What is Bitcoin? [A Comprehensive Guide to Understanding Bitcoin]

What is Bitcoin? [A Comprehensive Guide to Understanding Bitcoin]

By Mr.CryptoWiki | cryptocurrency | 16 Sep 2019


Defining Bitcoin can be difficult and confusing as it is such an innovative and disruptive thing. It would be simple if Bitcoin was just a currency but it’s so much more than that. Bitcoin is a new form of money, it’s a store of value, it’s a technological innovation, and a philosophical monetary movement. 

There is so much to Bitcoin that makes it unique and special, which is why it is the most popular and highly valued digital currency. In this article I divulge what makes Bitcoin so special, I explain what it is, how it works, where to buy it, and so much more. If you want to truly understand what Bitcoin is, continue reading and be enlightened. 

What Is Bitcoin?

Bitcoin is a cryptocurrency, a digital asset that’s designed to work as a medium of exchange. It’s a new kind of money (electronic cash) and an innovative payment network that operates with no central authorities or banks. Bitcoin is a decentralized digital currency that can be sent from user to user on the peer-to-peer (P2P) Bitcoin network without the need of third-party intermediaries such as banks or payment processors. 

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Bitcoin essentially empowers individuals to become their own bank and take total control of their finances. This is because Bitcoin is decentralized, meaning that no government or central authority can take away your Bitcoin, freeze your transactions, or control who you transact with or where you transact to. It’s a global digital currency in which everyone can use, regardless of nationality or identity.  

Bitcoin is a Currency and Method of Payment

In addition to Bitcoin empowering people with control of their finances, it can also be used to pay for things electronically, if both the buyer and seller are willing to. Major companies from all over the world are accepting Bitcoin payments including Wikipedia, Microsoft, Expedia, Overstock, AT&T, Gyft, Cheapair, and many more. 

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Image Source: https://pixabay.com/photos/bitcoin-crypto-currency-currency-3215559/

While there is a decent selection of merchants accepting Bitcoin payments, paying this way still isn’t very popular due to the digital asset’s price volatility, ease of use, and transaction fees. As of today, Bitcoin has yet to sufficiently scale to be used as an alternative form of payment that replaces traditional means of payment like cash or credit cards. Currently bitcoin transaction fees average around $1.50 to have your transaction confirmed within 10 minutes and are as low as $0.12 if you’re willing to wait an hour. This makes Bitcoin payments unsuitable for small transactions that require fast transaction settlement times, such as buying a coffee or any other small and quick purchase.

Therefore, with the current state of the Bitcoin network and level of scalability it’s thus far achieved, Bitcoin is better suited for larger transactions that require a higher level of security.

A real-world example of such a transaction comes from Binance, the world’s largest cryptocurrency exchange, who in May 2019 moved a colossal $1.26 billion worth of Bitcoin and paid just $124.60 in network fees.    

Bitcoin is great for any purchase that requires a very high level of security and finality because Bitcoin transactions are immutable and the Bitcoin network is the most secure cryptocurrency network due to the total accumulated hashes (energy) from mining – more on this later. 

Bitcoin is a Store of Value 

Apart from empowering people to control their finances, being a currency and method of payment, Bitcoin is also considered to be a store of value. Similar to gold, Bitcoin is increasingly being viewed as a place to store wealth because it’s limited in supply. There will be no more than 21 million Bitcoins ever created and if Bitcoin’s history has taught us anything, it’s that it tends to increase significantly through time. 

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Furthermore, Bitcoin makes a great store of value because it is decentralized and censorship resistant. This feature cannot be overlooked because it is of vital importance to Bitcoin’s value proposition over many cryptocurrencies and other assets. Bitcoin’s decentralization and censorship resistance means that no government or centralized authority owns or controls Bitcoin. Therefore, Bitcoin cannot be controlled, shut down, or taken away from you. Unlike gold, which is generally stored physically in a central bank or government vaults, Bitcoin can be securely stored directly by an individual. Bitcoin enables individuals to be the master of their own monetary sovereignty. 

Now that we understand what Bitcoin is and understand it’s value proposition, let’s delve into who created Bitcoin.

Who Created Bitcoin?

No one knows who created Bitcoin. All we know for sure, is that the creator of Bitcoin goes by the pseudonymous name of Satoshi Nakamoto. Till this day, no one has been able to conclusively connect Nakamoto to an actual person or group of people. 

Satoshi Nakamoto released the Bitcoin whitepaper in 2008 and claimed to have started working on Bitcoin in 2007 – 2 years before the first block (the Genesis block) was mined in 2009. Nakamoto continued to contribute to Bitcoin’s development and interact with the community until he vanished from the internet in 2011. 

While many people have claimed to be Satoshi, there is no conclusive evidence to support their claims. The most-well known case of someone claiming to be Satoshi is by Craig S. Wright, an Australian academic and computer scientist. Wright has tried multiple times to prove he is Bitcoin’s inventor but has yet to be successful. 

Apart from Wright, there have been various other Satoshi Nakamoto candidates in which people theorize to be the true creator of Bitcoin. One of which is Hal Finney, a cryptographer known to have communicated with Satoshi and was the first person to receive Bitcoins from the anonymous creator. Finney passed away from ALS in 2014 and remains as one of the top Satoshi Nakamoto candidates.

Another viable candidate is renowned cryptographer, Nick Szabo, who created the digital currency Bit Gold several years before Bitcoin. The similarity between the two projects lead some to speculate he is the creator of Bitcoin. 

There are many Satoshi Nakamoto candidates and no one can say for sure who it is. However, there is one candidate whose story and theory is far more intriguing and believable than others. This candidate is Paul Solotshi Calder Le Roux, a criminal mastermind and genius cryptographer. If you’re interested in this intriguing and believable theory be sure to read my article on it here

Whoever Satoshi is, it’s quite obvious that they intend on staying anonymous and believe this anonymity is important for Bitcoin. After all, they created the world’s first decentralized currency without any central points of failure. Nakamoto must have realized that maintaining his anonymity was crucial to remove the last central point of failure. 


How Bitcoin Works?

As previously mentioned, Bitcoin is a decentralized digital currency that can be sent from user to user on the peer-to-peer Bitcoin network. In order to understand how it’s able to do this, we must first understand what this P2P Bitcoin network is, so let’s delve in.

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Image Source: https://bitcoinmagazine.com/articles/coinffeine-launches-technical-preview-peer-peer-bitcoin-exchange-1430945655

In the simplest of terms, Bitcoin’s P2P network works on a vast shared public ledger, also called a blockchain. All confirmed transactions are included as blocks on the blockchain and each block that’s added to the blockchain is broadcasted to the peer-to-peer computer network of users for validation. Once a block is added, it cannot be removed and it’s there for the whole world to see and analyze, meaning the Bitcoin blockchain is completely transparent. This transparency and immutability ensures the integrity of each transaction and prevents stealing and double-spending. Furthermore, the integrity and the chronological order of the Bitcoin blockchain are enforced by cryptography, hence the term cryptocurrency. 

Transacting Bitcoin

Since all confirmed Bitcoin transactions are recorded and verified on the blockchain, Bitcoin wallets are able to calculate their spendable balance and users can transact with one another. 

In order to transact Bitcoin, users must have a Bitcoin wallet. Bitcoin wallets can be downloaded onto your phone or computer, you can use online wallets, or offline hardware wallets – the latter is the most secure option.

Each Bitcoin wallet contains a secret piece of data called a private key or seed, which allows Bitcoins to be spent by signing transactions. Each private key is mathematically related to Bitcoin addresses generated in the wallet and proves that a transaction comes from the owner of the wallet when signed. As well, the signature prevents the transaction from being altered. 

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Image Source: https://bitcoin.org/en/how-it-works

A Bitcoin wallet’s private key is of vital importance and should never be lost or revealed to anyone. 

As stated by Andreas M. Antonopoulos, a prominent Bitcoin educator and author, he said:

“The private key must remain secret at all times because revealing it to third parties is equivalent to giving them control over the bitcoins secured by that key. The private key must also be backed up and protected from accidental loss, because if it’s lost it cannot be recovered and the funds secured by it are forever lost, too.”

Moreover, in addition to a private key, wallets also contain a public address or key. The public address is derived from private keys by using cryptographic math functions and is used for receiving Bitcoin. The public address can be shared with anyone and is what a user needs in order to send the receiver Bitcoin. Also, users can make as many public addresses as they want to receive Bitcoin. 

All public Bitcoin addresses consist of 26-35 alphanumeric characters and begin with either the number 1, 3, or bc1 (depending on the type of address format). The most popular Bitcoin address format starts with a 1, eg: 1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2. Once you have a public Bitcoin address, you can enter it in the search bar at a Bitcoin blockchain explorer such as blockchain.com and see your balance and transaction history.

Furthermore and as previously mentioned, all transactions are broadcasted to the public Bitcoin network where they are then verified and confirmed. This confirmation process is completed by miners, a process that I will be explaining next. 

How Bitcoin is Mined?

For the people uninformed about Bitcoin, the term “mining” can be odd and confusing because Bitcoin is virtual not physical, so they ask how can it be mined? The answer to this is simple. 

Bitcoin mining is similar to gold mining in that Bitcoins exists in the protocol’s design, just as gold exists in the ground. People mine the ground to bring that gold to light, and people mine Bitcoin’s protocol to bring that Bitcoin to light. That’s why the process of minting new Bitcoins is called mining.

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Image Source: https://www.bitcoincasinopro.com/news/do-you-have-what-it-takes-to-mine-bitcoin/

Now, the question remains, how is Bitcoin mined?

Nodes/Miners Solving the Puzzle

The public Bitcoin network is run by powerful computers known as nodes (miners). These miners relay information and spread Bitcoin transactions around the network. In doing so, they keep the network secure and are rewarded in Bitcoins for running the open network.

These miners add new blocks to the blockchain by solving computationally difficult mathematical puzzles. Miners who solve these equations and add new blocks are compensated for their hard computational work (which is costly and energy intensive) with newly mined Bitcoins. The reward for solving the puzzle is now 12.5 BTC, but halves every 4 years. The next halving is estimated to be in May 2020 where the reward will then be cut in half to 6.25 BTC for every block mined. 

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Image Source: https://www.investopedia.com/terms/b/bitcoin-mining.asp

 

Mining Difficulty

Moreover, the mining difficulty increases over time and the difficulty equation is adjusted frequently so that it takes on average 10 minutes to process a block. This mining process will continue until the maximum number of 21 million BTC are mined, which is expected to be sometime in 2140.  

Where To Buy Bitcoin?

For people new to Bitcoin and cryptocurrency, taking the first steps and actually buying it can be an overwhelming and scary thought. However, it’s really not that difficult or complicated. In the following section, I'll divulge where and how you can buy Bitcoin and explain each method thoroughly. 

You Don’t Need to Buy 1 Whole Bitcoin!

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Image Source: https://www.chainbytes.com/bitcoin-divisibility/

 

Before I delve into where and how to buy Bitcoin, it’s important to make note that there is no need to buy a whole Bitcoin. 1 BTC is divisible to 8 decimal places, meaning 0.00000001 BTC is the smallest amount that can be handled in a transaction. This smallest unit is called a “Satoshi” or “Sat” for short. Each Bitcoin can be broken down into 100,000,000 satoshis. Therefore, when buying Bitcoin you can simply buy 0.00040 BTC which equates to $5.00 USD at a Bitcoin price of $12,400 (at the time of writing). While buying such small amounts may be possible on some exchanges (depending on the minimum buy order amount) it may not be beneficial to buy small amounts due to trading fees. 

Cryptocurrency Exchanges

The most popular way to buy and sell Bitcoin is on an online cryptocurrency exchange where you can exchange fiat currency (government-issued currency such as USD, CAD, AUD, EUR, GBP, CNY, JPY, etc.) for Satoshi’s – the divisible units of Bitcoin (BTC). 

Not all crypto exchanges support fiat currencies, some are strictly crypto-to-crypto but if you are buying for the first time you need to use a fiat-to-crypto exchange. Depending on the cryptocurrency exchange, there will be multiple methods of depositing fiat currency on the online platform so that you can buy Bitcoin. The most common available fiat deposit methods include: Debit & Credit Cards, Prepaid Cards or Vouchers, Bank Wire Transfers, E-wallets, and ACH Transfers (Electronic Bank Transfer).

Before buying Bitcoin on a crypto exchange, the user will be required to create an account and verify their identity by filling out applicable know-your-customer (KYC) information and submitting a picture of government issued photo ID. Some of the most popular online cryptocurrency exchanges supporting fiat currency include Coinbase, Gemini, and Kraken for North America, Bitstamp for Europe, and CEZEX for Asia. There are many more than the ones mentioned here but it’s important to ensure they are regulated or at least reputable to ensure a safe buying process.

Bitcoin ATMs

A relatively quick and easy method to buying Bitcoin is from a Bitcoin ATM. Most major cities throughout North America, Europe, Asia, and other parts of the world have multiple Bitcoin ATMs throughout. For a comprehensive list of Bitcoin ATMs around the world check out CoinATMRadar.com. With Bitcoin ATMs, a user can purchase Bitcoin by depositing cash into the ATM and receiving Bitcoin in their wallet. It’s a quick and easy method for buying Bitcoin. The only downside is that the rates and fees are generally higher than online cryptocurrency exchanges. 

Classified Peer-to-Peer Exchange Services

Another method in which individuals can purchase Bitcoin with cash is through a service that matches a seller and a buyer who will trade Bitcoin for cash. One of the most popular services like this is LocalBitcoins, which helps you find individuals near you that are willing to exchange Bitcoin for cash. 

Another service is LibertyX, which lists retail outlets across the United States that enables you to exchange cash for Bitcoin or pay with debit card. Other exchange services include WallofCoins, Paxful and BitQuick, all of which direct you to a bank branch near you that accepts cash deposits in exchange for Bitcoin.

Problems Bitcoin Faces

Bitcoin is the first successful cryptocurrency the world has ever seen. It’s the most popular and widely adopted cryptocurrency out of the 2,500+ cryptos in existence and the entire crypto market depends on Bitcoin to some extent. However, Bitcoin is not without problems. It faces many hurdles to overcome if it hopes to become a globally accepted and adopted currency.

One of the primary problems Bitcoin faces today is surrounding scalability – the number of transactions the Bitcoin network can process in a period of time. Currently, Bitcoin’s average or median transaction processing capacity is between 3.3 and 7 transactions per second. This is a far shot from Visa’s transactional average of 1700 transactions per second. However, Bitcoin scaling solutions are being developed and implemented right now to make it a viable global currency that can outperform Visa and other payment methods.

In the following paragraphs, I touch on two of Bitcoin’s most viable scaling solutions:

Scaling Solutions

There are multiple scaling solutions that are being developed and implemented on Bitcoin right now. These scaling solutions can either be first-layer solutions which require code changes to the Bitcoin blockchain, or second-layer solutions which are secondary protocols built on-top of the main blockchain.

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Image Source: https://en.bitcoin.it/wiki/Segregated_Witness

First-layer scaling solutions require a blockchain to be forked into a new or upgraded version of the last one. One such first-layer scaling solution that Bitcoin has begun to adopt is Segregated Witness (Segwit). Segwit is a protocol upgrade for Bitcoin that frees up space on Bitcoin’s 1MB blocks and thus allows the capacity of more transactions. With Segwit, the signature data for each transaction (which makes up almost 70% of the space of a transaction) is removed, making room for more transactions to be included in a single Bitcoin block. This increases the number of transactions that can be processed and has improved the blockchain’s speed quite significantly. 

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Image Source: https://bitcointalk.org/index.php?topic=2108565.0

As for second-layer scaling solutions, they reduce the load from the main blockchain in order to save space and reduce network congestion. Bitcoin’s second-layer scaling solution is known as the Lightning Network (LN). Bitcoin’s LN utilizes off-chain channels to facilitate instantaneous transactions with near zero fees. It incorporates smart contract functionalities on top of Bitcoin’s blockchain to lighten the main blockchain’s load by moving transactions off the main chain to state-channels. This reduces the congestion on Bitcoin’s main chain and allows transactions to be executed instantaneously with very low fees within the channel. 

All in all, Bitcoin scaling solutions are being developed to make it better used as a currency and method of payment. However, in order to maintain Bitcoin’s high level of security, changes to the protocol and second-layer scaling solutions are very slow to implement. These scaling solutions must be tried and tested before they are fully adopted as everything must be perfect in order to preserve Bitcoin’s most important aspects; decentralization, censorship resistance, and security.

Useful Resources:


Mr.CryptoWiki
Mr.CryptoWiki

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