Cryptocurrency has taken the world by storm...but just what is Bitcoin?
In this guide, you'll discover everything you need to know about Bitcoin.
Read on or skip to the section you're interested in...
1. What Is Bitcoin?
Launched in 2009, Bitcoin was the worlds first cryptocurrency...
Now, no-one really knows the true identity of it's creator, Satoshi Nakamoto. In fact, that remains a mystery to this day!
But how does it work?
Well, Bitcoin actually uses advanced encryption techniques to secure and verify transactions. And unlike other currencies, Bitcoin and other cryptocurrencies can function without the need for any central authority...
This basically means it's completely decentralized, thanks to blockchain technology.
2. How does Bitcoin work?
2.1. The Blockchain.
To understand how Bitcoin works, you first need to understand the blockchain...
When you use traditional payment methods, such as credit cards, your transactions go through a bank.
The bank has to clear the transaction before it is verified and added to your accounts transaction history (account statement). Normally, this history is kept by your bank and only viewable by the bank and yourself.
The blockchain is a revolutionary technology because the transaction history paradigm weve been using for all these years is being flipped on its head.
Credit card transactions are stored in one location (with your bank) and usually viewable by only your bank and yourself. On the other hand, Bitcoin transactions are stored on nodes (computers or servers) across the world and viewable by the entire world!
With this new paradigm (the blockchain), transaction history is free from any foul play, such as changing records.
If you modify your copy of the blockchain (the record book of all Bitcoin transactions), everyone would know since your copy wouldnt match the thousands of other copies of the blockchain.
To protect your privacy as well as that of others, users are identified by just two things:
Wallet addresses (a string of random letters and numbers where people can send you Bitcoin). No one knows your address unless you give it to them
Transaction amounts
2.2. How Do Transactions work?
So if theres no central authority like a bank to process your transactions, how do Bitcoin transactions work?
As Bitcoin transactions happen throughout the course of a day, these transactions are grouped into what are called blocks.
These blocks are processed then added to the blockchain, or chain of blocks (the public ledger of all transactions).
2.3. Mining Bitcoin
While credit cards have payment processors like Visa to process transactions, Bitcoin has what are known as miners.
Since Bitcoin doesnt physically exist, the name miner can be misleading.
Bitcoin miners are actually people or groups of people that run Bitcoin mining software on specialized Bitcoin mining devices known as application-specific integrated circuits (ASICs).
(Bitcoin mining used to be possible with personal computers but is now too resource-intensive).
When users of Bitcoin transact with the digital currency, their transactions are sent to the Bitcoin network, where miners pick them up and group them into blocks. These blocks are then added to the blockchain.
However, for each new Bitcoin block to be added to the blockchain, something called proof-of-work has to be performed to ensure that transactions are real and that the network remains secure.
Each new block has whats called a nonce or a string of numbers, that, when found, allows for the block to be added to the block before it.
An easy way to think about this is comparing mining to finding the correctly shaped Lego piece (nonce) in order to attach it to the previous Lego piece (previous block in the blockchain).
Miners are the ones responsible for this proof-of-work, or finding nonces
And thus confirming transactions and securing the Bitcoin network.
Proof-of-work mining is very resource-intensive in terms of computing power and energy. These days, finding the correct nonce is extremely difficult.
Most Bitcoin mining operations are now extremely professional and large in scale. Your everyday person simply doesnt have the resources necessary to make Bitcoin mining profitable.
Miners have to invest in a ton of computing power (one or more ASICs) as the more computing power you have, the more times per second youre able to try and guess the correct nonce.
(If you can guess more times per second than others, you have a higher chance of finding the nonce before them).
For their efforts, Bitcoin miners are rewarded with transaction fees, which users pay to miners to process their transactions quicker. They also get newly minted Bitcoins if guess the right nonce and add a block to the blockchain.
Along with eliminating the need for centralized authorities like banks (vs. a network of miners), this proof-of-work mining system also makes it very difficult to modify the Bitcoin blockchain.
Modifying any one block requires modifying all blocks before it (since all blocks are tied to each other via nonces).
Considering that as of April 2, 2018, there are over 500,000 blocks (each of which contains hundreds or thousands of transactions), the computing power necessary to change the blockchain makes such an attack infeasible.
Note: Even though the blockchain is secure, the storage of Bitcoin is still prone to hacks...
We'll come on to that later.
2.4. Is Bitcoin Infinite?
As mentioned, every time that a block is added to the blockchain, Bitcoin is minted or created then released to the miner who found the blocks nonce.
However, this creation of Bitcoin is not endless, as when Bitcoin was created, the code was written so that the supply of Bitcoin would max out at 21 million.
This is significant and a huge factor that gives Bitcoin its immense value as fiat currencies, such as the United States dollar, are more or less printed at will. This leads to inflation and devaluation of currency.
In other words, every dollar or dollar-denominated asset you own, such as a house, decreases in value over time, as more and more dollars come into circulation. More dollars in existence means that each dollar is worth less due to dollars not being as scarce.
2.5. What Happens When Bitcoin Runs Out?
Many wonder what will happen when Bitcoin supply maxes out and no more Bitcoin are created. While no one can see into the future, there are a couple of predictions that have been thrown out there.
Of course, if no more Bitcoin is created, that means mining will cease to exist. As such, many think miners will be heavily affected since they will have no more incentive to mine and gain rewards from adding new blocks to the blockchain.
This may lead to miners backing out of Bitcoin mining, which may lead to centralization of Bitcoin as less people will store copies of the Bitcoin blockchain and confirm its validity.
Yet, others believe that miners will still be able to be part of the Bitcoin ecosystem as they will still be paid in transaction fees and ASICs may become more efficient in terms of energy usage (lower energy costs to run Bitcoin mining hardware).
Another prediction that people make is that if the supply of Bitcoin runs out, the price of Bitcoin will increase even further! Why?
People would scramble to get their hands on some of the remaining Bitcoin (assuming that Bitcoin continues to retain its value).
3. How Is Bitcoin Stored?
Cryptocurrency exchanges like Coinbase and Kraken, where you can buy and sell Bitcoin, offer wallets on their websites where you can store Bitcoin.
Another option you have is a paper wallet, often thought of as the most secure Bitcoin storage method.
Paper wallets are piece of papers with your Bitcoin private key and public key.
Your private key can be used to access and send your funds from an online wallet. Your public key is your wallet address or where people can send you funds.
Yet another popular storage option for Bitcoin is hardware wallets, such as the Ledger Nano S.
As with paper wallets, hardware wallets store your Bitcoin offline but this time in a device (the hardware wallet).
The hardware wallet is connected to your computer (usually via USB connection) when you want to make transactions.
Your private keys are kept on the device, which greatly reduces the risk of someone stealing your Bitcoin through online infiltration (such as an exchange getting hacked).
4. The History Of Bitcoin.
Though Bitcoin is just over 9 years old, a lot has happened since its inception...
Founder(s) Satoshi Nakamoto first released a whitepaper detailing the vision for the cryptocurrency in November 2008. On January 3, 2009, Nakamoto mined the first Bitcoin block, thus starting the Bitcoin blockchain.
Nevertheless, this growth hasnt come without its growing pains. Bitcoin has had splits (called forks) where Bitcoin has split into Bitcoin and other forms of Bitcoin, such as Bitcoin Cash and Bitcoin Gold.
These forks mostly came about due to community infighting over how to progress Bitcoins development.
The biggest development issue in recent times is how to address increased usage of Bitcoin as it grows more and more popular (otherwise known as improving Bitcoins scalability).
Forks like Bitcoin Cash advocate scalability options like increasing blocksize.
For example, the current Bitcoin blocksize is 1 megabyte while Bitcoin Cashs blocksize is 8 megabytes.
A larger blocksize means more transactions can fit in each block. In short, this means more transactions can be processed at once.
The original Bitcoin community (referred to as core) advocates other initiatives, such as the development of The Lightning Network.
This proposal advocates handling transactions between two parties off the blockchain (on the Lightning Network).
After transacting on the Lightning Network, the parties would send their ending balances to the original blockchain, greatly reducing the load on the original blockchain.
However, Bitcoin eventually bounced back and in recent times, has seen tremendous growth in terms of factors, such as price and number of daily transactions.
While Bitcoin remains the king of cryptocurrency for now, other cryptocurrencies (known as altcoins short for alternative coins) have emerged.
Some altcoins like Ethereum and Litecoin are immensely popular themselves.
Over time, Bitcoin continued to gain in popularity, with services, such as the massive Mt. Gox Bitcoin exchange, arising as a result.
5. The Benefits Of Bitcoin
So why would anyone use Bitcoin over traditional currencies?
Though some would argue that Bitcoins high price isnt justified, theres no doubt that it has a list of benefits that give it value, such as scarcity, decentralization, anonymity, immutability, and divisibility.
Let's run through them...
As mentioned, Bitcoin is scarce.
If people continue to see it as valuable in the future, its price will further increase similar to other scarce assets like gold as new Bitcoin creation continues to decrease.
Decentralization is another benefit of Bitcoin since thousands of copies of its blockchain are stored across the globe.
This means that no one malicious actor (or group of malicious actors) is able to manipulate Bitcoin without a near-impossible amount of computing power.
With the Internet and moving of transaction history online, anonymity has largely fallen by the wayside.
Nowadays, if youre not using cash, banks and others can see how you spend your money, for better or worse.
Bitcoin restores some privacy back to the people by making transactions anonymous (aside from the addresses that Bitcoin is sent to and from as well as transaction amounts).
As mentioned, Bitcoin transactions are immutable or cant be changed since that would entail changing copies of the blockchain across the world.
This prevents problems with other digital currencies like double spending.
Also, while Bitcoin supply is fixed at 21 million, since Bitcoin doesnt physically exist, it is infinitely divisible.
For example, you can have .1 Bitcoin, .01 Bitcoin, and so on and not just whole number amounts of Bitcoin. Thanks to its divisibility, Bitcoin is easier to obtain and move around than assets like gold.
6. The Disadvantages Of Bitcoin.
7. Threats To The Future Of Bitcoin.
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What Is Bitcoin? The Ultimate Beginners Guide To Bitcoin
