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What is Bitcoin and How Does it Work

The concept what is Bitcoin and How Does it Work is a very interesting concept.

Bitcoin is a digital form of cash.

But unlike the traditional fiat currency, there is no central bank to control it.

Each Bitcoin unit is unique and cannot be copied or destroyed. It runs over a distributed network that is managed by thousands of computers around the world.

Read Also: How to Buy Bitcoin Cryptocurrency

It was only a matter of time before computer scientists and developers started thinking What if data could not be copied?

What if there was something like a unique data element and what if it could be transferred from user to user?

what is bitcoin and how does it work

Ultimately, these questions and their practical consequences have made it fairly clear that unique data that cannot be copied can be used as digital cash.

Though there were other types of digital currencies, Bitcoin cryptocurrency was the first to implement cryptographic techniques, marking the beginning of cryptocurrencies.

Most people have little or no experience with this type of digital currency. So you might be asking yourself what is Bitcoin and How Does it Work.

The underlying technology that makes cryptocurrencies so unique is fascinating, but for the majority of us, it’s probably one of the most complex issues for most of us

What is a Bitcoin

What is a bitcoin can be answered in most simple way as Bitcoin is a digital currency. No printing bills or minting coins.

It is decentralized – there is no government, institution like banks or any other authority that controls it.

The owners are anonymous. Instead of using names, tax numbers or social security numbers, Bitcoin connects buyers and sellers via encryption keys.

And it is not issued from top to bottom like traditional currencies. Rather, Bitcoin is mined by powerful computers

Bitcoin cryptocurrency is a digital currency that was founded in January 2009.

It follows the ideas of a white paper by the mysterious developer Satoshi Nakamoto, whose true identity has yet to be verified.

Bitcoin crypto promises lower transaction fees than traditional online payment mechanisms and unlike government-issued currencies, BTC is operated by a decentralized agency.

There are no physical bitcoins, only credits that are kept in a public directory in the cloud and that – together with all bitcoin transactions – are checked by an enormous amount of computing power.

Bitcoins are neither issued nor supported by banks or governments

Although Bitcoin is not a legal tender, it is very popular and has triggered the launch of hundreds of other virtual currencies, collectively known as altcoins.

what is a bitcoin, Video source Youtube: Austin Evans

Bitcoin crypto as Money

When it comes to Bitcoin as money, it can be described as a digital currency that runs on a distributed peer to peer economic system.

Bitcoin crypto or bitcoin cryptocurrency can also be referred to as BTC

Bitcoin is managed as digital cash from thousands of lines of code.

bitcoin cryptocurrency as digital money

It is based on open source software that is regularly improved by a large community of developers.

Initially, this software was also known as Bitcoin. To avoid misunderstandings, Bitcoin’s main client software was officially renamed Bitcoin Core in 2014.

Bitcoin cryptocurrency and Blockchain

Bitcoin is not issued or controlled by a single authority or agency, but supported by many computers (nodes) around the world.

The Bitcoin network has its foundations on a distributed ledger known as blockchain

Blockchain is responsible for maintaining organized list of all transactions through which bitcoins are sent or received

These transactions are combined into linked blocks and form a chain of blocks known as blockchain

Read Also: Binance Exchange Review

Due to their different qualities and functions, it is quite common for people to be confused about the differences between Bitcoin and blockchain, as they are closely related, although different concepts exist.

What exactly is a blockchain

In essence, a blockchain is a set of records, much like a general ledger or flat database.

However, its uniqueness rests on the mechanism by which it validates and protects these records.

The problem of clear and immutable data has been bothering programmers since the earliest days of digital storage.

cryptocurrency blockchain

If data on a hard drive can be changed so easily, who is the legitimate and true version?

It is a difficult question, to which there were few answers until the early 1990s, when Stuart Haber and W. Scott Stornetta created the first archetype of a blockchain.

They were the first to use cryptographic evidence to secure a chain of blocks to prevent data tampering.

The work of Haber and Stornetta certainly inspired the work of Hal Finney and many other computer scientists and ultimately led to the creation of Bitcoin.

The Bitcoin white paper was published by Satoshi Nakamoto in 2008, and the first block was dismantled on January 3, 2009.

KEY POINTS

Bitcoin was launched in 2009 and is the world’s largest cryptocurrency by market cap.

Unlike the fiat currency, Bitcoin is created, distributed, traded and stored using a decentralized general ledger system known as blockchain.

The history of bitcoin as a store of value was turbulent. The cryptocurrency rose to around $ 20,000 per single bitcoin in 2017

How does Bitcoin Work

How does bitcoin work is explained in an easy way. Bitcoin cryptocurrency is one of the first digital currencies to use peer-to-peer technology that enable instant payments.

The independent companies and persons, who have enough computing power and participating in the Bitcoin crypto network, are known as miners, and are motivated to join mining network by rewards in the shape of transaction fees paid in Bitcoin.

These miners can be seen as a decentralized authority that strengthens the credibility of the Bitcoin network.

New Bitcoin coins when produced after mining are issued to miners at a fixed but periodically decreasing rate as the total supply of Bitcoins is approaching 21 million.

After the total supply of 21 million is reached no new bitcoin will be mined

There are currently around 3 million bitcoins that still need to be mined. This is how Bitcoin differs from the Fiat currency.

In centralized banking systems, the currency is released at a rate commensurate with commodity growth to ensure price stability

while a decentralized system like Bitcoin sets the release rate in advance and using an algorithm.

how does bitcoin work, Video source Youtube: Techquickie

What is Bitcoin Mining

Bitcoin mining is the process by which bitcoins are placed on the market.

In general, mining requires solving computationally complex puzzles to find a new block to add to the blockchain.

By contributing to the blockchain, transaction records are added and checked throughout the network during mining.

Miners receive a reward in the form of some bitcoins for adding blocks to the blockchain.

The reward is halved every 210,000 blocks. The block reward in 2009 was 50 new bitcoins and is currently 12.5 and will become 6.25 after bitcoin halving 2020

As more and more bitcoins are created, the difficulty of the mining process that is the amount of computing power increases

The mining difficulty started at 1.0 when Bitcoin debuted in 2009.

Read also: What is Bitcoin Halving

At the end of the year it was only 1.18. As of October 2019, the mining difficulty will be over 12 trillion.

Once an ordinary desktop computer was enough for the mining process.

But now miners must use expensive, complex hardware such as Application-Specific Integrated Circuits (ASIC) and more advanced processing units such as Graphic Processing Units (GPUs).

These complex mining processors are known as “mining plants”.

A bitcoin is divisible into eight decimal places (100 millionths of a bitcoin), and this smallest unit is called a satoshi.

If necessary and if the participating miners accept the change, Bitcoin could eventually be made divisible into even more decimal places.

How is bitcoin different from fiat currencies?

There are number of reasons that make bitcoin cryptocurrency is different from fiat currencies

  • Decentralization

The main feature of Bitcoin is that it is decentralized. No single institution controls the Bitcoin network.

It is maintained by a group of volunteer programmers and operated by an open network of dedicated computers around the world.

This attracts individuals and groups who are not comfortable with the banks or government controlling their money.

  • Limited offer

Fiat currencies supply is not limited – central banks can issue as many currencies as they want and try to manipulate the value of one currency in relation to other currencies.

Holders of the currency and in particular citizens with little alternative bear the costs

At Bitcoin, however the supply is strictly controlled by the underlying algorithm.

A small number of new bitcoins are seeping out every hour and will continue to do so at a decreasing rate until a maximum of 21 million has been reached.

This makes Bitcoin more attractive as an asset theoretically the value increases when demand increases and supply remains the same or the supply decrease.

  • Distributed and secure

The technology underlying Bitcoin is designed to ensure the integrity of data and transactions.

First, each transaction is digitally signed and checked using cryptographic techniques that ensure that funds can only be spent once.

When it is confirmed that the transaction is valid, it is permanently recorded on the blockchain through a process called mining which involves more cryptography.

This appears to be a considerable additional effort, but has a very strong impact on the security of the system.

In order to change the Bitcoin blockchain, the entire structure must be decrypted record by record, which is practically impossible even for the most powerful computers.

  • The power of unique data

Most of the value of digital technology has been derived from easy-to-replicate data, and much of the future performance of the technology will result from using unique information and analyzing its possible interaction.

For example, complex financial transactions will be much more accurate and far less prone to errors due to innovative advances like Bitcoin.

Frequently Asked Questions

Who invented Bitcoin?

Nobody knows who invented Bitcoin or at least not now even after bitcoin was invented in 2009.

Satoshi Nakamoto is the name of the person or group of people who released the original Bitcoin white paper in 2008 and worked on the original Bitcoin software that was released in 2009.

The Bitcoin protocol requires that users register a birthday when registering; the person named Satoshi Nakamoto registers and records April 5 as the date of birth.

In the years since that time, many people have claimed to be or have been proposed as the real people behind the pseudonym, but the true identity behind Satoshi has remained in the dark till today.

  • August 18, 2008: The domain name bitcoin.org is registered. This domain is “WhoisGuard Protected”, which means that the identity of the person who registered it is not public information.
  • October 31, 2008: Someone using the Satoshi Nakamoto name announced on the cryptography mailing list at metzdowd.com: I am working on a new electronic checkout system that is completely peer-to-peer and has no third party

The paper is available at http://www.bitcoin.org/bitcoin.pdf this link leads to the well-known white paper of “Bitcoin: An Electronic Peer-to-Peer POS System “, which was published on bitcoin.org

  • January 3, 2009: The first Bitcoin block is Block 0 also known as the “Genesis Block” was produced
  • January 8, 2009: On the Cryptography Mailing List, The first version of Bitcoin software was announced
  • January 9, 2009: Block 1 will be dismantled and Bitcoin mining began seriously.

What is Bitcoin used for? Or what is the purpose of Bitcoin?

Bitcoin cryptocurrency is network that enables new payment system and is digital money. It is the first decentralized peer-to-peer payment network without central authority or intermediaries.

From a user point of view Bitcoin is simply cash for the internet.

Bitcoin can be used to buy things or make payments on internet on thousands of places that accept bitcoin

What is a Bitcoin worth?

Bitcoin crypto worth keep on changing, the price kkep on fluctuating on daily basis you can view the daily basis rates of bitcoin on binance exchange bitcoin usd

In other words bitcoin is of great worth, a very valuable assets, it’s worth was  only some dollars in 2009, 2010 and it rose to almost 20,000 Usd in Dec 2017 becoming the most profitable asset of the decade

Can Bitcoin be converted to cash?

Bitcoin can be converted into cash in a number of easy steps

  • Sell Bitcoin through a cryptocurrency exchanges like Binance, Coinbase or Kucoin. This is the easiest method if you are selling Bitcoin and want to transfer the resulting cash directly to a bank account.
  • Sell bitcoin to friends. If you have friends who want to buy Bitcoin, you can sell your BTC for fiat currency. Of course, this method assumes that you have friends who are looking for Bitcoin and that you trust they will pay you for your Bitcoin
  • Get a Bitcoin debit card. You can sell Bitcoin on several websites
  • Use a Bitcoin ATM. There are currently just over 2,200 Bitcoin ATMs worldwide. If its nearby you can exchange Bitcoin for cash

How to get a Bitcoin address?

There are many ways to get a BTC address. The 3 most popular methods are:

  • Set up an account on crypto exchanges
  • Use an online wallet
  • Use an offline wallet

Cryptocurrency exchanges

Most crypto exchanges like binance exchange will give you a BTC address when you create an account..

Although this is convenient, it is not recommended to use this address for anything other than temporary storage.

The crypto exchanges are online and put your money at risk for hackers or malicious software.

Online wallets

There are many reputable online wallets that you can use to get a BTC address. Exodus and Jaxx are two solid options that support not only Bitcoin but other cryptocurrencies as well.

Offline wallets

Offline wallets are the recommended way to get an address to store your Bitcoin.

You can either use a hardware portfolio like Trezor and Ledger or create a paper portfolio for your money. Since these wallets are offline, you reduce the risk of getting hacked by using them.

Is Bitcoin Mining profitable?

In Bitcoin mining, Bitcoin crypto is earned in exchange for performing the verification process to validate Bitcoin transactions.

There are several factors that determine whether mining Bitcoin is a profitable undertaking. These include

  • The cost of electricty to power the computer and mining system
  • The availability and price of the computer and mining system
  • The difficulty level of mining

Consider the cost of equipment, electricity, mining difficulties, and the impact of Bitcoin price on potential rewards of mining to determine if Bitcoin mining is profitable for you or not

When did Bitcoin Start?

On January 3, 2009, the Bitcoin network was launched with Satoshi Nakamoto, who mined the Genesis Bitcoin block also known as block number 0, which had a reward of 50 bitcoin cryptocurrency at that time

What is my Bitcoin Address?

Your BTC address consists of 26 to 35 letters and numbers that identify your Bitcoin wallet. BTC addresses start with either a 1 or a 3 and distinguish between upper and lower case.

What is my Bitcoin Address

If you would like to receive money, share this information of your Btc address with the person who is going to pay you BTC.

Your BTC address is often referred to as your wallet address or your public address.

Tips to Remember

  • The most important thing to remember is only send or receive Bitcoin to your Bitcoin address

 if you send or want to receive Ethereum crypto or any other cryptocurrency to your BTC address

you will never get it and your funds of that particular crypto that you are trying to send or receive on you BTC address will be lost for ever

So only send or receive BTC on BTC address

  • Every cryptocurrency like Bitcoin, Ethereum, Litecoin etc have their own unique addresses and cannot be send or received to any other cryptocurrency addresses

This address is considered public because, unlike the private key that manages your wallet, it can be released to the public.

Most wallets make your Bitcoin cryptocurrency address easily accessible.

You can easily find your address in Receive BTC tab in your wallet or crypto exchange.

Should i buy Bitcoin?

Should I buy bitcoin or should I not is the question that is very controversial

There are two main reasons to buy bitcoin

  • Bitcoin has a fixed supply of 21 million coins, once all the coins are mined the price will sky rocket just like gold that has also limited supply
  • Bitcoin transactions are securable and not censorable making it a transparent network

The reasons not to buy bitcoin is that it is not yet properly regulated and it is not known what the international countries will decide about BTC, will they regulate it or will they totally ban it

How much is 1 Bitcoin?

Bitcoin price keep on varying just like traditional stocks, you can see below how much worth is 1 Bitcoin

Binance bitcoin usd

Coinbase bitcoin usd

Bitfinex bitcoin usd

Is bitcoin Legal?

Is bitcoin legal or not vary from country to country, However bitcoin is yet not accepted as legal tender in any country

Legal tender is defined as a currency like dollor, euro etc which are widely accepted and properly regulated by the world banks and Governments around the world

Bitcoin cryptocurrency is not accepted as a legal tender anywhere in the world yet in many countries bitcoin is legal to be used as a payment option if both parties agree to make their transaction in Bitcoin

Countries where bitcoin is legal are

  • The United States
  • Canada
  • Australia
  • The European Union
  • Japan
  • South Korea

Countries that say no to bitcoin are

  • China
  • India
  • Russia
  • Vietnam
  • Columbia

 

 

     

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