What is Bitcoin? If you are new to cryptocurrencies, you may have heard the word Bitcoin many times but what is it actually? Bitcoin is digital money that uses encryption to secure transactions and control the creation of new units with the help of blockchain technology. It was the first ever “cryptocurrency” created by Satoshi Nakamoto in 2008 as a decentralized alternative for fiat currency. The coin enables payments to be made without the need of a central system like a bank or a central authority. After Bitcoin, there has been a wide spread of other Bitcoin-like currencies such as Ethereum, Litecoin, Dash and till date, there are over 2000 cryptocurrencies. Who is Bitcoin’s creator? Until today, the person or group of persons who created Bitcoin remains anonymous. However, the creator named himself Satoshi Nakamoto and it is believed that he is a software engineer or developer while the name is believed to be a pseudonym. In trying to answer what Bitcoin is or what it can do, Nakamoto, through the Bitcoin whitepaper, said that:
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”
Bitcoin evangelists believe fiat currency (dollar, euro, Yen etc) is unlimited in supply and for that reason, the central bank can always print more money whenever they feel like it. Bitcoin’s total supply During creation, the total number of Bitcoins created by Satoshi Nakamoto is 21 million. As of the time of writing, almost 84% of the BTCs originally created have already been mined. This leaves approximately 3.5 million Bitcoins yet to be mined. Once miners have mined the total supply of BTCs, there is an argument the miners will rely on transaction fees. Bitcoin’s hash algorithm Bitcoin employs a hash algorithm to dictate how events happen on its platform. Bitcoin uses the double SHA-256 hash function. This function takes data with random lengths and hashes or compresses it to produce data with uniform length. For Bitcoin’s hash function, the output data is compressed to 256 bits. Core properties of Bitcoin
Irreversibility: Because there is no central institution when it comes to the blockchain if transactions are made to a specific address, it cannot be reversed. Not even Satoshi Nakamoto or the president has the power or capacity to reverse a transaction that has been made. Therefore, if a hacker gains access to funds in an account, or if Bitcoins are transferred to the wrong address, the funds are gone.
Fast: Sending Bitcoin is very fast thanks to the blockchain. When transactions are made, the funds get reflected almost instantly on the receiving address. This is one of the properties that makes Bitcoin better than traditional fiat currencies.
No permission needed: With Bitcoin, no permission is needed to transfer any amount of funds from one wallet to another. Also, there are no borders with bitcoin transactions. Therefore, from the comfort of your living room, no middleman is needed to send Bitcoins to another nation all without the need for authorization from anybody.
Secure and Anonymous: With no ID cards necessary to create or own an address, this makes sending and receiving Bitcoin anonymous. Each Bitcoin address consists of 30 characters in public keys. However, the private keys keep the funds secure and are not to be shared with anyone. The powerful cryptography makes Bitcoin very secure.
Bitcoin’s Consensus mechanism Discussing Bitcoin is cannot be complete without briefly looking at how the Bitcoin blockchain reaches a consensus on any given block of data or transaction. The Bitcoin blockchain uses a Proof of Work (PoW) consensus algorithm. This algorithm dictates that those validating transactions prove they are the ones who have actually done the work. The PoW algorithm makes the mining process to consume a lot of electrical power and requires specialized equipment.
Methods of owning Bitcoins
Bitcoins can be owned via various methods with the primary method being mining BTC while other methods may include buying them via an exchange, getting them as payments for goods and services or buying them via online marketplaces. Also, it is very important to have access to an internet connection on a PC or mobile device as a PC is needed to either obtain a Bitcoin address, store Bitcoins or mine Bitcoins. The obtained BTCs are then being stored in an online Wallet which then gives the owner the choice of what to do with the coins. This could either be used to make payments, could be sent to exchanges for trading or could be exchanged for another cryptocurrency.
Download a software on your phone or PC to set up your Bitcoin Wallet.
Get your set of Public Keys generated by your software
Buy or mine Bitcoins
Spend, store or trade your BTCs
When discussing what Bitcoin is, mining will have to crop up somewhere along the way. Unlike mining as known in the traditional setting, Bitcoin, or cryptocurrency mining refers to the validation and addition of a transaction block on the bitcoin blockchain. As we indicated before, the Bitcoin platform is like a ledger distributed across multiple computing devices. To keep the authenticity of this ledge, each device has an exact copy of the ledger. Every transaction that involves Bitcoin passes through the hands of the miners. Basically, what the miners do is taking the transaction as an input to the hash function, passes it through the function to produce a 256-bit output. If the hash output (hash output will be looked at below) has adequate preceding zeros, it’s then added as a true copy of the transaction on the Bitcoin blockchain. There are many miners seeking to verify new blocks, the first one to successfully add a new block to the blockchain is rewarded with 12.5 Bitcoins although this number is bound to decrease when the next Bitcoin halving event takes place (we shall briefly look at Bitcoin halving later on in our discussion). Every block on the Bitcoin blockchain has a header which contains things like the hash of the previous block, the protocol version, a time stamp, a Merkle Root which is a special hash which its inputs were all the previous transactions already added on the Bitcoin blockchain, among others. Below, we will look at some very important terms to know when talking about or thinking of engaging in Bitcoin mining. Bitcoin mining difficulty: BTC mining difficulty refers to how easily a miner can find the answer to the cryptographic hashes. Over the years, the mining difficulty has been fluctuation with the market. However, in 2018 the mining difficulty decreased by approximately 15% making it a bit easier to validate new transactions. The decrease has been caused by miners who have been switching off and abandoning their mining rigs due to the massive dip in the price of Bitcoin as the cost of running these rigs is above what the miner makes mining Bitcoin. Bitcoin hash power: As we continue exploring Bitcoin, let us briefly look at what hash power refers to. Firstly, hash power can also be referred to as the hash rate and is the total computing power available on the Bitcoin blockchain. The hash rate is indicated in the number of guesses a computing device needs to perform per second for it to stand a chance to validate a block. The number of guesses is measured in hashes per second or h/s. It can either be kilohashes per second (KH/s) i.e 1000 hashes per second, or Megahashes (1,000,000 hashes) per second (MH/s), or Terahash (1,000,000,000 hashes) per second (TH/s). Bitcoin halving: Recently, the question of Bitcoin halving has been trending on forums after the community learnt that the next halving event is about 2 years away. This event is hardcoded on the Bitcoin blockchain and will reduce what Bitcoin miners receive as a reward after successfully adding a block on the Bitcoin blockchain. It happens once after every 210,000 blocks have been added on the blockchain. When Bitcoin was created, miners received 25 BTCs for every successfully validated transaction. In 2016 after the Bitcoin blockchain reached 210,000 blocks, the halving even took place and lowered what the miners get as a reward for adding a new block to 12.5 Bitcoins. The next halving event is predicted to take place in mid-2020 and will halve the reward to 6.25 Bitcoins.
Other ways of owning Bitcoins
Cryptocurrency exchanges: This is one of the most popular ways to buy or own Bitcoin. There are hundreds of cryptocurrency exchanges around the world with some countries hosting dozens. The most popular and largest US-based cryptocurrency exchange is Coinbase. Coinbase is also present an operates in over 30 countries. Other smaller exchanges such include Bitfinex and Coincheck. After creating an account on a crypto exchange of your choice, buying and trading can commence within a couple of minutes to days depending on how long the account verification process takes. For the purchase of BTC in most exchanges, local currencies can be used. Buying Bitcoin from marketplaces: These marketplaces are online platforms where BTC can either be swapped for other digital assets such as Ethereum, Litecoin, Ripple and a host of other coins or the buyer can simply get in touch with a seller. An example of a platform where Bitcoin can be swapped for other cryptocurrencies is ShapeShift while other marketplaces require the seller to get in touch with the buyer directly. In such platforms, the seller posts his coin and waits for the reaction from a buyer and if his price is found interesting, the exchange can proceed. Example of such platforms is LocalBitcoins. Exchange of goods and services: One of the most important but developing methods of owning this coin is by exchanging goods and services for the virtual currency. In fact, this is one of the main reasons for which it was created and most Bitcoin evangelists can’t wait to see this a reality in the nearest future. As individuals, governments, and institutions get to understand Bitcoin and its potentials, the currency is expected to gain more popularity and get accepted by the masses. Nevertheless, it is already being accepted in many countries for payments with Japan being one of the most crypto friendly nations in the world. Many multinational companies are also accepting Bitcoin as an official payment method. Microsoft, for example, accepts bitcoin as one of the methods of payment meanwhile other companies such as the Dallas Mavericks plans on accepting Bitcoin.
Before thinking of how you can poses Bitcoin, it’s good to first think of how to store or how it is stored. Although BTC is not physically accessible, it can be stored in a wallet. Not as the one used to store fiat, but a special software wallet. However, software wallets have been associated with low security giving birth to Bitcoin hardware wallets which are said to be more secure.
As we have seen in our discussion above, the answer to what Bitcoin is can be given in so many ways depending on the aspect of Bitcoin being discussed. For example, you can discuss Bitcoin in terms of its hash function or look at Bitcoin from the consensus algorithm viewpoint or view what is Bitcoin from the perspective of the virtual currency itself. Additionally, Bitcoin can be discussed when looking at the platform that holds the cryptocurrency. In this article, we have briefly touched on the Cryptocurrencies from all possible perspectives to help you gain a general understanding. What is Bitcoin? Hopefully, you now can answer this question.