Updated · Dec 03, 2022
What Is Bitcoin and What is the Hype All About?
Updated · Oct 16, 2022
Although it’s been more than a decade since its birth, few understand what Bitcoin is.
So, here’s Bitcoin explained:
Bitcoin is a decentralized digital currency, which uses peer-to-peer technology to manage and create bitcoin transactions.
The sentence above doesn’t mean much if you don’t already have any knowledge of Bitcoin and blockchain technology.
To break down the bitcoin definition in a more simplified manner, this article is what happened.
Moreover, we’ll find out what cryptocurrency is.
Let’s start with a quick history lesson.
Bitcoin Timeline – a Decade of Cryptocurrency
Although Bitcoin is relatively young, many events marked its evolution in the past decade. Before we can speculate about bitcoin’s future, let’s discover its history.
|October 31, 2008||Bitcoin Whitepaper relеase.|
|January 3, 2009||Bitcoin Genesis Block Mined (also known as Block 0)|
|January 12, 2009||The first Bitcoin transaction.|
|May 22, 2010||Laszlo Hanyecz paid 10,000 BTC for two pizzas.|
|July 2010||Mt. Gox launch. At its peak the exchange controlled 70% of all BTC transactions.|
|November 6, 2010||Bitcoin market cap exceeds $1 million.|
|October 2011||The first Bitcoin fork – Litecoin was created.|
|June 2012||Coinbase launch. Fiat-to-crypto currency exchange.|
|November 2012||The first Bitcoin halving event. The reward of 50 BTC is halved to 25 BTC.|
|February 7, 2014||The Mt. Gox hack. 850,000 bitcoins are lost or stolen.|
|December 11, 2014||Microsoft adopts bitcoin payments.|
|June 2015||BitLicense is established.|
|August 1, 2017||Bitcoin Cash was born.|
|December 2017||Bitcoin futures launch.|
|December 2017||Bitcoin price reached $19,498.|
|September 2018||Cryptocurrencies’ prices drop with an average of 80%.|
|November 15, 2018||Bitcoin market cap falls below $100 billion.|
|October 31, 2018||Bitcoin 10-year anniversary.|
|January, 2021||Bitcoin reaches an all-time high of $41,962.36.|
Now that we know the background of Bitcoin, we can delve deeper to see how it works.
What Is Bitcoin – Its Inner Workings Explained
Okay, so what is bitcoin in its essence, and do we need cryptocurrencies?
Imagine a friend of yours gives a dollar. That’s the whole transaction. There isn’t any sort of intermediary during this transaction - just the physical action.
The same is with bitcoins. You can transfer bitcoins to anyone, anywhere, anytime. Regardless of any financial restrictions your country may pose, or bank transfers’ delays and fees. That is, except for the nations, which ban Bitcoin altogether.
That’s it – simple and secure. And only you and the recipient are accountable for this transaction – there is no third-party.
In a country like Iran, you have regulations about cross-border transfers.
Bitcoin solves this problem.
Or what about the people without bank accounts?
There are more than 1.7 billion unbanked people worldwide.
What could they use for payments, instead of cash?
Bitcoin solves this problem, too.
So you see, Bitcoin has its benefits.
But how does it work?
To answer that we need to understand some technological terms, first.
How Does Blockchain Work?
In simple words, – a blockchain is a list of records. These records are called blocks, and as the name suggests – they are linked together in a chain. Each block contains information about a transaction, its hash, and the hash of the previous block. Hash is like a vehicle registration plate for blocks.
The latter is exceptionally important in terms of security.
See, if someone wants to tamper with a block, they’ll have to recalculate the proof of work for all the following blocks.
Each block connects to its following “cousin” via cryptography.
What Is Cryptography?
Cryptography is the method of protecting data via codes.
Simple as that.
It enables sharing sensitive information in a hidden (crypto) way that no one but the intended recipient can read it.
Here’s an example:
If we use cryptography to encrypt this sentence: “What is Bitcoin?”, this is what we’ll get:
This message is readable only by the intended recipient.
The same is with a bitcoin transaction. If I send you a bitcoin, this transfer will be stored in a block. You and only you will be able to receive it.
Then everyone who uses the Bitcoin network will validate our transaction.
The Brilliance of the Blockchain Idea
What is so great about blockchain technology is that it uses trusted timestamping, which makes it remarkably secure. Trusted timestamping keeps track of the creation and modification time of the data. No one, including the data’s owner, can’t modify it, once it’s recorded.
Furthermore, everyone who uses the same blockchain technology is accountable for its existence and evolvement. In simple words – there is no single entity in control of the data in the blockchain.
Every single user in a given blockchain system has a real-time copy of the blockchain network.
The Bitcoin blockchain was over 210 GB of data, and it's stored on every user’s device.
Bitcoin made use of the blockchain technology precisely the way it was meant to be used. It’s decentralized, and each transaction is validated by all the users involved.
But it gets better:
The Bitcoin blockchain reduces possible errors to a minimum. You can’t double-spend your Bitcoins, and no one can intercept your Bitcoin transaction. Even better, these transactions aren’t recorded solely on the Bitcoin secured register. Users validate, therefore register these transactions on every device, connected to the Bitcoin blockchain network.
As a consequence, the blockchain is practically unhackable! To hack the blockchain, a cybercriminal has to have control over 51% of all users. This hypothetical situation is almost impossible to happen, considering the vast network of bitcoin miners and nodes.
In essence, a bitcoin miner is a computer. To be more precise – a high-powered computer, that solves mathematical problems. When a miner solves one of these complex math problems, they create a new bitcoin. Then nodes verify the bitcoin transactions, thus making the blockchain secure.
Each bitcoin miner connects to the blockchain via bitcoin mining software. Once they complete a block and add it to the blockchain, the miner receives a “block reward.” These rewards are bitcoins – as of 2019, this reward equals 12.5 bitcoins per block. It halves every 210,000 blocks. Back in 2009, a year after Satoshi Nakamoto came up with the concept of Bitcoin, the reward was 50 bitcoins per block. In 2020 it was "only" 6.25 BTC.
However, considering the high price, more and more cybercriminals are tempted to use cryptojacking to turn people's devices into mining rigs.
Once the miner receives its reward, its owner’s Bitcoin wallet receives the rewarded bitcoins.
What is a Bitcoin Wallet?
The cryptocurrency wallet is, in fact, an app. It acts as a cryptocurrency gateway – you require a cryptocurrency wallet to transfer, receive, or buy bitcoins.
Bitcoins aren’t actually in your digital wallet. They are in the blockchain. What your wallet stores are the locations (addresses) of your bitcoins in the blockchain.
Here’s the deal.
See, bitcoins don’t move like paper money. They only change their owner. Once you send, say, one BTC to a friend, what you do is that you reassign the ownership of its address, in favor of your friend.
The owner of a Bitcoin wallet uses two keys to make transactions:
- Public key
This is the address of the recipient of the payment. If you want to buy coffee with cryptocurrency, you scan the coffee shop’s QR code – this is their public key. The public key is available to anyone.
- Private key
This is the key to your bitcoins' addresses. When you bought that coffee, you used your private key to unlock your bitcoin safe and release the required amount for the transaction. Your private key is the only thing that could reach your bitcoins. They aren’t tied to your account in any other way. So if you lose your private key, or it’s stolen, there’s nothing you can do about it (your Visa card is more convenient from that point of view).
So you need both keys to make a transaction.
What Is a Bitcoin Transaction?
In simple words, a bitcoin transaction is the change of bitcoins’ ownership.
No matter if you just transfer to someone, or if you’re into bitcoin trading. Each operation is stored in a block, and it takes about 10 minutes for a block of transactions to become part of the blockchain (thus verifying each transaction).
In other words – once you send BTC to someone, the nodes in the blockchain have to verify your transaction first.
What is essential to a bitcoin transaction is that the block which verifies it keeps a log of the sender, the receiver, and the amount of BTC.
This means that people can trace every bitcoin’s ownership exchange back to its creation.
Now, let’s delve a little deeper into the fundamentals of Bitcoin.
Bitcoin’s Key Components
There are many essential features that differentiate Bitcoin from fiat currencies. For one – it’s not printed in a central bank somewhere.
“Government of the people, by the people, for the people.”- Abraham Lincoln
Nowadays, we have centralized political and economic systems.
The government regulates the economy, determines taxes, and so on.
You know where the government is. You know who works there. You vote for a government.
The same goes for the banking sector. The bank stores your money, and you rely on it for every transaction.
See, only you and the bank know what happens with your finances. You can’t check a friend’s balance, for instance, only the bank can.
So there’s the difference between a centralized and a decentralized system.
Decentralization removes the middle man and leaves the participants in charge.
In the Bitcoin blockchain, all miners are connected to the blockchain. They can all view the same data. Once a miner creates a new block, everyone in the network is aware of it.
That’s the beauty of blockchain technology – all users are responsible for the network.
So, if you want to send money to Bob, you send it, and that’s that. This transaction is between you and Bob, but everyone else in the blockchain must agree about it (verification). No one can tell you – “Hey, you can’t send money to Bob because he lives in Venezuela, and we don’t get along with them.”
What's great about blockchain is that everyone can join this network. If they have a powerful enough computer, that is. And if they can afford to pay for higher electricity consumption. The blockchain is available to anyone who wishes to join it. There are no limitations.
Not only that, but it’s more secure than centralized structures, simply because no one can mess with it.
Imagine the blockchain as a history book. If an event occurs, something led to that event. Everything happens for a reason, right? So here’s an example:
Napoleon became emperor in 1804.
By 1811 he controlled almost every country in continental Europe.
In 1812 Napoleon commanded the biggest army the world had ever seen before WWI.
The same year the Grand Armeè invaded Russia. Napoleon's Big Army in French.
Although the French were victorious at the first big battle near Borodino, they paid a high price for this victory. The remaining army suffered a significant lack of supplies, diseases, and the famous Russian winter. These events forced Napoleon to retreat to Poland.
Since the Russian campaign severely weakened Napoleon's army, it could no longer control all occupied territories. Eventually, his empire collapsed.
In history, one thing leads to another. Blockchain is the same. A block follows each block. Until the invention of the time machine, no one can tamper with the past. The same goes for the blockchain. If someone interferes with a block, they would have to alter every following one. Also known as the butterfly effect.
What is more, to break the immutability, one has to convince 51% of the network to alter a block. Imagine how hard this is since, in 2021, there are at least 11,393 nodes in the Bitcoin blockchain network. And their number continues to grow, despite that mining will cease once all bitcoins have been mined.
Limited Supply of Bitcoins
With fiat currencies, central banks can just print as much money as they need. Bitcoin doesn’t have this option. Once the mined bitcoins reach the limit of 21 million, that will be it.
This makes Bitcoin an even more valuable asset, because once a miner digs the last coin - you’ll only be able to buy them.
As of the time of writing, there are more than 18 million existing bitcoins. This means there are about 12% bitcoins left to mine. If miners continue to keep this pace up – in less than five years, the last bitcoin will be mined.
However, miners will still earn money even when they stop mining.
Today miners acquire most of their bitcoins thanks to the block reward. Additionally, they earn a small fee by each bitcoin transaction. In the future, bitcoin trading and operations will pay the miners.
*Interesting fact – Bitcoin’s creator, Satoshi Nakamoto, owns one million bitcoins, which were mined at the beginning of the mining process. Although no one knows who he is, this is an impressive amount, considering the current bitcoin value - about $34,000. So the creator has the key (literally) to over $34 billion as of this date.
Bitcoin Transaction Security
There are several vital elements that secure bitcoin operations.
- Bitcoin transactions are irreversible.
Once a transaction is verified, you won’t find an “undo” button. And there’s no authority to call if you’ve made a mistake. However, if you know and trust the person who received the payment, they can refund you.
- Bitcoin won’t allow you to send money to an invalid address.
The blockchain technology doesn’t tolerate invalid addresses, so you can’t send money to a non-existing recipient by mistake.
- Users have full control over their payments.
Unlike with traditional payments, Bitcoin doesn’t allow merchants to charge you with hidden fees.
- Bitcoin payments can be anonymous.
You don’t need to add personal information to the transaction. This acts as a protection against identity theft.
However, despite Bitcoin’s benefits, the system isn’t flawless.
Crucial Drawbacks for Bitcoin Adoption
Ever since Bitcoin entered the currency stage, it had some predefined defects.
Slow Transaction Times
As mentioned before, the blockchain takes about 10 minutes to add a new block. Hence, you have to wait for at least 10 minutes for your transaction to be verified. Once verified, it becomes irreversible. Every 10 minutes you technically receive another verification of this transfer.
You require several verifications to complete a transaction. For instance – one confirmation is enough to send a small payment (usually under $1,000). You’ll need at least three verifications to transfer amounts up to $10,000. Most exchange companies will also require at least three confirmations to accept a deposit.
Six is the magic number, which makes a transaction to be viewed as secure. That way, you can send up to $1 million.
If you want to transfer a more substantial amount than $1 million you’ll need about 60 verifications. Which equals around 10 hours.
Thing is, Bitcoin can validate only seven transactions per second. And there’s an average of 12.23 transactions per second being generated (at the time of writing). Safe to say it may take some time.
Fair warning, the system is sluggish. (As you might suspect.)
The average time for a confirmation of a Bitcoin transaction is about 12 minutes. And while you wait for your transaction’s validation, your machines eat up quite a bit of your earnings.
Bitcoin Mining Power Consumption
Miners eat power faster than a ghetto monkey eats a banana.
As of today, bitcoin mining consumes up to 66 TWh per year, almost the electricity consumption of the Czech Republic.
In terms of power bills, for every $6 you earn from mining bitcoins you have to pay an average of $3.3.
But it gets worse:
There are two factors to take into consideration:
- First – the hashrate difficulty grows.
- Second – the block reward is smaller.
Unless electricity becomes cheaper, or a new method allows miners to use less power, we’ll be using more electricity for smaller gains.
The only benefit of using so much power is if you live in Siberia and you use the mining rigs for heaters.
However, the decentralized cryptocurrency can’t keep us warm forever.
The Irony of Decentralization
The Bitcoin network is decentralized, sure. Exchange companies, however, aren’t. And that’s where many of the bitcoins are. So it turns out we have a decentralized system of resources, yet we keep them in a centralized way.
This has led to some shocking situations:
QuadrigaCX’s founder passed away, locking up $190 million worth of cryptocurrencies on his laptop.
But do these issues affect Bitcoin’s future and adoption rates?
Bitcoin Future and Adoption
More and more people adopt cryptocurrencies with each passing day. The same goes for vendors. Actually, there are hundreds of thousands of venues, which accept cryptocurrency payments. You can find all the vendors on this map.
Now, although Bitcoin isn’t perfect, its system is still evolving and improving.
One of the biggest problems we cited in the previous paragraph was the bitcoin blockchain scalability – i.e. the time required for a transaction to be verified.
See, Bitcoin uses a ridiculously slow algorithm to “sign” every part of a transaction.
A guy by the name of Claus-Peter Schnorr created a better way. The Schnorr signatures are significantly faster, which open up the future of Bitcoin.
In fact, Bitcoin Cash (BCH) developers implemented his idea in May, 2019.
The other issue Bitcoin faces is it’s not really fit for everyday spending. That’s why the Winklevoss twins joined forces with Flexa to make cryptocurrency easier to spend. They created the SPEDN app, (no, not a typo) thanks to which you can easily purchase items or services with cryptocurrency.
This app and other innovations shape a trend of a more comfortable use of Bitcoin for the mass user.
Everyone involved In this technology aims to make it easier and faster to use cryptocurrencies, without neglecting the security of the blockchain technology.
By now, you now know what Bitcoin is, how it works, and why it matters.
See, Bitcoin (and cryptocurrencies as a whole) are a game-changer in our society. They could have a substantial impact on our centralized banking system and change the way we think about money. Fiat currencies may not become obsolete, but their power diminishes, thanks to cryptocurrencies.
And Bitcoin, in particular, doesn’t intend to step down from the #1 spot in the cryptocurrency world.
Bitcoin’s future seems bright, and it leads many other cryptocurrencies along to a new era.
Now that you know what Bitcoin is and how it works, you also found out how it can work for you. You can discover if mining is worth your time, money, and energy by using this calculator.
What is a bitcoin, and how does it work?
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How do you earn bitcoins?
Why does Bitcoin have any value?
When was Bitcoin created?
Who created Bitcoin?
What is a Bitcoin wallet?
How to buy bitcoin?
Is bitcoin mining profitable in 2021?
Deyan has been fascinated by technology his whole life. From the first Tetris game all the way to Falcon Heavy. Working for TechJury is like a dream come true, combining both his passions – writing and technology. In his free time (which is pretty scarce, thanks to his three kids), Deyan enjoys traveling and exploring new places. Always with a few chargers and a couple of gadgets in the backpack. He makes mean dizzying Island Paradise cocktails too.
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