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What Is Bitcoin Used For?
Bitcoin is the most popular cryptocurrency in the world. If you're new to crypto, you've probably heard about "digital gold," but you may be wondering what it is used for and how.
Therefore, we decided to make a comprehensive guide explaining how Bitcoin works and how to get the best possible experience when using this currency. By reading this article, you'll also learn more about the blockchain-powered Bitcoin network, BTC mining, and more.
What Is the Reason Behind Using Bitcoin?
Currencies used by countries (referred to as fiat currencies) are controlled by governments and central banks, which act as intermediaries.
People needed a type of money that a third party does not control, and Bitcoin provided just that: a peer-to-peer system that allows users to send to and receive funds directly from each other. This resulted in lower storage costs, as it's virtually free to store your BTC wealth in your cryptocurrency wallet. Moreover, each transaction is much cheaper, as there's no need for any third party to take their cut. Of course, you'll still have to pay some fees determined by the decentralized network, but they are much smaller than fiat money transaction fees.
Because the fees are so low, you can send minimal amounts of money to any other Bitcoin wallet owner anywhere in the world, which leads us to the cross-border payments advantage. So far, it has been time-consuming and expensive to send money to other countries (or receive it, for that matter). Sometimes, that's impossible if two countries don't have any economic ties. Luckily, these obstacles currently do not exist for Bitcoin.
Unlike fiat money, which can be printed indefinitely and is subject to inflation, Bitcoin's reserves are limited. The total amount of BTC that will ever be minted is 21 million bitcoins.
Finally, Bitcoin features superb security, and it's virtually impossible to counterfeit BTC. The decentralized network and cryptography ensure maximum protection for BTC users, which has never been seen in the world of fiat money. This effectively makes Bitcoin (and many other cryptocurrencies) one of the safest types of money to ever be invented.
Why Is Bitcoin More Popular Today Than Ever Before?
It's no secret that Bitcoin started small when its mysterious creator, Satoshi Nakamoto, released a whitepaper for it. More than a decade ago, not many people were interested in changing the current financial system in the world, so only a few finance experts, tech people, and web nerds recognized Bitcoin's potential.
Many were skeptical, and with good reason. Namely, there had been attempts before Bitcoin to create a type of digital money that would help people on the web. Unfortunately, most of those projects were created by individuals or companies who just wanted to make a fast buck, with no honest intention of helping people. When Bitcoin was released, it was more than just digital money, as it was backed by revolutionary technology now known as the blockchain.
Back in the day, most people either didn't care or didn't understand blockchain and its importance. Many still don't fully understand blockchain since it's a complex technology that requires at least some technical knowledge. What we need to know is that it allows us to use computers around the world to create a decentralized network and a fair system that gives cryptocurrencies real value. All data is stored in blocks, which are part of a distributed ledger. It gets a bit confusing, but we'll explain this relationship between BTC and blockchain in detail below. The point is that you had to be a cryptography and technology enthusiast back in the day to understand the true power of BTC.
A groundbreaking event for Bitcoin took place on May 22, 2010, when a pizza company accepted payments for a pizza via BTC. This seemingly minor incident gave BTC real-world use, and it started attracting many individuals and organizations to the idea of digital money.
Bitcoin has since become a payment method on many platforms. For example, some of the most popular online casino platforms started accepting BTC deposits and withdrawals simply because it was convenient for casinos and players to transfer their money quickly at low fees. Many were immediately marketed as instant withdrawal casinos since no other method could process funds that fast.
Bitcoin Explained: Basic Things You Want to Know
The following section will explain some of the basic terms and technologies you need to know to understand how Bitcoin works. This will ultimately help you grasp how other cryptocurrencies work and the benefits and risks of using BTC.
Bitcoin and Blockchain: Power Relationship
Blockchain revolutionized money, and it's just a database. However, this is not an ordinary database — it's decentralized, which means each computer that's part of the Bitcoin network stores a copy.
Therefore, it's safe to say that the data is distributed widely. The peer-to-peer part means no single location is the main one, as the Bitcoin network doesn't follow a hierarchical structure. Instead, all computers are just nodes in the network, storing information and ensuring that the network runs.
The way blockchain stores data is also essential and makes it stand out from the pack. Reasonably, the name blockchain isn't arbitrarily selected, as the network consists of a chain of blocks. Each block is a bundle of transaction data stored together and added to all previous blocks. So, technically, you can trace the blockchain to its first block and the first BTC transaction ever made.
Each block is added to the previous one and includes its current hash value. Now, we're not going to confuse you with what a hash value is, as you're here to learn about using Bitcoin, but it's important to know that each block is linked to the previous one with it (and, subsequently, to all the previous ones). This creates a chain between blocks and allows storing transaction information securely.
Here's a short overview of distributed ledger technology (blockchain) and its main features that skyrocketed the popularity of cryptocurrencies and many other blockchain-related projects. Blockchain is:
- Programmable – You can program smart contracts and create decentralized applications based on a distributed ledger. Even though Ethereum started exploring these possibilities, it's important to mention that Bitcoin, after all, is a decentralized network that was programmed in a certain way by its creators.
- Distributed – As mentioned above, all nodes (also referred to as miners in the context of Bitcoin) have a copy of the database, which makes it completely transparent.
- Secure – Security comes from the fact that the platform is transparent and all records are individually encrypted (hence the name cryptocurrencies).
- Anonymous – You don't have to provide any sensitive info when trading and storing Bitcoin on a blockchain. It's completely anonymous, as you'll only use your wallets and their keys for transactions.
- Immutable – It's impossible to reverse transactions once they take place and are recorded on the blockchain. It means that once you send money, you cannot un-send it. Immutability also means nobody can tamper with the stored data on the network and alter information. They might be able to do it on a single instance of the database, but not thousands of others stored on all other nodes.
Bitcoin Mining: Brief Overview
You've probably stumbled upon the term "Bitcoin miner." BTC mining is a process of using your computing power to keep the Bitcoin network running and receive rewards for it. Miners are devices that ensure the network is running, and they need to do a bit more than storing a distributed ledger in the Bitcoin network.
In short, the Proof-of-Work algorithm requires all computers to constantly solve challenging puzzles so that they are not used for anything else. Every once in a while, a particular computer finds a solution and receives a bitcoin as a reward.
Bitcoin miners nowadays have powerful machines with tremendous processing power, which helps them solve puzzles faster. The more computing power you have, the more likely you will receive a new BTC for your effort.
Namely, despite the limited amount of BTC, many still aren't "minted". Therefore, when all 21 million BTC are out, miners will still receive incentives from the fees that BTC users pay for transactions.
However perfect, BTC mining has often been accused as a devastating factor for the environment, as it currently consumes an amount of electricity equal to Finland. In other words, the entire country of Finland spends the same amount of electric energy per year as the Bitcoin network. The good news is that many bright minds are currently working on changing the system to reduce the risk of pollution. Some other cryptocurrencies rely on the proof-of-stake mechanism, which is more eco-friendly.
Bitcoin: Most Common Uses
The use of Bitcoin has become widespread nowadays, as thousands of businesses worldwide accept it. The most common uses can be narrowed down to trading, investing, shopping, and gaming. Let's explain them in detail.
- Trading – Many Bitcoin enthusiasts actively trade BTC with other digital currencies using cryptocurrency exchanges. This type of activity usually requires active engagement and following the crypto market to make a profit. Since Bitcoin and many other cryptos are highly volatile, traders often aim to sell when the prices are low and buy when they are high. This is a high-risk, high-reward activity because of volatility.
- Investing – Many services that allow trading, such as the Coinbase exchange, are also one-stop-shops for people who want to invest in coins, including Bitcoin. The main difference between investing and trading is that you don't trade as often once you invest. Some BTC investors only invest once and then "hodl." Hodling (which is just internet slang for holding) means not selling for a long time.
- Shopping – Many e-commerce businesses nowadays accept payments in Bitcoin, meaning you can use it to buy plenty of things, including food, clothes, software, hardware, and more.
- Gaming – By gaming, we primarily mean iGaming, as gambling games have been closely associated with Bitcoin since the cryptocurrency's inception and the legendary Satoshi Dice game. Nowadays, there are plenty of online casinos with Bitcoin that will let you play great games or even bet on sports with BTC. Bitcoin isn't the only crypto used for these activities, as many crypto casinos also allow using other popular digital currencies, such as Ethereum, Litecoin, Bitcoin Cash, and dozens of others.
This is just a short overview of the common uses of the popular Bitcoin payment system. Later in this article, we'll explain how trading and purchases work with cryptocurrencies.
Is It Worth Investing in Bitcoin?
This is a complicated question, as Bitcoin can bring you huge profits or losses, depending on your moves. As we already mentioned, BTC is a volatile cryptocurrency, meaning its overall value frequently changes and is affected by various things, including news, hype, regulations, and more. If you know when to invest and when to sell, you'll earn more money, but things don't always work like that in reality, as investing requires actively following the prices of BTC and all other crypto and making the right trade at the right time.
Many people opt to invest long-term. For example, if you invested $1,000 in BTC in 2011, you would be a millionaire right now. Unfortunately, that might not be possible with Bitcoin today, as it's already an expensive crypto, but you can still make a decent profit in the long-term if you decide to hodl. Even though BTC has had its ups and downs, you'll notice a long-term growth trend if you look at its overall price.
Investing in Bitcoin bears certain risks, as there's no definitive way to tell whether you'll make a profit. Therefore, it's difficult to say with certainty whether Bitcoin is worth investing in.
Let's look at some of the significant downsides of using Bitcoin.
- It is still not massively adopted – Even though an increasing number of individuals and organizations use BTC, the popular cryptocurrency is still not as adopted as fiat money. It still has a long road to travel before it becomes equal to currencies such as the dollar or euro.
- You could lose your private key – You cannot retrieve your private key. If you lose it, you won't be able to access your wallet, meaning you will lose your BTC forever. Even though this is great for security, many people lose their keys. This is impossible in centralized systems, as your password is permanently stored on the server, and you can retrieve it after validating your identity.
- The value fluctuates – Bitcoin's value changes all the time. Sometimes, these changes are enormous, with many people losing thousands of dollars worth of BTC within a day due to volatility. The good news is that price fluctuations can also go in a different direction, meaning you can increase your Bitcoin wealth if the price goes up.
- You cannot reverse transactions – Once a transaction is written on the blockchain, it cannot be reversed, which creates difficulties when doing business, as chargebacks are impossible. This also affects buyer protection.
- There is a risk of technical flaws – Despite being around for more than a decade, the Bitcoin network is still relatively new. We're yet to explore its major advantages and significant drawbacks. Therefore, there's always a risk that such a flaw might harm Bitcoin holders.
Why Does Bitcoin Have a High Value?
To explain why there's a high value, we must touch on the philosophical aspect of Bitcoin. Many things in this world don't have an intrinsic value. For example, water or food have inherent value because our lives depend on them. However, some things, such as diamonds or gold, only have value because people worldwide unanimously agree that they should.
Bitcoin received its value in the first place because people agreed that it's something of value. They reached an agreement because of Bitcoin's underlying technology, making the cryptocurrency secure and trustworthy.
But why does it have high value? The answer is simple: demand. Plenty of people want to buy it, and the supply is limited to BTCs that are currently mined, with the biggest-ever supply being 21 million BTC.
The demand is the result of Bitcoin's popularity. It has never been easier for an ordinary person to invest in assets, even just a tiny amount. Traditional investing is often complex and incomprehensible to people who don't do it for a living. On top of that, it usually requires investing higher amounts of money. None of this is necessary when it comes to investing in BTC.
This limited supply is called scarcity. If something is scarce, there's a limited supply that can run dry at some point. On the other hand, Fiat money doesn't have the problem of scarcity because central banks can print as much money as they need. Because of this, fiat money isn't as volatile as BTC.
BTC Value Through the Years
Bitcoin didn't become popular overnight. Since there was no practical use for cryptocurrencies and nobody knew about them, you could buy thousands of BTC for a handful of dollars when it was first launched.
In May 2010, BTC was worth less than $0.01, and this was the first time BTC was used in the real world for buying two big pizzas. In less than a year, Bitcoin's price was worth more than $1, which was when people outside a small circle of enthusiasts started adopting BTC.
In the next two years, BTC's price skyrocketed to more than $1,000, although it dropped back to less than $530 in 2014.
BTC really started turning heads in 2017, when people began massively investing money in it. Suddenly, it became recognized by millions of people and reached its first spike: $19,783.06 on December 17, 2017.
The price started dropping once again in 2018 and 2019. In addition, the coronavirus crisis also negatively affected the price, and the digital coin lost 25% of its value in 24 hours in March 2020.
However, people then started to recognize BTC as a way to save their funds during hard times, which resulted in another investment round that was more massive than ever. By October 2021, BTC reached an all-time high of $66,974.77.
As of 2022, the price has been fluctuating. At the moment of writing this guide, the price is around $30,000.
How to Use Bitcoin in Practice?
We have already discussed ways to use Bitcoin, and now we'll provide a short overview of how to do it. Let's cover how to buy BTC as an investment option and how to use it for online and local purchases.
Bitcoin as an Investment Option
To invest in BTC, you first need to read more about the Bitcoin exchanges available in your country. Then, if you want to buy BTC with fiat money, you'll have to select a centralized exchange, which needs to be regulated and owns a license to operate in your area.
Centralized exchanges require you to open an account and connect a fiat payment method (such as a credit card or debit card) to make a deposit. Once you have funds available in your balance on the platform, all you need to do is place an order to buy BTC for a specific price and wait for the exchange to fulfill that order.
After purchasing BTC, you'll need to obtain a Bitcoin wallet and withdraw your funds from the exchange to the wallet to have complete control of them. Even though you can trust exchanges, they are regarded as less secure than wallets, which no one but you can access. Moreover, once BTC is in your wallet, you can use it for various things, including playing the best casino games such as bitcoin lottery.
If you already have cryptocurrencies, you can use a decentralized exchange (DEX). These platforms are more difficult to regulate, and they sometimes don't even require registration, meaning you can exchange funds anonymously.
Bitcoin for Online Purchases
All you need to buy things online with Bitcoin is a Bitcoin wallet. The process is rather simple: once you decide what you want to buy, you just need to make a payment using the wallet address given to you by the seller. Once the payment is through, your product or service will be purchased.
Some Bitcoin wallets have QR code scanners. If you have a mobile wallet, all you need to do is use the wallet app to scan the QR code offered by the platform and make the transaction that way.
Bitcoin at Local Retailers
The process of Bitcoin purchases in brick-and-mortar businesses isn't that different from online purchases. You'll need to have a mobile phone with you and your mobile wallet installed on it. Once you need to make a payment, scan the QR code provided by your retailer and purchase the desired goods or services.
Why Is Bitcoin Becoming a New Type of Money?
Bitcoin is getting more popular with each passing year. Even though it's still not close to overtaking fiat currencies, it's widely deemed the new type of money that will likely become adopted by countries around the globe. Here are some of the main reasons why BTC has such potential.
Bitcoin eliminates complex processes. There's no need to include a third party in transactions; there's also no need for complicated paperwork, additional fees, commissions, etc. Simply put, Bitcoin is an intelligent solution for payments.
All transactions are encrypted and stored on a distributed ledger that is impossible to tamper with. Therefore, Bitcoin is much more secure compared to all fiat payment methods. However, don't forget that BTC's security also depends on you, as you're not supposed to give your private keys to anyone.
No centralized entity decides on the faith of Bitcoin. Instead, it's operated by a decentralized network where rules can be changed only if 51% of network participants agree. Since there are thousands of nodes around the globe, achieving consensus may not always be easy, but it also means no one can make a 51% attack on the Bitcoin network. It's simply too huge.
Easy to Use
All you need to do is enter the address of another person's wallet and send your money. That's the whole process of sending BTC. If someone else wants to make Bitcoin transactions and send money to you, they need to do the same thing. Sending and receiving money digitally has never been easier in the history of humankind.
As mentioned several times throughout this guide, scarcity is one of the key features of Bitcoin and what makes it different from fiat money. This means BTC cannot be subject to inflation.
Like all other cryptocurrencies or fiat money, BTC is fungible, meaning you can exchange one coin for another with no difference in value. At this point, we should clarify that BTC or cryptocurrencies shouldn't be confused with non-fungible tokens, usually referred to as NFTs.
Will Bitcoin Ever Replace Traditional Currencies?
Our world is still modeled after traditional (fiat) currencies, and it's tough to say whether it will switch to Bitcoin and other cryptocurrencies entirely in the future. From what we know so far, the world is accepting Bitcoin rapidly, as an increasing number of businesses already accept it as a payment method. It all depends on whether you're a crypto skeptic or an enthusiast. At this moment, both scenarios are equally possible.
Our Key Takeaways: Does Bitcoin Use Have a Future?
Even though we cannot claim with certainty whether Bitcoin will replace fiat money, we can say that everything indicates that it will be a great matter of interest in the near future. Even if it doesn't make any progress in terms of acceptance among businesses, people will still consider it a great investment opportunity. It will remain a "digital gold."
If Bitcoin goes south (although that seems impossible at the moment), blockchain definitely won't, as people constantly develop many practical uses for it and create thousands of other cryptocurrencies.
How can I use Bitcoin?
First, you need to buy Bitcoin on an exchange (or directly from another person) and store it in your Bitcoin wallet. Then, once you own it, you can use your wallet to send and receive BTC or make payments. All of that is conducted with the help of wallet addresses, which are a random string of characters that work similarly to email addresses.
What can I buy with Bitcoin?
Nowadays, it's possible to use Bitcoin in a wide range of stores and e-commerce platforms, meaning you can buy plenty of different things.
Is it a good idea for a beginner to invest in Bitcoin?
It's important not to get carried away. We suggest doing in-depth research and starting small, as you can invest as little as a couple of bucks in BTC and learn how it works. Also, don't invest more than you can afford to lose.
Can I convert Bitcoin to cash?
Yes, you can, by using Bitcoin ATMs or a cryptocurrency exchange. Technically speaking, you'll sell your BTC and buy fiat money in that process.
Is it legal to use Bitcoin?
Bitcoin is legal and regulated in some countries, while it remains a gray legal area in others. Finally, a handful of countries, such as China, altogether ban the use of Bitcoin.
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