When people, who don’t know much about the crypto world, think of cryptocurrencies they think of Bitcoin. Bitcoin was the original Cryptocurrency which is still prevalent today, above all the other “Altcoins” (a cryptocurrency that is not Bitcoin) out there.

 

What is Bitcoin?

Bitcoin is the first digital currency which is decentralized, meaning there is no single administrator operating all the transactions and keeping tabs on all the Bitcoin wallets out there.

Satoshi Nakamoto, an unknown person or group of people who programmed Bitcoin, came up with a white paper after the global financial crisis in 2008. The perfect timing for such an invention.

Its stability and resistance to fraud has helped in its acceptance over the years, even some retailers accept Bitcoin as a form of payment today (Amazon has had a lot of news about it but still thinks its too volatile for now). It also is consistently the highest valued coin on the cryptocurrency market and still is to date.

 

Blockchain – a secure distributed technology

The Blockchain is the most confusing term for most of the people involved in cryptocurrencies. A lot of people have a vague understanding of it and only some really do understand the principal although it isn’t that hard to understand.

What the Blockchain entails is some “nodes” on the P2P (Peer-to-Peer) network, these are people like you and me who offer their computing resources to the Bitcoin network. And then there is a huge file containing all the information about past transactions, our “ledger” or Blockchain.

The Blockchain is a series of “blocks” which all point to its previous block and to its next block, hence forming a chain.

Now that the chain is formed the nodes come into play. The chain or ledger is only correct if the majority of all nodes accept it as the correct/original Blockchain. So we have all the nodes spread all over the globe which contribute to the network and confirm blocks on the Blockchain. If one tries to alter one block for example they still could not overcome the system, as all other nodes have a different chain which they use, so the original ledger with the fake information won’t be spread to all the other nodes.

So the distributed network confirms new transactions, adds them to the chain and distribute the new updated block info the all the other nodes.

A more detailed info about the Blockchain can be found here. [coming soon]

Transactions and its fees

The big problem with digital currencies is that you shouldn’t be able to double spend your own money. Therefore, the previously mentioned Blockchain was introduced to counteract this problem.

A new transaction is formed and has to wait till it gets into a block on the Blockchain. As soon as it gets into one, confirmations for your transactions can happen. Individual nodes confirm your transaction and get a % of the fee you paid for the transaction.

After about the average of 6 confirmations from different nodes, one can be sure that the amount of Bitcoin you sent was not double spent and has reached its receiver.

The fees are a measure against spamming the system to overload it and a way to pay for miners (another node on the network) who keep the network secure and working 24/7.

Fixed supply – no inflation!

Miners get paid with new Bitcoin plus transaction fees once they find a new block for the Blockchain (This method of acquiring new coins is called “Proof of Work”). That amount gets halved approximately every four years by todays technology standards.

This hard coded maximum should total 21 million Bitcoin in existence by the year of 2024. A fixed supply means that there is also no inflation possible for Bitcoin as there cannot be more than 21 mil. coins.

The state of the market is the only variable that depicts the value of Bitcoin.

Wallets

Since we talked about the Blockchain, a Bitcoin wallet does not actually store your amount of Bitcoin you have on your computer for example but it does store your keys to access those funds on the Blockchain.

A wallet is typically considered “hot” or “cold”. Hot meaning that it is somehow connected to the internet and cold meaning it is offline storage. Most people would advise you to store large amounts of Bitcoin, which are meant to be hold, on cold storage and small amounts for regular use, on hot wallets.

  • Hot storage
    • A desktop client – a software you download to your computer which handles your keys for you, secured with a passphrase you set
    • Online web wallets – an online service provider which offers you an online software wallet, also secured with your credentials
    • Mobile wallets – nearly every person has a mobile phone and mobile apps as a form of software wallet have gained a lot of use
  • Cold Storage
    • A hardware wallet – a physical device like the Ledger Nano S
    • A piece of paper with your private key written on it

People often argue whether a hardware wallet should be considered cold storage but I think it is the perfect middle ground between hot and cold storage, as it is often times a little physical device, like a USB stick, which is easy to carry around and easy to use.

Mining – proof of work

Miners contribute to the system by keeping it secure and helping others to keep synchronized together. These miners are the ones who find new blocks and in turn get paid in form of transaction fees and newly generated Bitcoin.

As long as Bitcoin stays proof of work, mining will still be needed even when the last Bitcoin has already been mined, as there needs to be someone, a node, on the network who confirms transactions.

People often see this as a fault in the current system, because they believe once mining won’t be as profitable anymore as no new Bitcoin can be gained, that a lot of miners will stop providing their computing power for the Bitcoin network.

Conclusion

Bitcoin was a great invention which pushed us into a new financial era. I am a strong believer of the Blockchain technology and think that cryptocurrencies are the impending future of currencies.

I am self invested in these currencies and hope that they get broader acceptance as more and more people join in and believe that this p2p system can work and will be give us the freedom from banks and governments.

 

Please comment below your thoughts as I would be interested in your opinions on Bitcoin.

  • Do you believe it can reach mainstream acceptance?
  • Can you think of Bitcoin being the currency used by everyone all around the globe?
  • What are your experiences with Bitcoin or other cryptocurrencies so far?

 

Tell me your opinions! 🙂

Cheers and have a nice day!

David