it for.

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5. Is it safe?

Bitcoin is a double-edged sword. It's a risk but if that risk pays off, it's a great investment. The risk is there because Bitcoin values are unpredictable, it fluctuates and can quickly surge or quickly plummet.

The decentralised nature of Bitcoin also poses some risk. While it helps in keeping transactions private, buyers and sellers can also operate without being easily tracked which can be tempting for many to use it for fraudulent activities. It's also difficult to resolve issues since all users and transactions are anonymous. In 2018, almost 850,000 Bitcoins were lost in the void when Mt. Gox went offline.

As it's unregulated, the future of Bitcoin is also mostly unknown. Despite a decade-long existence, Bitcoin is still considered relatively new which at one hand, welcomes innovative ways to grow it but at the same time, cannot predict if it'll continue being successful in the long run.

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