Written by Nica Latto & Joseph Regan
Published on June 18, 2021

What is Bitcoin?

Bitcoin is a digital currency created in 2009. A decentralized cryptocurrency, Bitcoin relies on a peer-to-peer network called the blockchain to record transactions, rather than any official regulatory authority. There are no physical bitcoins, and their value can swing widely depending on the market.

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    When it first launched, one bitcoin was essentially worthless. Laszlo Hanyecz made the first real-world purchase of physical goods with bitcoin in May 2010 when he bought two pizzas for about 10,000 bitcoins (BTC). At bitcoin’s highest recorded price — almost $65,000 USD per coin — the price of those pizzas would’ve been around $650 million USD.

    Bitcoin has inspired a variety of other cryptocurrencies, including Ethereum, Cardano, Dogecoin, and thousands of others. Anyone with the technical know-how can create their own cryptocurrency. While that might not sound very secure, cryptocurrency and blockchain technology is surprisingly robust.

    Why is Bitcoin safe?

    Bitcoin technology is mostly safe because it’s built on secure technology: the blockchain. Bitcoin is also cryptographic, public, decentralized, and permissionless. As an investment though, Bitcoin may not be safe due to market volatility. Here are the four main reasons why Bitcoin tech is (mostly) safe:

    Reason #1: Bitcoin uses secure cryptography

    How is Bitcoin secure? Bitcoin is backed by a special system called the blockchain. Compared to other financial solutions, the blockchain is an improved technology that relies on secure core concepts and cryptography. 

    Blockchain uses volunteers — lots of them — to sign hashes that validate transactions on the Bitcoin network using cryptography. This system makes it so transactions are generally irreversible, and the data security of Bitcoin is strong.

    Reason #2: Bitcoin is public

    While being public may not sound safer, Bitcoin’s ledger transparency means that all the transactions are available to the public even if the people involved are anonymous. That makes it very difficult to cheat or scam the system.

    With all the data publically available, there’s nothing for bad actors to “hack in” and see — all transactions are public to everyone.

    Compare that to the common data breaches of traditional companies, and Bitcoin starts to sound a lot safer. When you buy or sell bitcoin, you don’t add any personal information to the blockchain like your passwords, credit card numbers, or your physical address, so there’s nothing to leak.

    That’s very different from when hackers break into traditional financial systems — just ask the folks over at Equifax.

    Reason #3: Bitcoin is decentralized

    Bitcoin’s distributed network has over ten thousand nodes all over the world that keep track of all transactions happening on the system. This large number of nodes ensures that if something happens to one of the servers or nodes, others can pick up the slack. 

    It also means that trying to hack into one of the servers is pointless. There’s nothing there you could steal that the other nodes and servers couldn’t prevent, unless you happen to control 51% of the nodes — not impossible, but extremely unlikely.

    Reason #4: Bitcoin doesn’t require permissions

    Being public and decentralized means very little if you have to be allowed in by some authority. With no regulatory body, Bitcoin is open to everyone. Its lack of permissions keep Bitcoin open and fair for everyone.

    Bitcoin’s decentralized, cryptographic technology makes it mostly secure. Bitcoin’s security is supported by decentralized, cryptographic technology.

    What is the blockchain, exactly?

    Blockchain is a distributed ledger that uses hash functions to provide a unique fingerprint of every transaction, recording and authenticating them. When each transaction is signed and verified as unique, it’s sent to join a “block” of other transitions and becomes impossible to modify. These blocks together form the blockchain.

    How secure is the blockchain? It’s protected by the 256-bit SHA hash functions, the same level of security that banks, the military, and virtual private networks (VPNs) use to encrypt their systems. But unlike encryption, which can be decrypted, SHA hash functions provide a unique fingerprint for each transaction that cannot be reconstructed.

    In other words, cryptography in blockchains is used to sign the data with a unique, unbreakable identifier that other network participants can verify using the same cryptographic algorithm.

    The blockchain also builds security by consensus. For it to be hacked, someone would need to take over 51% of Bitcoin mining capabilities, which would be incredibly unlikely. However, your cryptocurrency wallet isn’t necessarily secure — and that’s where you’d store your bitcoin.

    Does Bitcoin use encryption?

    No, Bitcoin does not use encryption. It’s called “cryptocurrency” because its digital signature algorithm uses the same mathematical techniques used for a type of encryption based on elliptic curves. Bitcoin uses the Elliptic Curve Digital Signature Algorithm (ECDSA) with the elliptic curve secp256k1, not encryption.

    Bitcoin security issues

    While Bitcoin technology is pretty safe, there are some risks to consider before you make an investment. Bitcoin isn’t anonymous, the price of cryptocurrencies can be extremely volatile, Bitcoin relies on passwords, and cryptocurrency wallets are not immune to theft.

    icon_01Bitcoin isn’t anonymous

    While Bitcoin does disguise your personal information, it doesn’t disguise the address of your crypto wallet. That means you’re not “anonymous” but “pseudonymous” — and someone could use clues to track down your personal information. Governments can subpoena information, and cybercriminals use all kinds of illegitimate ways to obtain information.

    Because all the ledgers are public, if someone knew how much you spent, when, and where you spent it, they could find your transaction on the ledger and trace it back to your wallet. Once they’ve done that, they could map your spending habits, gather data on your life, and maybe even blackmail you.

    But with the current amount of web tracking these days, it’s far more likely that advertisers or data brokers are spying on your private business through your internet browsing.

    icon_02Bitcoin is volatile

    Although Bitcoin uses secure cryptography, you could argue it’s not a safe investment because of its volatility. With no regulatory body and an international, 24/7 market, a bitcoin worth $60,000 one day can be worth $30,000 just a few days later.

    Though there have been some periods of stability, these never last long. After all, there’s a reason why people joke that Bitcoin is just astrology for men. Invest at your own risk, knowing that you may incur serious losses.

    icon_03Bitcoin passwords can be lost

    Bitcoins are stored in crypto wallets. If you forget your Bitcoin password — that is, the password to your wallet — you’ll be in trouble. There’s no central authority you can contact to recover your account. Several people have lost millions of dollars after failing to remember the password to their crypto wallet.

    That’s just one more reason you should always use a password manager. But even your own precautions might not be enough. One famous crypto exchange failed to repay $190 million to clients after its founder died without disclosing the only password.

    icon_04Bitcoin can be stolen

    Bitcoin’s blockchain can’t be hacked, because all data is already publicly available, but can bitcoin be hacked? Sort of — just because bitcoins are broadly secure on a system level doesn’t mean hackers can’t use other methods to steal them. Here are some of the potential threats to your cryptocurrency:

    • Phishing attacks: This classic social engineering technique can trick you into revealing all kinds of personal information, from your banking details to your crypto wallet details. Always be wary of spoofed emails or messages that request your personal data.

    • Fake websites: A sneaky fake website could trick you into handing your personal info over to hackers.

    • Man-in-the-middle attacks: Although unlikely, a hacker could launch a man-in-the-middle attack on your node or crypto wallet.

    • Malware: Plenty of malware strains revolve around bitcoins and Bitcoin wallets. Watch out for malicious code that can access your crypto wallet, or crypto mining malware that forces your computer to mine crypto for a hacker.

    It’s even possible for some crafty hackers to steal wallet keys from cold storage, although the method is still fairly experimental. 

    With the complexity and novelty of Bitcoin and other cryptocurrencies, it can be hard to know if you’re staying safe. A robust antivirus like AVG AntiVirus FREE will guard against phishing attacks, fake websites, and all kinds of malware. Get 24/7 protection so you can trade, mine, and browse securely.

    Should I try Bitcoin?

    As with any investment, you’ll have to make your own choices. Is Bitcoin really safe? As discussed above, there are lots of reasons Bitcoin is (mostly) secure. But there are plenty of reasons to be skeptical as well — and only you can decide what you consider a safe investment. If you do decide to invest, be ready for all kinds of highs and lows.

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    Nica Latto & Joseph Regan