Bitcoin is peer-to-peer digital money allowing anyone to participate in the network without the involvement of third parties, such as banks, companies, and governments. Everyone with a computer and smart device could install a wallet and start sending value across the globe straight away. There is only 21 million Bitcoin (every Bitcoin could be broken down to 100 million satoshis) will ever exist. Let’s have a look at what is Bitcoin and how does it work.
How does Bitcoin work?
Bitcoin cryptocurrency distributed ledger is called a blockchain. The ledger contains all the transactions from the genesis block (the first block ever mined) to the last block. All transactions are included in blocks that are created from the miners (hardware machines producing hashing power) and validated by the nodes which are distributed on thousands of computers around the world and communicate with each other to prevent dishonest actors to hurt the network. When the new block (new block is generated every 10 minutes) gets created the miners are rewarded with coins called the block reward. Every new block generates a new coin which is added to the blockchain and on every 210 000 blocks this block reward getting cut in half (called halving).
When Bitcoin was released back in 2009 the reward was 50 coins. 4 years later it has become 25 then12,5 and now 6,25 which makes BTC more scarce than gold. That is the reason why some people called it a Digital Gold! The biggest problem that Bitcoin solves is the double-spend problem or preventing the spending of the transaction multiple times by its owner.
If it’s still not clear, let summarize:
1. Bitcoin Block
Block is basically where all of the Bitcoin transactions are stored. The block size of BTC is 1Mb and could include around 3500 transactions which means that the Bitcoin blockchain could handle around 6 transactions per second. Each block is created by the miners.
2. Bitcoin miner
The bitcoin miner is a powerful computer solving computational math problems to create a block and proceed with the transactions. Miners also protecting the network from a double-spend attack in case someone likes to reverse the Bitcoin blockchain.
3. Bitcoin Node
Bitcoin node is a program running on a computer. The node contains all of the BTC transaction histories and is connected to all other nodes of the network. The communication process is how nodes sharing information between and preventing 3rd parties from cheating the network.
4. Block Reward and Halving
Block reward is the process where miners earning coins for the creation of the block accepted from the network. This reward getting cut half every 210 000 blocks so the miners getting fewer coins as a reward every 4 years.
What makes Bitcoin valuable?
Everyone could use it. You don’t need special permission to start using Bitcoin. There is no need for Passports, Bank statements, Utility bills to send and checked by 3rd parties who need to decide if you are eligible to transfer money or not. Considering that billions of people don’t have passports around the world and some may need to travel miles away to the nearest bank branches just to try to send are receiving money makes Bitcoin extremely needed.
Bitcoin ledger exists on thousands of computers around the world so you could transact with anyone around the globe if the person has a BTC wallet. It is important to remember that Bitcoin exists only on the blockchain and what you have in your wallet is a private key to learn more here and, you could memorize this key, travel anywhere in the world without worrying that someone will take your coins.
Bitcoin is open-source software that doesn’t recognize, what color, race, or religion the user is. This software could be used by the most powerful governments on the planet, could be used by the richest people, and could be used by the poorest part of the human population.
4. Censorship Resistance
No 3rd parties such as governments, corporations, companies, or private individuals can stop you to make a transaction. When the transaction is broadcasted on the blockchain no authority could stop it.
Bitcoin is public and is auditable by everyone because everything is written on the leger. If you send or receive a transaction, it is there forever and if you running a node (have a copy of the leger), you trust no one but yourself.
Can governments ban Bitcoin?
As we know already Bitcoin protocol exists on thousands of computers around the world so banning is impossible. Dozens of courtiers tried to ban it over the years and they all failed. We are seeing some governments planning to invest in Bitcoin mining and some authorities changing their laws to attract companies involved with building the infrastructure around Bitcoin. Understanding that they can’t ban Bitcoin the governments and the central banks looking for a way to create their own version of cryptocurrency. Of course, if such a currency is not decentralized they just replicate their existing fiat money as they are also digital and controlled by them and the biggest plus for them could be only the efficiency.
How to get Bitcoin?
1. Mine Bitcoin
The first and probably the most difficult way is to mine Bitcoin. Since its creation, BTC evolved from CPU through GPU mining. Now you need an ASIC miner to mine Bitcoin. The industry is very competitive and if you want to get involved you need to consider many factors like electricity cost, the temperature of the region you planning to build your mining farm, political stability in the country, etc.
2. Buy Bitcoin
There are many ways that you could buy Bitcoin. This may vary in different countries around the world but is getting easier every single day as some of the banks are getting involved in the space. There are many exchanges where you could purchase Bitcoin with a credit or debit card and the fees are quite low. You could have a look at the article How to buy Bitcoin for more information.
3. Earn Bitcoin
Earning is also a good way if you want to get some Bitcoin. If you are an employee in the company probably could go and speak with your employers and ask them if they pay you some of the salaries in Bitcoin. This will probably not doing to work for everyone, but for people with small businesses, this is an excellent way to start. If you have an online business you could start to accept BTC on your website. Accepting Bitcoin for a small business also has some advantages because with this strategy you will get more customers and the Bitcoin community mostly will like to support you.
How to store bitcoin?
There are several ways you could store Bitcoin but the primary one is to store it in a wallet where the private key is in your possession and no 3rd party has access to it. There are two types of Bitcoin wallets: Cold and Hot wallets are the ones connected to the internet, such as mobile wallets and desktop wallets. They are a less secure way to store your coins. On the other side, Cold wallets are Hardware and Paper wallets where internet connection is not necessary. There are some other ways to store your coins like cryptocurrency exchanges. Unless you are not a trader there is no point to keep your Bitcoin there as they are centralized companies. They could be targeted not only by hackers but by governments as well. Before explaining the different types of wallets let’s first see how they operate.
1. Bitcoin exchanges
Bitcoin or also known as cryptocurrency exchanges are places where you could buy, trade, and keep your Bitcoins. Most of the exchanges we are using today are not a very safe method for keeping our precious Satosies. They operate the same way banks do and you don’t own our private keys. Over the years many exchanges got hacked and many people lost their coins. However, things are getting better with the regulation we are seeing in some jurisdictions and also there are some reliable decentralized exchanges (DEX) in existence today.
2. Mobile wallets
Mobile wallets are mobile applications where you could store your Bitcoin and hold your private keys. This is a more secure way to store your coins than exchange. The negative here is the constant connection with the internet. The best use case of a mobile wallet is for shopping on high street, or when you are out with friends for dinner in a restaurant, or you like to pay for coffee in the coffee shop, so you could keep a small amount of BTC in your mobile wallet.
3. Desktop wallets
Desktop wallets are similar to the mobile wallets where you need to install the wallet but this time on your desktop computer or laptop. They are more secure for storing your keys than mobile wallets as you don’t need to trust 3rd parties. The problem with the desktop wallet is if your computer is infected with a virus you could lose everything.
4. Paper wallets
A paper wallet is generated from a website and should be printed out on a piece of paper. It contains the public and the private key so if you have a printer is very easy to generate one. Paper wallets have been very popular a few years ago and still many people using them nowadays. They are still one of the safest ways to keep your Bitcoins safe but there is also a learning curve if you want to do it the right way.
A hardware wallet is a physical, electronic device that stores the user’s private keys. As such,
hardware storage is a kind of cold wallet and is considered one of the most secure alternatives.
These wallets have considerable advantages over standard software wallets. The private keys are
often stored in a safe area of a microcontroller and cannot be extracted out of the device. They are
immunized against computer viruses that can steal from software wallets.
What is a Bitcoin wallet?
The wallet is the place where you can send or receive a Bitcoin transaction and store your coins. BTC wallet is a software program storing private and public keys. To send a transaction your wallet uses the private key to sign the transaction. In case if you want to receive Bitcoin you need to share the public key. It is important to know that your wallet stores only the keys (public and private) and Bitcoin is stored on the blockchain and anywhere else. Most of the wallets we are using now are HD wallets or Hierarchical Deterministic wallets. They are able to generate multiple keys, addresses, and support different cryptocurrencies.
What is Bitcoin Public and Private Key?
Bitcoin public and private keys are the strength of letters and numbers mathematically related to each other and asymmetrically generated. As we mentioned above the public key is for receiving a transaction and the private key is for signing the transaction. The public key is generated by the private key which is a random process. Bitcoin uses ECDSA or Elliptic Curve Digital Signature Algorithm to generate the public key from the private key.
This is done by one-way hashing function conversion which is irreversible. Because the public key is generated on ECDSA they don’t have any symmetry between. The public key is a point on the elliptic curve so determining the private from the public key is not possible. The easiest way to understand what is ECDCSA with a real-world example is with your signature. When you see a document with your signature is easy for you to understand that this document is signed by you and with a digital signature signing a transaction is only possible with the private key. The private key is the most important thing you should care about the most. You should take your time and learn how to deal with it, what wallet to use, and how to keep your key safe.
Who invented Bitcoin?
Bitcoin was invented by Satoshi Nakamoto and launched on January 3rd, 2009. No one knows who actually who Satoshi is but over the years many names from Hal Finney, Charlie Lee, Shinichi Mochizuki through Nick Szabo to even Elon Musk been mentioned but there is no proof that some of them are the creator of Bitcoin. Satoshi mined a lot of Bitcoins in the early days and his holdings are around 1 million coins.
The identity of Satoshi Nakamoto could easily be proven by making or signing a transaction from a genesis block of BTC as he is the one who mined that block. Many people are speculating that he or she is dead but we can’t be sure what exactly is the reason for the disappearance of Satoshi. The last time he was active was 13/12/2010. Because Bitcoin is a decentralized system running on thousands of computers around the world in which anyone can participate the identity of Satoshi is not important for the future of the project.
Interesting facts about Bitcoin
18/8/2008 bitcoin.org was registered.
31/10/2008, a link to a paper from Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list
On the 3rd of January 2009 January, an anonymous person or group of people named himself Satoshi Nakamoto mined the genesis block (block 0) of Bitcoin. The block contains the title from the newspaper The Times “ Chancellor on brink of second bailout for banks“.
09/1/2009 the first open-source client was released.
12/1/2009 the first bitcoin transaction from Satoshi Nakamoto to Hall Finney was made.
05/10/2009 BTC to USD exchange rates are first posted by New Liberty Standard, where $1 is worth 1,309.03 BTC
12/10/2009 the first exchange of bitcoin for USD. Martti Malmi (Sirius) sells 5,050 BTC to New Liberty Standard for $5
22/5/ 2010 Programmer Laszlo Hanyecz paid 10,000 Bitcoins for two delivered Papa John’s pizzas worth about $30 of the time. This is believed to be the first purchase with Bitcoin and until today is celebrated as Bitcoin Pizza Day.
7/2010 Ross Ulbricht started the development of Silk Road
15/08/2010 184 billion bitcoins were generated in a transaction and sent to two addresses on the network because of the inflation bug. Later a new version of the bitcoin protocol was released following buy network fork and the generated Bitcoin erased.
13/12/2010 last time Satoshi Nakamoto was online at www.bitcointalk.com
15/6/2011 WikiLeaks announced the acceptance of Bitcoin.
We hope that you now have a broader understanding of what is Bitcoin and how does it work.