What is Bitcoin ?
Updated: Nov 1, 2020
We all heard about it...and it's even one of the most popular searches on Google lately but what is it ? Here is an overall explanation trying to be fair with beginners.
Not that new ...
Seems like we just heard about it, or it's a new thing for the past 2 or 3 years but it has been around for now 11 years ! It was created in 2009 by an unknown person called Satoshi Nakamoto. The whole concept from the beginning was to cut the middle men, and in that case, the banks ! Bitcoin can be traded on major exchanges like you would trade stocks but you are not only buying or selling Bitcoins like if you'd buy currencies (USD, EUR,GBP) you are actually purchasing a technology that can be used yes in making payments but also for other purposes.
So what is it? How does it work?
Bitcoin is very simply a decentralized digital currency. In other words it's kind of like virtual cash or gold and it's transferred person-to-person which means that there's no bank or government control or even prerequisites to be able to own or transfer Bitcoin and the symbol for Bitcoin looks like the B in the above picture with little hashes through it or "BTC" kind of like USD for US dollar. Bitcoin is a crypto currency and crypto currencies have been around since the 1980s but there was a major problem called "double spend". All of the prior digital currencies or crypto currencies have had the problem where if somebody spends a unit of that currency it's been very difficult to tell if it's already been spent and that's the biggest problem that Bitcoin has solved and why it has gained so much popularity.
Peer to Peer Network and Idea
The way that Bitcoin avoids double spend is through its distributed peer-to-peer network which works kind of like bit torrents. The first Bitcoin was actually issued in 2009 by Satoshi Nakamoto and this is believed to be a pin name and nobody really knows who started Bitcoin so there will actually only ever be 21 million bitcoins in circulation. In 2009 we had the first bitcoins that were released and there is a predetermined amount of bitcoins that are released every 10 minutes so over the years this will continue to happen until the year 2140.
Bitcoin is divisible down to the eighth decimal place so like the US dollar is divisible to the penny or two decimal places.You can almost infinitely breakdown Bitcoin to a very very very small amount. The "Bitcoin protocol" or the "Bitcoin network" is the way that Bitcoin operates since there's no central location that is governed by any specific Country. It's very difficult and expensive to hack and there's some numbers that say to even hack the Bitcoin network for 10 minutes, it would cost around half a billion dollars...so there's a lot of trust and a lot of vetting of the protocol and the network that has happened over the past few years. It's basically controlled by the consensus of market participants so again no one government no one person or no one group actually controls the Bitcoin network which is why it's gaining so much popularity.
Why is Bitcoin and it's technology so important?
There are some aspects of crypto currencies that I think show huge prospects for really changing the world so let's look at this first fact that out of the seven plus billion people that live on the planet about six and a half billion people don't have access to basic financial and banking services like checking accounts or credit cards. In the US alone it's estimated that about eighteen percent of people don't have access to these basic financial services and Bitcoin makes it very easy for anybody without government permission or control to have access to virtual banking and I think that's really gonna change the world!
Since the 2008 financial crisis, fiat currencies like the US dollar which is backed by nothing but the trust that people have in the government crashed. You know back in the 70s the U.S were on the gold standard and Nixon took them off that standard, now the US dollar is not really tied to anything. I've always kept this hundred trillion zimbabwe dollar story as a kind of a reminder of what can happen when governments get out of control by printing too much money. In the span of than two years the Zimbabwe government essentially devalued their currency to nothing and there's a lot of people that are speculating that some of the major world's fiat currencies are going in that same direction and it's kind of scary because right now the US dollar is the world's reserve currency and we're just printing it like nobody's business.
Revolution The way that Bitcoin handles this problem is that there is a predetermined set amount of bitcoins that are going to be released over the years and what that does is that it's inherently designed to be deflationary and really controls inflation. In recent history we've used fiat currencies like the US dollar and gold as widely accepted forms of money and it's time for a change.
The 4 properties that defines money
1) It need to be broken down in decimals and divisible like the current popular currencies. You can even take gold as an example, it can also be broken down, you can have a bar or an ounce there's different ways to break it down.
2) it needs to be durable: It needs to be able to stand the test of time so if you have a bar of gold for example, and leave it somewhere, odds are it's not going to just evaporate into thin air.
3) Interchangeable : So for example, one U.S dollar is equal to the value of another U.S dollar they're interchangeable kind of like on the futures markets where people trade you know oranges or coffee or oil and gold. Each unit is equal to another unit, they're all created equal in their value.
4) Needs to be verifiable : You need a way to verify that it's real and not counterfeit so Bitcoin does a very good job of answering those four properties of money.
let's look at some other ways that there's actually value derived from Bitcoin. It is limited. Like gold on planet earth there's only a set amount of gold just like there is a limited amount of bitcoins. There will only be 21 Million Bitcoins that are ever mined just like you can only mine a certain amount of gold.
It's decentralized. So we've mentioned this there's no central government which means it's a peer-to-peer network like torrents and it can be anonymous. There are some areas for improvement when it comes to the anonymous nature of crypto currencies but for the most part it is actually anonymous. It is also transparent meaning the code in the structure on how the Bitcoin cryptocurrency network and protocol is built is transparent, anybody can go and evaluate and look at the code and how it's built and because it's been vetted by people way smarter than me for over five years. People place their trust in the Bitcoin protocol even more than they're putting their trust in their own government. I think the whole cryptocurrency movement could really change the way that world leaders, governments and people look at money. It's also very easy to buy and sell we'll talk about how Bitcoin works and how it's so easy just to move bitcoins between two people and the extremely low transaction fees, it's irreversible so merchants love it there are no chargebacks and none of the problems that you have when it comes to taking credit cards so it's important to keep in mind that bitcoin is not backed by anything tangible just like fiat currencies and not on the gold standard, not backed by anything except for the trust that people have in the Bitcoin system.
The real value is Determined by what people are willing to pay for it which is why we've seen the price of Bitcoin go up so much over the past couple of years so the demand has increased and people place value in these major aspects of Bitcoin: The lack of government control and manipulation, you know no person who is elected into office can step in and contribute to hyperinflation. How Bitcoin actually work is very simple. Let's say you take some money somebody gives you cash or writes you a check and you take that money to a bank and you deposit it into your bank account, well Bitcoin kind of works like this where if somebody gives you bitcoins they are stored in a public ledger and everybody has access to this ledger from the very beginning in 2009. Every transaction is actually recorded in this ledger and sending and receiving bitcoins is as easy as sending an email.
Security and Crypto wallets
Your coins are actually stored in wallets and you have a few different kind of wallets you can use. On your computer, on a Hardware Wallet (safest way possible) or you can have paper wallets where you physically write down the codes that are associated to your Bitcoin and keep it off the network (COLD) and for the lest secure,hosted online (hot wallet). So there are companies that are actually providing hosted wallets where you can access your coins from anywhere in the world and that's where the security risk comes in. Your Bitcoin account number is your public key so this is kind of like your account number or your email address and your Bitcoin key (or bitcoin address) is actually made up of 16 to 32 alphanumeric characters and you actually give out to anybody who wants to send you bitcoins. The private key which is your password for example you do online banking you need to know your password to log in to your online bank right well it's similar with the private key which is the password you need to access your bitcoins in the account or in that public ledger.
Mining Bitcoin You can mine. Bitcoins are released every ten minutes or so there are miners out there who actually mined for these bitcoins and it works like a lottery system where the more CPU power that you have and the more that you mine the better your odds are of getting these bitcoins for free and the way that you do that is by running software on your mining machines (you can build your own). It is though increasingly more difficult ... the more competition there is the more computing power it takes to actually mine for these bitcoins and more cost is associated with hardware you have to buy and really the more electricity you have to pay for. So before you consider to start mining you really have to do a cost analysis to figure out if it's gonna be profitable or not.