What is Bitcoin – The Newbie Guide to Bitcoin

In this article, I tackle the what is bitcoin subject. It will be and ongoing article with regular updates and additions. Meanwhile, you can refer to our blockchain glossary if some terms are unclear to you. Hope you enjoy and don’t forget to share it if you find it helpful!

What is Bitcoin – The Definition

Bitcoin is a cryptocurrency or electronic cash system that is operated in a peer-to-peer network.

Because it runs on a peer-to-peer network, it does not subject to control of any central system and therefore it’s untraceable to a certain degree, and anonymous. Furthermore, in majority of cases, bitcoin transactions can’t be taxed by any government, unless you withdraw the funds by converting your bitcoins into fiat money.

That anonymity and security of transactions are among the things that make bitcoin popular and valuable.

Who Created Bitcoin?

The idea to create a secure electronic currency was first discussed among the Cypherpunk mailing list members. The first person or persons to create an actual workable system that used a database duplicated across nodes residing in a peer-to-peer network, and secured using cryptography was Satoshi Nakamoto.

Nakamoto outlined it in 2008, and implemented it in 2009.

He has never revealed his identity in real life; therefore, we don’t know the identity of the owner of the first bitcoin. He or they created the first blockchain database, and therefore were the first ones to solve the double spending for electronic currency. Nakamoto remained an active bitcoin developer until December 2010.

It is guesstimated that Satoshi Nakamoto own between 1 to 1.5 million bitcoins which, with the today’s bitcoin price, translates into roughly half a billion USD.

Here’s a quick breakdown to back this up as Sergio Demian Lerner pin points a single computer that have mined more than 1 million bitcoins in the very beginning of the bitcoin existence.

How Does Bitcoin Work?

When users send or receive a payment in bitcoins, network nodes verify that transaction and then record it in a shared public ledger called a blockchain. Since the network nodes and the blockchains do not have a single administrator or repository, bitcoin is referred to as a decentralized digital currency.

The network nodes are simply the computers within the peer-to-peer network that host the blockchains. The blockchain is capable of recording all transaction without the intervention any person. The nodes that run the bitcoin software maintain the blockchain.

When a transaction is made, it’s immediately broadcasted as “payer A sends B bitcoins to Payee C” to the bitcoin network. In our example below, the user A sends the B amount of 0.25 bitcoins to the user C. The coins are being transferred from wallet A to wallet B.

Once the other nodes get the broadcast, they validate the transactions, and if they are correct, they record them in their own ledgers. They then broadcast the ledger additions to the network. That way, each node in the network keeps a whole copy of the blockchain. It’s important that each node retains an updated copy of the blockchain to be ready to independently verify incoming transactions to avoid approving multiple spending of Bitcoins.

The Bitcoin network miners create a new group of approved transactions about six times per hour, which is referred to as a block. The block is then added to the blockchain and the rest of the network nodes publish it.

While the records in convention ledger show currency that has been transferred and exists apart from it, records in a blockchain can contain unspent Bitcoins from a transaction. That must happen because every input is an unspent output of a previous transaction; otherwise, the network nodes will treat it as an invalid input.

The Mechanics Behind Bitcoin

Bitcoins are used to transact business just like any other currency. You can use it to buy products and services. It differs from traditional currencies because you don’t get to keep it in your wallet. It’s kept in the blockchain.

What you keep in your bitcoin wallet are the credentials or digital signatures that you use to claim your bitcoins. When you pay someone with your bitcoin, the transaction will not be accepted as an input into the block if it does not have your digital signature. However, that also means that once you transfer a certain amount of bitcoins, you cannot reverse it because your digital signature will change to reflect that transaction and be shared in all nodes. The same will happen to the receiver of those bitcoins.

A single transaction can have multiple outputs that allow a person to make multiple transactions at once. When specifying the value to be transferred, it can be in any number of multiples of the Satoshi as long as it does not exceed the value “held” in your bitcoin wallet. You cannot make an overdraft.

When what you have paid exceeds the intended value you were required to transfer, a new output is created which transfers the balance back to you or makes it available as a fee for miners. Once the transaction gets verified, it’s recorded in the blockchain.

When there are Satoshis not accounted for in the outputs, they become the transaction fee, which is optional. You can choose to keep the fee; however, it’s important to know that miners will prioritize transactions with higher fees or at least those that pay some fees.

The amount of fees is determined by the size of the transaction processed. The size of the transaction depends on the number of inputs generated during that transaction. More inputs mean more work for the miners. Priority is first given to older unspent inputs.

Miners use special computing devices that run the Bitcoin software to keep the blockchain consistent, complete, and incorruptible. They achieve that by collecting and verifying newly received transactions from the network, and grouping them to blocks.

Using the hashing algorithm SHA-256, they assign each block a cryptographic hash of the previous block, which links it to the blockchain, and gives it a name.

The mining is made difficult by the fact that each new block can only be accepted into the network if contains proof-of-work. To get proof-of-work, miners must get a number called a nonce. The nonce has a numerical value that when hashed with the block’s content, the result will be numerically smaller than the network’s difficult target.

The proof-of-work is therefore easy to verify but hard and most important, time consuming to achieve. The network adjusts target with reference to the latest network performance such that it keeps the number of new blocks created to less than one every 10 minutes.

Advantages of Bitcoin

Benefit 1: Limited Supply of Bitcoin

Unlike conventional currencies, bitcoin does not suffer from inflation due to printing of currency without proof of equivalent work, and other poor economic policies.

In fact, the bitcoin code originally written by Satoshi Nakamoto limits the number of bitcoins that will ever be created to 21 million bitcoins. Miners are expected to hit that target by 2140.

After that, miner will only be rewarded through transaction fees only. Currently, miners share the reward for creating a new block that is successfully added to the blockchain or get paid the processing fees.

Furthermore, the reward halves after every 210,000 blocks. At the moment, the reward stand at 12.5 bitcoins for every new block created.

Benefit 2: Good for Investors, Speculators & “Hodlers”

However, from the economical point of view, this indicates that bitcoin could reach extreme highs in terms of its price. That’s due to the basic law of supply and demand—if demand outgrows supply, the price will increase.

Now, imagine the scenario that bitcoin becomes the number one world currency which is quite likely to become reality in the next couple of decades.

There are about 7.5 billion people in the world. If you were to divide 21 million bitcoins by 4 billion adults, it equals to 0.00466666 BTC per adult person. How much do you think 0.0046 bitcoin will be worth then?

Blockchain experts such as Trace Mayer predict that bitcoin could be worth as much as a few million dollars in due course.

Benefit 3: Bitcoin is Decentralized

Bitcoin allows you to send money anywhere in the world to anyone who accepts bitcoins. General transacting is cheaper because there are no third-party transaction charges. However, you can add some fees to get a faster processing.

There are no restrictions, controls, delays, or central authority controlling bitcoins. For example, Paypal charges transaction fees that are much higher than you would have otherwise paid on the blockchain. But there’s a small difference between keeping and sending your money on the bitcoin network and through third-party services such as Paypal. The difference is:

Benefit 4: You’re Actually Safe

Your personal information is not tied up with the transactions you make. That protects your privacy when trading online and prevents identify theft. You can view all bitcoin transactions ever made on the blockchain over here, but you won’t be able to see a single name of all the senders and receivers.

People will only see your public address and what’s on it in terms of your bitcoin balance, rather than your private information. It’s like a transparent wallet but invisible owner.

Nobody can steal your bitcoins unless they get hold of your private key or hack a third-party service where you keep your bitcoins on. That’s why we recommend getting a hardware wallet such as Ledger Nano S to store large amount of bitcoins, instead of trusting online wallets or exchange platforms.

Benefit 5: No Chargebacks

Bitcoin carries fewer risks for anyone doing a legit business. It’s not possible to reverse a bitcoin transaction, or claim you didn’t authorize it, which is a plus when doing business online where crime is potentially high. Bitcoin solves this problem.

Benefit 6: The Best Developers

Bitcoin is being coded by the best developers in the world (apart from a few exceptions such as Vitalik Buterin, Charlie Lee etc). If one of the smartest groups of people in the world believe in this concept, why shouldn’t you?

This, and the fact that bitcoin was the first cryptocurrency, positions it to be the most popular and “cared for” digital asset that exists today. Because of these two simple facts, I believe it is safe to say that bitcoin is here to stay and eventually take over the role of our current monetary system.

The worry of bitcoin face palming the floor is the old tale of the most diehard skeptics who still tend to wrongly share their views on why bitcoin is a scam. But in all fairness, these are the people that will regret the most that they didn’t jump on board and rode the bitcoin wave earlier when it was still affordable to get in.

Benefit 7: What Boom?

BTC has not even come close to peaking which is the number one reason for the green light to invest in this asset. Bitcoin will reach its peak when it becomes the world’s currency.

But before that happens, it will still reach extreme prices in the next 5-10 years.

Benefit 8: Bitcoin Solves Real-life Problems

Bitcoin is already solving real-life problems when it comes to our flawed monetary system.

People have gone from the commodity money (paying with physical gold and silver) to political money (fiat) and it’s about freaking time we go to digital money.

We have moved on into the information age, upgraded pretty much everything else in terms of the technology we use (electric cars, mobile phones, internet, solar energy etc) but we still use money the same way we used it 50 years ago. And let me tell you—not taking action about this is taking a bold action in the wrong direction.

Here are three simple examples of the monetary problems:

Who wants to own, in their right mind, a $20,000 credit card and trust the provider to keep their personal information safe. And if they don’t do that, you will spend another 3 months going back and forth trying to wipe your fraudulent profile because somebody had used your card to buy an iPad. You wouldn’t have had this problem on the bitcoin blockchain now, would you?

In more than 20 countries, the retirement funds have been nationalized. This means that these governments used up perhaps your money to fund the mistakes made by incompetent political decision makers. They didn’t ask anyone’s permission to do that, they just did it whether you like it or now. Now, would that be possible on the blockchain? Of course not.

I’m not sure about USA, but in the UK we have this organization with a mysterious abbreviation of FSCS. Imagine this: if you had £100 million in your British bank account, and for whatever reason this bank went bankrupt, you would have been compensated with $75 thousand. What a great deal. Better this than nothing, right? What if you kept all of it on the blockchain? Well, you know where I’m going with this.

These are just a few reasons why it’s worth taking a look at investing in bitcoin and the concept behind it. It’s just simply a ton better than what we’ve been using since the world war II.

Conclusion

Bitcoin is a digital currency that was designed to solve problems common with centralized currencies.

It is secure and safe to use when dealing with strangers because it establishes trust without a third-party “middleman”. Each transaction you make is recorded in a public ledger called a blockchain.

The blockchain is public and it’s updated about every 10 minutes across all nodes in the Bitcoin network. Inflation and government control adversely affect conventional currencies.

Such factors don’t affect bitcoin; it will therefore continue to offer a better and reliable way to carry out transactions online reliably and securely.

What are your thoughts?