What is Bitcoin and How Does it Work?
WHAT IS BITCOIN AND HOW DOES IT WORK?
What is Bitcoin and how does it work? Bitcoin is the world’s first widely adopted cryptocurrency. It is a decentralized digital currency that allows peer-to-peer transfers, free of intermediaries such as governments and banks, utilizing the underlying technology of blockchain.
What does that mean? Let’s break it down so you can brag to your friends that you are ‘lowkey’ Satoshi Nakamoto.
The term ‘Decentralized’ means it isn’t centralized (duh) – in the financial sector, this means that there is no ‘central’ governmental body watching over and ultimately – dictating what the value of the item is.
The phrase ‘digital currency’ is exactly that, a digital or an electronic method of currency.
Gone, or mostly gone, are the days where humans continue to use physical cash to purchase goods and services. As technology advances, so must our method of paying for said technology.
Will you pay for an international delivery from Amazon with cash? Probably not.
But you could use digital currencies – say, Bitcoin to purchase these items instead.
‘But why is Bitcoin so popular now?’ you may be asking.
Well – to be perfectly blunt and honest, it’s been around since early 2009 as the first ever cryptocurrency and it further expanded when it surfaced in mainstream media, like when a certain pizza purchaser traded 10,000 Bitcoin for two pizzas from Papa Johns.
FUN FACT: 1 Bitcoin can buy you over 1,400 Pizzas – Now, imagine what 10,000 Bitcoin would get you!
If we use our current value of Bitcoin, we can easily say he definitely overpaid for that cheesy delight. Back then, the price of Bitcoin wouldn’t even scratch the surface of a cent – however, due to the increase in use across the world, the value of this lovable digital currency also skyrocketed. This has resulted in Bitcoin being the world’s largest cryptocurrency by market capitalization.
But of course, this is merely the beginning.
Just as Anakin Skywalker paved the way for Luke Skywalker, Bitcoin paved the way for over 18,000 other cryptocurrencies including Ethereum, Solana and Dogecoin.
In 2008, a mysterious entity known as ‘Satoshi Nakamoto’ and Martti Malmi founded Bitcoin when they registered the domain Bitcoin.org.
The fundamental creation of Bitcoin was to counteract the unfortunate events of the recession back in 2008. Of course, back then – when stocks plummeted, so did the financial well-being of millions of families.
Nakamoto did not stand for this and wanted to create a decentralized exchange where there was no manipulation from larger governmental bodies. Later in 2008, a white paper authored by Satoshi Nakamoto was posted on a cryptography mailing list, metzdowd.com. Titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, the post wrote “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party”. Here it detailed the fundamental advantages and main properties of Bitcoin.
In early January 2009, not too long after this white paper was published, the first ‘Bitcoin Block’ known as ‘Block 0’ or the ‘Genesis Block’ was mined. With a little nod to the 2008 recession Satoshi Nakamoto embedded a secret message within the genesis block – “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
Block 0 was monumental as it started the rise of this decentralized financial system – it was the start of the Bitcoin blockchain.
Since then there have been over 740,000 mined Bitcoin blocks.
Is this Blockchain made out of actual blocks?
No, silly – we don’t use legos here.
However, we do use an electronically distributed ledger that continuously records transactions in a chronological order. Within this ledger, copious amounts of data is stored as blocks which are ultimately linked through extremely precise codes (aka cryptography) in a 256 bit number – this is ‘tech-talk’ for an extremely long code (256 decimal places to be exact).
It’s like having a ‘leaderboard’ that everyone can see, everyone can vouch for each other’s statistics and it happens in real-time from ‘day dot’. From here – you can tell that no specific entity is controlling the integration of this data, rather it’s the actions of the whole network. This information is updated fairly quickly, currently it takes around 10 minutes for each Bitcoin block to be mined.
With this enormous amount of data being integrated – you might be thinking, what’s the point of all this data, all this knowledge?
To give back the power to the people as we all know Scientia potentia est (Knowledge is Power) and considering the destructive recession back in 2008, why would we want a ‘Peer-to-Peer currency exchange’?
The data fostered from Bitcoin blockchain allows for transactions to occur between individuals across the world. As people partake in these transactions, it bolsters the strength of the blockchain, thereby increasing its value and increasing its longevity across society.
Of course, besides the usual transactions there are also Bitcoin miners who attempt to verify each transaction by solving the previously mentioned precise codes. These codes are solved through the SHA-256 hashing algorithm which encrypts each data on the blockchain to aid that extra oomph of security.
WHAT IS BITCOIN MINING?
Back in the day, ‘mining’ would be the process of digging into the ground with a pick-axe and discovering precious metals through an uncanny amount of labor.
These days, the labor is still there – but instead of digging, we’re using computers!
In the beginning, you were able to mine bitcoin using nearly any computer. However, since its popularity and the number of miners have increased to a competitive level, so have the chances of individually solving the problem and reaping the rewards.
Have no fear – ASICs are here!
Most Bitcoin miners now use specialized hardware called Application Specific Integrated Circuits (ASICs). These can be quite expensive and have high running costs, such as electricity, cooling systems, and maintenance – But, if done right it can be quite profitable.
But where does the new bitcoin come from?
New Bitcoin is found in what’s called a ‘block’, a new, undiscovered portion of the blockchain. In order to receive the Bitcoin reward, a miner, like the ASIC, is solving math problems.
Except these are not the same type of math problems you did in grade school, or even in your university-level math class for that matter. They are intensive, complex math problems that your miners are designed to solve.
Once the problem is solved, and a new block is discovered, Bitcoin rewards are given to those that took part in its discovery.
In 2009, the reward for discovering a new block was 50 Bitcoin. This halves every 4 years, and currently a miner will receive 6.25 Bitcoin for every block they mine. When the next bitcoin mining halving occurs in 2024, the rewards will halve to 3.125 Bitcoin.
HOW TO BUY BITCOIN?
You know what? Not everyone could be like Steve from Minecraft and we get it – maybe Bitcoin mining isn’t up your alley, but simply buying Bitcoin could be.
Purchasing Bitcoin (or any cryptocurrency for that matter) is as easy as ordering take-out from UberEats. As a matter of fact, you don’t need to even purchase a whole Bitcoin, you can purchase a fraction of these cryptocurrencies, or even a dollar’s worth.
There are a few ways to buy Bitcoin, but the cheapest would be through a cryptocurrency exchange such as Kraken Pro, Coinbase, and Crypto.com.
In all cases, you need to register and set up an account, you are then able to transfer your fiat to your exchange account using bank transfers, debit card, or credit card. Once your account is funded, you can spot-buy Bitcoin at that specific price on their exchange.
Some alternative methods to buying Bitcoin, and cryptocurrencies in general, are through using third party providers like Simplex, Moonpay, Wyre, and Transak. These are incredibly easy to use for beginners, but there are more fees involved too.
Just keep in mind that each method has its own pros and cons, so do your own research and find out what’s best for you!
HOW TO USE BITCOIN?
Bitcoin was designed to be a decentralized digital currency that allows peer-to-peer transfer free from any third parties.
In order to use Bitcoin as a payment method, you’ll first need to have a cryptocurrency wallet. Your wallet holds the private keys to the amount of Bitcoin you own on the blockchain.
Bitcoin can be used to pay for a product or a service if the merchant accepts Bitcoin. Luckily, some stores offer their wallet address as a QR code where you can send funds to – thereby preventing any unfortunate payments to random strangers.
In cases where you’re paying a very large amount, it’s highly recommended to transfer a small amount first to err on the side of caution.
Another option is to use the Lightning Network which is faster and cheaper than the main Bitcoin blockchain for everyday purchases.
COLLATERAL FOR A LOAN
As you can already tell, Bitcoin is the ‘way of the future’ – and because of this, it’ll continue to be on the up-and-up as it gains popularity and use in the public.
This means that your Bitcoin can function as collateral for a loan on crypto exchanges and other decentralized finance applications. Most of the time these loans use overcollaterization, which essentially means you must supply more value than the amount you want to borrow.
There will only ever be 21 million Bitcoin in existence, creating scarcity as demand rises. As long as the value holds over time, it will be a hedge against inflation.
What are the risks of investing in Bitcoin? Well, the cryptocurrency market is volatile and can see daily swings of 5-10%, to huge 90% crashes in a bear market, to 1,000% increases in a bull market.
So it is highly recommended to do your own in-depth research so you understand the risks of investing in Bitcoin.
And please, for the love of God, don’t trust anyone who says they know what the Bitcoin price will be tomorrow, next month, or even next year – no one knows!
But with historic data and technical analysis we can provide educated guesses.