What Is Bitcoin?

Beginner Guides
January 3, 2018 by Matt Cummings
306
Introduction to Bitcoin  Bitcoin (BTC) is a decentralized digital currency that operates free of banks, governments, and any third parties. A bitcoin itself is simply a piece of code that represents a store of value. Bitcoin operates on a decentralized network known as the blockchain that acts as a public ledger, keeping track of all
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Introduction to Bitcoin 

Bitcoin (BTC) is a decentralized digital currency that operates free of banks, governments, and any third parties. A bitcoin itself is simply a piece of code that represents a store of value. Bitcoin operates on a decentralized network known as the blockchain that acts as a public ledger, keeping track of all transactions in real time. The nature of its design makes it so that bitcoin is not owned or operated by any single entity. 

Bitcoins are created through a process known as “mining”, which involves participants in the network running the Bitcoin protocol who verify that transactions are legitimate by competing to solve cryptographic equations using their computing power. This is similar to your bank verifying that it is, in fact, you who is transferring money, only it’s done completely through mathematics and therefore it is extremely reliable. Bitcoin transactions are verified, completed, and transmitted without the need of any third party outside of the blockchain, creating a trustless transaction between two semi-anonymous parties.

The first instance of what is now known as the Bitcoin protocol was conceived in 2008 by a Satoshi Nakamoto (which has since been assumed to be a pseudonym). His idea was to create a digital store of value that operated completely independently of any other authority that was safe and mathematically protected.

Bitcoin’s infrastructure relies on three key elements: Limited Supply, Immutability, and Prevention of Double-Spending. In regard to limited supply, while new bitcoins are being created every day, the circulating supply of bitcoin is finite over time as seen below.

As more Bitcoins enter the market, it becomes more difficult for bitcoins to be mined or rather created. A more detailed explanation of Bitcoin mining and creation can be found here in “Basics of Mining”. Because Bitcoin’s max circulating supply is set 21 Million Bitcoins, the price fluctuates relative to the demand for the coins. As they become more valuable and rarer over time, their price will be locked in an ever-increasing march upward; as demand increases so will the price.

Bitcoin is also based on the principle of immutability. Transactions cannot be reversed as there is no central control that can authorize the return of funds to original accounts, and once the Bitcoin is in the recipient’s wallet, that is the end of the line as far as that transaction goes.

The final piece to the complex puzzle of Bitcoin lies in its prevention of double spending. A simple example would be to assume that you possess one bitcoin (1 BTC) in your Bitcoin wallet. You have agreed to pay one of your friends 1 BTC for his couch, and you have also agreed to pay another friend 1 BTC for his TV. You then attempt to fraudulently send both of them 1 BTC, a balance your wallet does not possess. Bitcoin prevents you from being able to do so by recording confirmations on the blockchain. Whichever transaction you sent first, will be confirmed on the blockchain and executed. The second transaction, however, will be immediately denied, as your wallet does not have the funds you tried to double spend. The first successful transaction will be added to the blockchain and updated on the distributed ledger across the entire network. This effectively prevents anyone from successfully double spending because, in order to do so, you would have to change your wallet balance to cover both transactions, which would require you to change the entire history of the bitcoins throughout their time changing hands on the blockchain. A process that intense would require the processing power of a quantum computer to carry out. Thankfully, we are still probably decades from functional quantum computing so the blockchain remains, for all intents and purposes, hack proof.

Bitcoin offers the world a first step into the promise of a new era of global finance, powered completely by cryptocurrency and blockchain technology. The ability to hold wealth free from any outside influence of a government or other centralized authority. And with the technology constantly evolving and improving, bitcoin has already begun to alter how people think about money, privacy, national sovereignty, and even democracy itself. Decentralization and trustless transactions could even help spark a revival of the ancient Greek tradition of direct democracy, by distributing power evenly to every individual on the network (or nation), each with the power of the vote.

From the first coin mined on the Genesis Block, to a valuable, versatile, revolutionary technology that is starting to redefine society, bitcoin’s legacy continues to help drive this industry into the mainstream.

To learn how to buy your first Bitcoin, visit our buying guide “How to Buy Bitcoin

 

 

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