What is Bitcoin ?
Well, what is bitcoin in its essence, and do we need cryptocurrencies ?
Look.
Imagine if one of your friends gives you a dollar. That's the whole deal. There is no intermediary of any kind during this transaction - just physical action.
The same goes for bitcoin. You can transfer Bitcoin to anyone, anywhere, anytime. Regardless of financial restrictions imposed by your country, or bank transfer deadlines and fees. That is to say, with the exception of countries that completely ban bitcoin.
That's all - simple and secure. And only you and the recipient are responsible for this transaction - there are no third parties.
In a country like Iran, you have regulations on cross-border transfers.
Bitcoin solves this problem.
Or what about people without a bank account?
There are over 1.7 billion unbanked people in the world.
What could they use for payments instead of cash?
Bitcoin also solves this problem.
So you can see that bitcoin has its advantages.
But how does that work?
To answer this question, we first need to understand some technological terms.
How does blockchain work?
In simple terms, - a blockchain is a list of records. These records are called blocks and, as the name suggests, they are linked together by a chain. Each block contains information about a transaction, its hash, and the hash of the previous block. Hashing is like a license plate for blocks.
This last point is exceptionally important in terms of safety.
You see, if someone wants to tamper with a block, they'll need to recalculate the proof of work for all subsequent blocks.
Each block is linked to its next “cousin” by cryptography.
What is cryptography?
Cryptography is the method for protecting data with codes.
It is as simple as that.
It allows sensitive information to be shared in a hidden (encrypted) way, so that no one but the recipient can read it.
Here is an example:
If we use cryptography to encrypt this sentence: “What is Bitcoin? “this is what we will get:
“SSVXF+A5OBT8SS6+HD1WU7VLFNIYOLCUVRJ6EYBH4MG=”
This message can only be read by the intended recipient.
The same goes for a bitcoin transaction. If I send you a bitcoin, that transfer will be stored in a block. You and only you will be able to receive it.
Then everyone who uses the Bitcoin network will validate our transaction.
The brilliance of the blockchain idea
The advantage of blockchain technology is that it uses trust timestamps, which makes it remarkably secure. The trusted timestamp keeps track of when the data was created and modified. Nobody, including the owner of the data, can change it once it has been saved.
Furthermore, everyone who uses the same blockchain technology is responsible for its existence and evolution. In other words, there is no single entity that controls blockchain data.
Each user of a given blockchain system has a real-time copy of the blockchain network.
The Bitcoin blockchain represented over 210GB of data, and it's stored on each user's device.
Bitcoin used blockchain technology exactly the way it was supposed to be used. It is decentralized, and each transaction is validated by all the users concerned.
But there is better:
The Bitcoin blockchain reduces possible errors to a minimum. You can't spend your bitcoin twice, and no one can intercept your bitcoin transaction. Even better, these transactions are not recorded only on Bitcoin's secure ledger. Users validate, therefore record these transactions on each device, connected to the Bitcoin blockchain network.
As a result, the blockchain is virtually inviolable! To hack the blockchain, a cybercriminal must have control of 51% of all users. This hypothetical situation is nearly impossible to achieve, given the vast network of bitcoin miners and nodes.
Bitcoin mining
In essence, a bitcoin miner is a computer. To be more precise, a very powerful computer that solves mathematical problems. When a miner solves one of these complex math problems, they create a new bitcoin. The nodes then verify bitcoin transactions, which secures the blockchain.
Each bitcoin miner connects to the blockchain via bitcoin mining software. After completing a block and adding it to the blockchain, the miner receives a “block reward.” These rewards are bitcoins - in 2019, this reward equals 12.5 bitcoins per block. It is halved every 210,000 blocks. In 2009, a year after Satoshi Nakamoto created the Bitcoin concept, the reward was 50 bitcoins per block. In 2020, it was “only” 6.25 bitcoins.
However, given its high price, more and more cybercriminals are tempted to use cryptojacking to turn individual devices into mining platforms.
Once the miner receives the reward, the owner's Bitcoin wallet receives the rewarded bitcoins.
What is a Bitcoin wallet?
The cryptocurrency wallet is, in fact, an application. It acts like a cryptocurrency gateway - you need a cryptocurrency wallet to transfer, receive, or buy bitcoin.
Bitcoins are not actually in your digital wallet. They are in the blockchain. What your wallet stores are the locations (addresses) of your bitcoins on the blockchain.
Here's the deal.
You see, bitcoins don't move like paper money. They're just changing owners. When you send, say, a BTC to a friend, you are reassigning ownership of their address in favor of your friend.
The owner of a Bitcoin wallet uses two keys to make transactions:
- Public key
This is the address of the recipient of the payment. If you want to buy a coffee with cryptocurrencies, you scan the coffee's QR code - this is its public key. The public key is accessible to everyone.
- Private key
It's the key to your bitcoin addresses. When you purchased this coffee, you used your private key to unlock your bitcoin safe and release the amount required for the transaction. Your private key is the only thing that can reach your bitcoins. They are not linked to your account in any other way. Thus, if you lose your private key or if it is stolen, there is nothing you can do about it (your Visa card is more convenient from this point of view).
So you need both keys to complete a transaction.
What is a bitcoin transaction?
In simple terms, a bitcoin transaction is the change of ownership of bitcoin.
It doesn't matter if you're just making a transfer to someone, or starting out in bitcoin trading. Each transaction is stored in a block, and it takes approximately 10 minutes for a block of transactions to become part of the blockchain (thus verifying each transaction).
In other words, when you send BTC to someone, blockchain nodes need to verify your transaction first.
What is essential for a bitcoin transaction is that the block that verifies it keeps a log of the sender, the receiver, and the amount of the BTC.
This means that people can trace the exchange of ownership of each bitcoin back to when it was created.
Now, let's dig a little deeper into the core principles of bitcoin.
Main characteristics of Bitcoin
There are many key characteristics that differentiate bitcoin from fiat currencies. First of all, it's not printed in a central bank somewhere.
Decentralization
“The government of the people, by the people, for the people” - Abraham Lincoln
Today, we have centralized political and economic systems.
The government regulates the economy, sets taxes, etc.
You know where the government is. You know who works there. You vote for a government.
The same is true for the banking sector. The bank stores your money, and you rely on it for every transaction.
You see, only you and the bank know what's going on with your finances. You can't check a friend's balance, for example, only the bank can.
So that's the difference between a centralized system and a decentralized system.
Decentralization removes the middleman and leaves participants in control.
Look.
In the Bitcoin blockchain, all miners are connected to the blockchain. They can all visualize the same data. As soon as a miner creates a new block, all members of the network are notified.
That's the beauty of blockchain technology: all users are responsible for the network.
So if you want to send money to Bob, you send it, and that's it. This transaction is between you and Bob, but everyone else on the blockchain needs to agree (verification). Nobody can tell you, “Hey, you can't send money to Bob because he lives in Venezuela and we don't get along with them.”
The great thing about blockchain is that anyone can join this network. If he has a fairly powerful computer, of course. And if they can afford to pay for higher electricity consumption. Blockchain is available to anyone who wants to join it. There are no limitations.
In addition, it is more secure than centralized structures, simply because no one can touch it.
Immutability of the blockchain
Think of blockchain as a history book. If an event occurs, something led to that event. Everything happens for a reason, right? So here's an example:
Napoleon became emperor in 1804.
In 1811, he controlled almost all the countries of continental Europe.
In 1812, Napoleon commanded the largest army that the world had never seen before the First World War.
In the same year, the Grand Army invaded Russia. Napoleon's Grande Armée in French.
Although the French were victorious during the first major Battle near Borodino, they paid a high price for this victory. The remaining army suffered from a severe lack of supplies, diseases, and the famous Russian winter. These events forced Napoleon to withdraw to Poland.
As the Russian campaign seriously weakened Napoleon's army, it could no longer control all the occupied territories. Eventually, his empire fell apart.
In history, one thing leads to another. Blockchain is the same thing. A block follows each block. Until the invention of the time machine, no one could alter the past. The same is true for blockchain. If someone interferes with a block, they will need to change all subsequent blocks. It's what we call theButterfly effect.
In addition, to break immutability, it is necessary to convince 51% of the network to modify a block. Imagine how difficult that is, since in 2021, there are at least 11,393 knots in The network of The Bitcoin blockchain. And their numbers continue to grow, despite the fact that mining will stop once all bitcoin has been mined.
Limited bitcoin supply
With fiat currencies, central banks can simply print as much money as they need. Bitcoin doesn't have that option. Once the bitcoin minted has reached the 21 million limit, it will be over.
This makes bitcoin an even more valuable asset because once a miner has mined the last coin, all you can do is buy more.
Right now
At the time of writing, there are more than 18 million existing bitcoins. That means there's about 12% of bitcoin left to be mined. If miners continue to maintain this pace, the The last bitcoin will be mined in less than five years.
However, miners will continue to make money even if they stop digging.
Today, miners acquire most of their bitcoin through block rewards. Additionally, they earn a small fee for each bitcoin transaction. In the future, bitcoin trading and trading will pay miners.
*Interesting fact - The creator of bitcoin, Satoshi Nakamoto owns one million bitcoins, which were extracted at the beginning of the extraction process. While no one knows who he is, that's an impressive amount, considering the current value of bitcoin — around $34,000. The creator therefore has the key (literally) to more than 34 billion dollars at that date.
Bitcoin transaction security
Several essential elements make it possible to secure bitcoin transactions.
- Bitcoin transactions are irreversible.
Once a transaction is verified, you won't find a “cancel” button. And there's no authority to call if you've made a mistake. However, if you know and trust the person who received the payment, they can give you a refund.
- Bitcoin won't allow you to send money to an invalid address.
Blockchain technology doesn't tolerate invalid addresses, so you can't send money to a non-existing recipient by mistake.
- Users have total control over their payments.
Unlike traditional payments, Bitcoin doesn't allow merchants to charge you hidden fees.
- Bitcoin payments can be anonymous.
You don't need to add any personal information to the transaction. This constitutes a identity theft protection.
However, despite the benefits of bitcoin, the system is not flawless.
Critical disadvantages for bitcoin adoption
As soon as it entered the monetary scene, bitcoin had certain predefined flaws.
Slow transaction speed
As stated earlier, the blockchain takes around 10 minutes to add a new block. You should therefore wait at least 10 minutes for your transaction to be verified. Once verified, it becomes irreversible. Technically, every 10 minutes, you receive another check of this transfer.
Look.
Several checks are required to complete a transaction. For example - a single confirmation is enough to send a small payment (usually under $1,000). You will need at least three checks to transfer amounts up to $10,000. Most exchange companies also require at least three confirmations to accept a deposit.
Six is the magic number, which allows a transaction to be considered secure. So you can send up to $1 million.
If you want to transfer more than $1 million, you need about 60 checks. That equates to about 10 hours.
The point is that Bitcoin can only validate seven transactions per second. And there is an average of 12.23 transactions per second that are generated (at the time of writing). It can be said that this may take some time.
Be careful, the system is slow (as you would expect).
The average time it takes to confirm a Bitcoin transaction takes approximately 12 minutes. And while you wait for your transaction to be validated, your machines consume a good part of your earnings.
Energy consumption for bitcoin mining
To date, theBitcoin mining consumes up to 66 TWh per year, which is almost the same as electricity consumption in the Czech Republic.
When it comes to electricity bills, for every $6 you earn mining bitcoin, you have to pay an average of $3.3.
But there are worse things:
There are two factors to consider:
- First — the hashrate difficulty is increasing.
- Second, the block reward is smaller.
Unless electricity becomes cheaper or a new method allows miners to use less energy, we will use more electricity for smaller gains.
The only benefit of using so much energy is that you live in Siberia and use mining rigs for heat.
However, decentralized cryptocurrency won't be able to keep us warm forever.
The irony of decentralization
The Bitcoin network is decentralized, of course. Exchange companies, however, are not. And that's where most of the bitcoin is. So it turns out that we have a decentralized system of resources, but we keep them centrally.
This led to shocking situations:
The founder of QuadrigaCX has died, enclosing in his laptop some cryptocurrencies worth 190 million dollars.
In addition, Mt. Gox, another exchange company, has lost more than 850,000 bitcoins after a cyber attack.
But do these questions affect the future of bitcoin and its adoption rate?
Bitcoin future and adoption
More and more people are adopting cryptocurrencies with each passing day. The same goes for sellers. In fact, there are hundreds of thousands of places that accept cryptocurrency payments. You can find all sellers on this map.
Today, although bitcoin is not perfect, its system continues to evolve and improve.
One of the main issues we cited in the previous paragraph is the scalability of the bitcoin blockchain, that is, the time it takes to verify a transaction.
You see, Bitcoin uses a ridiculously slow algorithm to “sign” every part of a transaction.
A man named Claus-Peter Schnorr created a better method. Schnorr signatures are significantly faster, opening up the future of bitcoin.
In fact, the developers of Bitcoin Cash (BCH) implemented his idea in May 2019.
The other problem with bitcoin is that it's not really suited to everyday spending. That's why the Winklevoss twins partnered with Flexa to make cryptocurrencies easier to spend. They created theSPEDN app, (no, it's not a typo) thanks to which you can easily buy cryptocurrency items or services.
This application and other innovations are drawing a trend towards a more comfortable use of bitcoin for the general public.
Everyone involved in this technology aims to make the use of cryptocurrencies easier and faster, without neglecting the security of blockchain technology.
FAQs
Can bitcoin be converted to cash?
Yes, it is possible. There are lots of ways to turn your bitcoin into cash.
Here are the most common methods: Online checkout. One of the most popular financial services for this type of operation is Coinbase. If you decide to choose it, there are fees ranging from 1% to 3.75%, depending on whether you want the money in your bank account or on PayPal. Exchange exchange. You can use one of the many cryptocurrency exchanges to convert your bitcoin into any other type of currency.
Binance and OKEx are such platforms.
You can sell your bitcoin directly to a buyer, in person or online. You can meet them in bitcoin communities like forums, etc. Or you can use websites like LocalBitcoins to find potential buyers.
How do I earn bitcoin?
The most obvious answer is to undermine them. However, if you don't have the necessary hardware, there are other ways to earn bitcoin: You can buy bitcoin. You can earn them as payment for a number of online jobs. These are the most common practices for people who are wondering how to get bitcoin. There is also gambling and trading, but the risk is too high. If you want to play it safe, use one of the methods above.
Why does bitcoin have any value?
The short, terrifying answer: because people believe it.
It has no intrinsic value, but as long as people are willing to accept it as a form of payment, it has subjective value.
It's the latter that counts in the real world. We reached the million dollar question. The main reason Bitcoin has value is the same reason paper money has value. And the answer is simple. People need currency to do their daily transactions.
Our society has gone far beyond the point in history where people traded chickens for rice and vice versa.
The more people adopt bitcoin as a payment tool, the more valuable it will become.
The second reason bitcoin has value is that it's similar to gold in a way — both have limited supply.
When was bitcoin created?
Bitcoin's official birthday is October 31, 2008.
Who created Bitcoin?
A developer or group of developers, under the pen name Satoshi Nakamoto, published a white paper on bitcoin in 2008. The idea was to create a decentralized and independent payment system based on mathematical proof. The identity of Satoshi Nakamoto is still a mystery to this day.
What is a Bitcoin wallet?
A Bitcoin wallet stores your bitcoin addresses on the blockchain. To make a bitcoin transaction, you first need to have a cryptocurrency wallet.
How do I buy bitcoin?
You can buy bitcoin using any of the following methods: Buy from a bitcoin exchange company. Use a peer-to-peer website to find sellers. You can use a bitcoin ATM to buy bitcoin. (Here are the locations of these ATMs)
Is bitcoin mining profitable?
In general, yes. Although the situation is unstable, bitcoin is expected to reach new heights.
Summary.
Now you know what bitcoin is, how it works, and why it matters.
You see, bitcoin (and cryptocurrencies as a whole) are changing the game in our society. They could have a substantial impact on our centralized banking system and change the way we think about money. Fiduciary currencies may not become obsolete, but their power is dwindling, thanks to cryptocurrencies.
And bitcoin, in particular, has no intention of leaving the top spot in the cryptocurrency world.
The future of bitcoin seems bright, and it is leading many other cryptocurrencies into a new era.
Now that you know what bitcoin is and how it works, you've also discovered how it can work for you.
Suggested reading: The best cryptocurrency exchanges
