The Bitcoin world is a new industry that has no shortage of adventure associated with it. You may have heard of the epic dramas in the news about major hacks and the black markets. For most people this is all they know about Bitcoin.
There are many misconceptions about Bitcoin, mostly because it's difficult for people to wrap their head around how it works. It's very easy for beginners to get confused when they hear experts try to explain it with technical jargon.
This guide is intended to be an easy to understand, no nonsense resource that explains what Bitcoin is. Our goal is to get you up to speed quickly, to give you a better understanding of this wonderful technology.
The Bitcoin Elevator Pitch
Bitcoin is an independent, global public ledger that's used to transfer and store value.
15 Facts About Bitcoin
- Bitcoin was created in 2009 by an anonymous developer named Satoshi Nakamoto
- It is a global payment network that doesn't rely on banks and governments.
- The network is called Bitcoin or the blockchain and it has its own currency called bitcoin, (with a small “b”.)
- All bitcoin transactions are permanently stored on the public ledger and are available for anyone to see.
- Transactions are linked to addresses that are a long string of alpha numeric code. An example would be 18P2LwrwPvEuKNxnc76mNV5xpL3U8UVnBL
- Each public address is paired with a private key. All bitcoins are locked on the ledger and ownership is determined by private keys that allow you to unlock and send coins.
- Bitcoin transactions cannot be censored. You can send almost any amount of money to anyone in the world at a cost of mere pennies.
- Bitcoin transactions are irreversible.
- There will only ever be 21 million bitcoins that exist, which makes them scarce.
- Every bitcoin is unique and can't be forged or double spent.
- A single bitcoin is divisible by 100 million. The smallest unit of bitcoin is called a satoshi and has a value of 0.0000001 BTC (bitcoin).
- Bitcoin is one of the most secure networks in the world.
- It costs around $3 billion a year to secure the network with computers and electricity.
- Bitcoin is a decentralized network, which means that no central authority controls it. Anyone can help secure the network with their computer and these computers are spread throughout the globe.
- Although transactions are on public record, unlike a bank account they do not require you to use your personal identity.
Other Uses for the Blockchain.
Bitcoin can be used for much more than just sending and storing money. Here's a list of other uses for the Bitcoin network:
- It can store and send financial securities such as stocks and bonds.
- It can be used to send credits backed by fiat currencies.
- It can be used as a notary service to record proof of documents and property ownership.
- It can be used for decentralized domain registration.
- It can be used to create smart contracts and provide a trustless escrow service.
- It can be used to audit accounting and prove reserves.
- It can be used for crowdfunding.
- It can be used as a trading exchange.
- It can be used as a voting system.
- It can be used as a messaging system.
- It can be used for cloud storage.
- It can be used for games.
- It can be used to prove randomness for online casinos.
How the Bitcoin Technology Works
So now that you know the many features of Bitcoin, let's go into more detail on how the underlying technology works.
The rules of the Bitcoin network are programmed into a piece of software called the QT-Client. You can download a copy of it here.
The software has four main functions:
- It is a program with all the rules of the network.
- It is a full ledger with every bitcoin transaction recorded on it.
- Each copy of the software can act as a node, which communicates transactions to other copies on the network.
- It can be used as a wallet for your bitcoins by storing your private keys.
There is another important piece that helps secure the Bitcoin network called mining. Bitcoin mining is the process of securing transactions on the ledger, so that nobody can game the system by spending coins twice or reversing transactions.
Mining is the process of adding computer power to the network by trying to solve an evolving complex math problem based on all previous transactions.
The computer power used to solve this evolving math problem ensures that the network is always moving forward with transactions and never backwards, making them irreversible.
These computers compete with each other to solve the problem by generating billions of random hashes (a string of numbers and letters) per second.
Solving the math problem is like finding the winning numbers to a lottery.
Every time a computer solves the problem, a group of new bitcoin transactions are bundled together and recorded permanently on the ledger.
This bundle of new transactions is called a block and linked together with other blocks of transactions. This is why the Bitcoin network is called the “Blockchain.”
Miners who help solve blocks to secure transactions are rewarded by receiving newly created bitcoins.
New blocks are solved on average every ten minutes.
The rate of newly created bitcoins gets reduced by 50% every four years. At the time of writing this, every time a miner solves a block, they are awarded 25 new bitcoins. In 2016 the rewards will get reduced to 12.5 bitcoins per block solved.
The creation of new coins is completely regulated and the last bitcoin will be created around the year 2140.
Originally, when Bitcoin started it was possible to mine with a simple home computer. The industry has since evolved and mining requires special computers called ASICs (application specific integrated circuits.)
This guide is just a simple overview of how Bitcoin works. There is actually so much more to learn and discover in Bitcoin.
You don't need to know all the ins and outs of Bitcoins math and cryptography to use it. All you need to know is how to store your coins safely, as well as how to send and receive them.
Because Bitcoin isn't backed by governments or banks, it's sometimes important for people to at least have a general understanding so that they know their money is safe.
Bitcoin is still a new technology and the currency can be quite volatile, so always exercise a degree of caution and never play with more money than you can afford to lose.