What is Bitcoin?

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Sami Noori

Jun 2, 2022

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Part 1: Introduction to Bitcoin

What is Bitcoin?

Bitcoin is a digital currency that operates without the control of a central bank or the oversight of governments. Instead, bitcoin relies on something called peer-to-peer software and cryptography.

Bitcoin’s financial system is run by thousands of computers distributed around the world. Anyone can participate in the ecosystem by downloading open-source software.

A public ledger records all Bitcoin transactions and copies are held on servers around the world. Think of the ledger as the account book of Bitcoin.

Anyone with a spare computer can set up one of these servers, otherwise known as a node. Consensus on who owns which coins is reached cryptographically across these nodes rather than relying on a central source of trust like a bank.

What are Bitcoin’s Uses?

Bitcoin has several use cases. Most importantly, it is an alternative to fiat currency that can be sent and received. Others trade and invest in the digital asset, whilst others even hold the asset as a store of value like gold or silver.

Many people value it for its permissionless nature – meaning that anyone with an internet connection can send and receive the digital currency.

Consider Bitcoin as a digital version of cash, in that no one can stop you from using it. Its digital presence means that it can be transferred globally at a surprisingly fast and inexpensive rate.

How Does Bitcoin Work?

Bitcoin uses something called a peer-to-peer internet network to confirm purchases and transactions between users.

Bitcoin uses an underlying technology called blockchain. This can be thought of as Bitcoins book of accounts, or a particular kind of database that records all bitcoin related transactions.

Network participants all have an identical copy of this stored on their devices. The participants connect with each other to synchronize new information.

Nobody really knows the true identity of the creator of Bitcoin. Satoshi Nakamoto is the anonymous name used by the creator(s) of the cryptocurrency, found in its 2009 whitepaper.

Who Created Bitcoin?

Nobody really knows the true identity of the creator of Bitcoin. Satoshi Nakamoto is the anonymous name used by the creator(s) of the cryptocurrency, found in its 2009 whitepaper.

Although the name Satoshi Nakamoto is often synonymous with Bitcoin, the actual person that the name represents has never been verified.

 

Part 2: Fundamentals of Bitcoin

How is Bitcoin Created?

There is a finite supply of bitcoin, but not all units have entered circulation yet. The only way to create new coins is through a process called mining – the special mechanism for adding data to the blockchain.

Miners are participants that effectively add new blocks (or new data) to the blockchain that must be verified by the rest of network. To do so, miners must dedicate computing power to solving a cryptographic puzzle. As an incentive, the miner who solves the puzzle first is rewarded with Bitcoin.

It’s like a virtuous circle. The miners maintain and secure the blockchain, the blockchain awards the coins, the coins provide an incentive for the miners to maintain the blockchain.

How Many Bitcoins exist?

Bitcoins protocol fixes its maximum supply at twenty-one million coins. In 2020, approximately 90% of these have already been generated. However, it will take over one-hundred years to produce the remaining coins, thanks to periodic events known as halving’s. This is an event which gradually reduce the bitcoin reward miners earn for creating new blocks. Halving’s occur after every 210,000 blocks are mined, or roughly every 4 years.

What is Bitcoin Mining?

Bitcoin mining is the way in which new Bitcoins are created. It is also the way the network confirms new transactions. Mining is performed using sophisticated computer systems that solves a complex computational math problem. The first computer to find the solution to the problem receives the next block of bitcoins and the process begins again. Mining is a critical component of the blockchain ledger’s maintenance and development.

Bitcoin Mining Farm, Image Source: CBS News

How Long Does It Take to Mine a Bitcoin?

The average time for generating one Bitcoin is about 10 minutes, but this applies only to powerful machines. The speed of mining depends on the type of Bitcoin mining hardware being using.

 

Part 3: Mechanics of Bitcoin

What is Blockchain?

Blockchain is a revolutionary system of recording information in a way that makes it almost impossible to change, hack, or cheat the system.

A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.

Source: AlFanar Media

What is Peer to Peer Technology?

Peer-to-Peer (P2P) technology is a type of networking structure, where a group of computers are linked together with equal permissions and responsibilities for processing data.

Bitcoin uses peer-to-peer technology, which is what allows it to operate without a central authority or bank. The P2P network means that transactions and bitcoin creation/issuance is managed and verified collectively by the network.

What is a Bitcoin Node?

A Bitcoin node is essentially just a storage device, like a laptop or a PC with internet access. The node has the capacity to store the Bitcoin blockchain. These nodes then relay information from users to miners.

Nodes are critical component of the blockchain infrastructure. It helps maintain the security and integrity of the network. A node’s main purpose is to verify each batch of network transactions, called blocks.

What is Bitcoin Halving?

Every four years, the amount of bitcoin awarded to miners is reduced by half. This is called a bitcoin halving. Halving’s will take place until all 21 million Bitcoins have been virtually mined (estimated around the year 2140).

The halving mechanism helps make Bitcoin a scarce, inflation-resistant resource.

 

Part 4: Getting Started with Bitcoin

How Can You Buy Bitcoin?

Bitcoin can be purchased through online exchanges that swaps your fiat currency for the digital currency. The transaction usually takes place by entering debit/credit card details in exchange for Bitcoin/ Multibank.io allows you to seamlessly buy Bitcoin in your browser.

How Can You Spend Your Bitcoin?

The list of goods and services that accepts Bitcoin as legal tender is growing daily as people and vendors get more comfortable with virtual money.

Insurance, consumer staples, real estate, plane tickets, luxury watches, and clothing are just some of the items that Bitcoin can buy.

It’s important to remember that Bitcoin adoption varies on a global scale. Whilst most countries allow Bitcoin to be traded and transacted, the digital currency is banned in counties like China, Egypt and Russia.

Heatmap of Regions That Accept BTC Payments, Image Source: NewsBTC

How is Bitcoin Stored?

Just as people keep cash in a physical wallet, Bitcoins are also stored in a digital wallet. A digital cryptocurrency wallet is essentially an app that allows individuals to store and retrieve their digital assets.

Bitcoin stored in a virtual wallet can only be accessed using a private key, which is essentially your password that unlocks the virtual vault that holds your cryptocurrency. Your key proves your ownership of your digital money and allow you to make transactions. If you lose your private keys, you lose access to your Bitcoin.

Can You Lose Bitcoin?

Yes, you can. Quite frequently, Bitcoin has been reportedly lost due to people losing the private key that grants them access to their wallet. There’s also been many cases of hardware being misplaced or failing where the user didn’t create a backup, making the funds impossible to retrieve.

Can You Revert Bitcoin Transactions?

Bitcoin transactions are irreversible once they’ve been added to the blockchain. Therefore, if someone sends bitcoin to an incorrect address, they are almost impossible to recover. The only way to recover bitcoin sent to an incorrect address is for the owner of that address to refund the incorrect transaction.