Bitcoin (BTC) is by far the best-known digital asset with the largest trade volume.
Bitcoin is both a currency and a technology. At its core, Bitcoin is peer to peer electronic money with one express objective. The objective is to replace the intermediation and trust vested on centralised financial institutions. It aims to be a replacement for traditional fiat currency and an innovative settlement layer for processing transactions without requiring a third party.
To learn more about Bitcoin and how to get started with cryptocurrencies, check out our beginner’s guide series.
Bitcoin is Decentralized
Before Bitcoin was invented, the only way to use money digitally, it was through an intermediary, like a Bank or PayPal. Even then, the money used was still government issued and controlled currency. However, Bitcoin changed all that by creating a decentralized form of currency that individuals could trade directly without the need for an intermediary. Instead of trusting a centralized bank to process transactions, we would trust a Protocol that is run by different individuals all over the world.
Each Bitcoin transaction is validated and confirmed by the entire Bitcoin network. There is no single point of failure, so the system is virtually impossible to shut down, manipulate, or control.
Main Features of Bitcoin
- Decentralized control: There is no authority that controls Bitcoin. All transactions are visible on a public ledger called the blockchain.
- Bitcoin is a store of value: You can use Bitcoin to purchase goods and services.
- Security: Bitcoin has never been hacked.
- Open source: the Bitcoin source code is publicly available and community members can update it.
- Public: All transactions are visible on the Bitcoin blockchain.
- Pseudonymous: You can use a pseudonymous identity to make Bitcoin transactions. It is not truly anonymous because the transaction addresses are visible on the public chain.
- Limited supply: Bitcoin has a limited and predictable supply.
How do Bitcoin transactions work? How do you earn Bitcoin?
The Bitcoin network is essentially a decentralized public ledger that relies on the combined computing power of its community. Bitcoin works as follows:
- Bitcoin transactions are unconfirmed until they are updated on the bitcoin transaction ledger. This is called the blockchain. This is a decentralised public ledger, i.e. everyone can update it and no one person controls this ledger.
- People can help update this ledger by using specialised computers. The computers will generate random numbers. The aim is to generate the correct answer to the mathematical problem generated by the system.
- The computer that guesses the solution gets to decide which of the pending bitcoin transactions will be grouped together into a block.
- The block and the answer to the mathematical problem is sent to the bitcoin network. This is a network of computers.
- The bitcoin network will check if the answer is correct. If it is, they will update their copies of the bitcoin transaction ledger with the block you had created. The process is then repeated. Hence the name “Blockchain“.
- The computer which guessed the correct number receives an award of Bitcoins and the transaction fees for the transactions in the block.
This process is called mining. This is because you mine (earn) Bitcoins through helping update the bitcoin transaction ledger.
Where are Bitcoins kept?
Bitcoin owners store their coins using wallets. You do not actually hold your Bitcoins, rather you hold a private key that allows you to access your Bitcoin address i.e. your public key.
Click here to learn more about private keys and public keys.
Wallets can come in several major forms:
- Hardware wallets: Physical offline devices which store your private keys. Click here for our wallet reviews and tutorials.
- Mobile wallets: These are mobile phone applications e.g. the Enjin wallet. Click here for a review of the Enjin wallet.
- Online wallets: Run on a cloud server and so can be accessed by multiple computers. Most common online wallets are cryptocurrency exchanges. Check out our review of the top exchanges.
- Paper wallets: A printout which contains your public and private keys. Though the most rudimentary, it is the safest method of keeping your cryptocurrencies safe.
- Desktop wallets: They are downloaded and installed onto your computer.
Who is Satoshi Nakamoto
It is the invention of a “Satoshi Nakamoto” in 2008 as a decentralised virtual currency that runs on blockchain technology. We still do not know the true identity(ies) of Satoshi Nakamoto, though there are people who claim to be him.
What’s the future of Bitcoin?
Bitcoin is getting more adoption for payments across the world. At the moment, many stores and merchants accept payment in Bitcoin. The list of merchants are increasing by the day.
Bitcoin is even usable with some credit and debit cards.
However, Bitcoin is not as easily scalable as most other subsequent coins. Accordingly, a future where Bitcoin replaces traditional currency is highly unlikely.
However Bitcoin will remain an excellent Store of Value (SOV). This is because of its immutability and periodic price appreciation. That said, the question of regulatory policies across the world may be the actual obstacle to Bitcoin’s long-term success.