What is Bitcoin? Blockchain?… in 4 mins
Blockchain? Cryptography? Decentralized? Fiat? Wallets? Mining?
This is the bitcoin and blockchain introduction I wish I read months ago. There are lots of terms to understand. And how they fit together.
I learned about bitcoin from my good friend Brandon Fancher. His initial explanation led me to more questions. So I Googled, YouTubed, Wikipedia-ed and wanted to learn more.
I signed up for bitcoin.com’s 10-day email course. I highly recommend the course. This article is heavily paraphrased from that course.
Bitcoin is a cryptocurrency, a new type of digital money, used as exchange. It’s like regular currency, or fiat, except it uses cryptography to verify transactions and control its creation.
Cryptography is system of complex codes processed by computers. Think of this like computers solving complex mathematical problems to secure and verify information.
Fiat, or centralized monetary systems, like the dollar in the U.S. Federal Reserve System, are controlled by the government, who controls the supply of currency by “printing” units of money.
Bitcoin is a decentralized cryptocurrency, invented in 2009 by Satoshi Nakamoto. Bitcoin can be freely transferred between people all over the world, without the control or limitations usually imposed by banks or governments. You do not have to worry about bank hours, physical location, personal identification, formal permission, or other limitations.
Bitcoin is the most popular digital currency. It is considered safe, is deflationary, and open source. There are many other cryptocurrencies, like Ethereum, Ripple, Litecoin, and Dash, to name a few.
Bitcoin is built upon blockchain technology, a peer-to-peer, open source, and decentralized network. Think of the blockchain as a ledger, or database, of transactions. Joe sent 2 bitcoin to Alex, Alex sent 5 to Steve, etc. Except the blockchain uses anonymous IDs, not names. An exact copy of this ledger exists in multiple places. The blockchain is not controlled by any one person or organization. Instead these blocks, or groups of bitcoin transactions, exist in multiple decentralized places, and are not easily altered without consensus on the network.
A “wallet” is a tool that stores digital credentials for accessing your bitcoin on the blockchain. Your wallet allows you to send and receive bitcoin. Wallets do not actually “store” or “hold” bitcoin. Wallets store your credentials to handle the bitcoin you own. The bitcoin you own are recorded on the blockchain.
You can get bitcoin by buying or selling them from various sources, online and offline. You can purchase bitcoin online directly with a credit card, or PayPal, or use an exchange or brokerage service that enables you to buy bitcoin via a bank transfer. Or a friend can send you bitcoin. There are even bitcoin ATMs.
You can also earn bitcoin from mining. Remember, the blockchain is a distributed and decentralized database. To achieve independent verification of ownership, and transactions, each network of computers stores its own copy of the blockchain. Mining is the resource intensive process of verifying transactions on the blockchain. The reward for successfully mining is bitcoin! Mining typically happens in special data centers, with a lot of processing power. Thousands of these bitcoin mining centers, called nodes, are spread all over the world.
Spending Bitcoin is similar to spending traditional money. However, bitcoin is not yet universally accepted, so only some stores accept it. The number of retailers accepting bitcoin has surpassed 100,000. This figure will rise as more merchants recognize bitcoin as a legitimate and convenient form of payment, with utility, like fiat.
Bitcoin is growing in popularity. Tens of thousands of entrepreneurs and programmers around the world develop new services and apps. Many more are buying and investing in bitcoin. As these groups grow, so will the acceptance of bitcoin from merchants. The value of bitcoin increases, with the laws of supply, demand, and speculation. At the start of 2017, 1 bitcoin was worth about $1,000. Today, in early 2018, the same bitcoin is worth over $10,000! Check out coinmarketcap.com for current prices.
You can get started with Bitcoin by downloading a wallet. You can buy some bitcoin with a credit card online, or have a friend transfer you some. You do not need a whole bitcoin to start. A fraction is ok! And that small amount may be worth a lot more in the future, as bitcoin gains utility and acceptance.
Phew! That’s bitcoin. And many related terms. Take the next step and subscribe to the bitcoin.com 10-day email course.
Check out our story about making a bitcoin wallet MVP, and then pivoting. Our pivot project, is a payment system, to buy goods with bitcoin, with no middleman!