What is Bitcoin?

Bitcoin is a decentralized payment network and digital cryptocurrency. In October of 2008, a document referred to as ‘the whitepaper’ titled “Bitcoin: A Peer to Peer Electronic Cash System” was published online by an individual who referred to him or herself as Satoshi Nakamoto. At the time, Satoshi’s whitepaper suggested a revolutionary way for creating a decentralized payment system with a digital currency called Bitcoin. In theory, this system would create digital currency (Bitcoin) without the need for a centralized authority such as a government and/or bank. On January 3, 2009, the first Bitcoin block was mined.

Unlike traditional fiat currency, there is no ‘physical’ Bitcoin. Today, at Bitcoin’s core exists a publicly accessible, decentralized ledger which records every transaction that occurs on the Bitcoin network. Bitcoin facilitates peer-to-peer transactions without the need for any intermediaries such as banks or payment processors.

How does Bitcoin work?

Cryptocurrencies are mediums of exchange that you can convert into your nation’s currency. Each digital coin like Bitcoin found on a modern exchange relies on a highly technical algorithm that records transactions into a public ledger that all users can see. Here are the core components that make any cryptocurrency work:

Bitcoin depends on cryptography

Much of what makes Bitcoin such a secure form of currency is the underlying cryptography that powers its design. Cryptography is simply the process of writing codes and in this case with Bitcoin, cryptography is applied to both the mining process of Bitcoin in addition to the addresses and private keys associated with Bitcoin wallets. The Bitcoin transactions that are processed on the blockchain are seemingly un-hackable with today’s technology due to their encrypted nature.

Bitcoin is a blockchain

The distributed ledger technology (DLT) of modern-day cryptocurrencies is the source code used to lay the foundation of what’s called blockchain. The world’s digital currencies all have different functions and capabilities, but for most of them, they each depend on the core processes of a blockchain algorithm.

Blockchains use “blocks” of data to represent the purchases made by a digital currency. A ledger’s confirmed transactions result in an encrypted string of code that gives way for other blocks of data to be executed. The groups of blocks in a DLT ledger are named for the chain of linked transactions they create. Nodes, which consist of a network of computers, are also needed to make cryptocurrencies autonomous. Every block in a DLT system must be confirmed by a majority of nodes in a network before an exchange between buyers and sellers can be fully accepted.

Bitcoin is decentralized

There is no single authority that manages or guides the transactions of bitcoins. The only way to infiltrate Bitcoin’s blockchain would be to control over 50% of all of its nodes. Centralizing Bitcoin, however, is highly unlikely due to the ability for network nodes to grow in number as the network becomes more popular and grows over time.

Bitcoin is in limited supply

The amount of Bitcoin in existence is in limited supply of about 21 million, and the smallest divisibility of Bitcoin is 100 millionths of a coin, which, in being a spendable unit, is called a satoshi. Many speculate that its limited supply is one of the primary reasons Bitcoin has become so valuable in recent years. Mining is the process in which bitcoins are extracted and released to the public. If they choose, anyone can mine Bitcoin by creating computer nodes that verify the transactions achieved by people using the network.

Bitcoin is anonymous

Cryptocurrency users describe the rise of Bitcoin and other digital currencies as a major reaction to the rise of centralized governments and banks looking to control or centralize monetary policy. Core to Bitcoin’s function and code are its features of anonymity and privacy. Bitcoin provides the ability to spend, send, or receive money without having your identity or balances revealed. The only way to determine buyers and sellers within the transactions of cryptocurrencies is when each party willfully identifies themselves through KYC (know your customer). Many services today that deal in Bitcoin are required by law to enforce KYC practices though there are some decentralized exchanges that due exists allowing traders to exchange Bitcoin to another crypto anonymously.

Bitcoin is cash convertible

Bitcoin and other cryptos are now offered by online vendors who sell these currencies in exchange for common fiat. Cash can be used to acquire a vast number of virtual currencies. Cryptocurrencies are typically priced based on the “home currency” you use to buy them with or you may also see them pegged to the Bitcoin (satoshi) value. Cryptocurrency exchanges, though consisting of simple tools to acquire electronic coins with, are used to invest in digital currencies in the same manner that people invest in stocks. Live exchanges that publish cryptocurrency prices enable investors to get in and out of the ownership of Bitcoin at will.

Bitcoin can be stored

Trading any electronic currency starts with acquiring a “wallet“. Cryptocurrency wallets are online accounts that hold a variety of different blockchain based currencies you wish to hold. Investors need to be cautious when using online (web) wallets, however, for these have a history of being hacked. A “hot wallet” is one that’s connected to the web. You can, instead, safely store your coins by using what’s called a “cold wallet” or also known as “cold storage”. Whether you rely on a computer that doesn’t connect to the web or a sheet of paper with your account data on it, a cold wallet must fall is one of the safest ways to store your Bitcoin today.

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