Bitcoin: What is it? A simple guide for beginners

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Bitcoin (BTC) is by far the best-known digital asset with the largest trade volume. 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.

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.

Check out our video explaining Bitcoin in a nutshell:

Bitcoin in a Nutshell

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.

Bitcoin mining farm
Bitcoin mining farm

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:

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.

2 COMMENTS

  1. Thanks Michael. Somewhere along the way the lines of decentralized became blurred. People are watching and waiting for governments and regulatory bodies to determine the fate of what was once governed by no
    one. Now taxation, regulations laws etc. are being created by self appointed authorities. We wait and hope for the conventional investors to dump trillions into crypto. It will NEVER happen unless they can apply the same rules and regulations that created the circumstances (housing market collapse) that inspired its creation! How ignorant is that. We seek permission from the very institutions we are fighting against. Maybe I am just an ignorant old man but this makes absolutely no sense to me.

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