What is Bitcoin? {Noob’s Guide to Bitcoin}

Shivendra Misra
Jul 30, 2018 · 13 min read
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This was originally written on shivendramisra.com/blog

Let me ask you one simple question. When you have money, what do you do? You probably keep it in the bank, right?

Since decades banks have emerged as the facilitators of trust in the financial system. While we think we transact with each other, there is always a middleman, called the bank. But what happens when these banks fail to stand up to their promise and jeopardize people’s money?

The financial crisis of 2008.

Due to the innumerable defaults by home owners on mortgages, the bankers and the investors lost all the profit they were hoping to make.

Two major investment banks, Lehman Brothers and Bear Stearns, collapsed, and more than 450 banks failed over the next five years. Several of the major banks were on the brink of failure and were rescued by a taxpayer-funded bailout.

This crisis not only impacted America but many other countries. Mulitple governments joined hands to reduce the impact of this large scale credit crisis but unfortunately, the damage was already done.

Countries going through such an economic crisis often tighten their financial thumbscrews. They impose restrictions that prevent people from doing even basic things like taking cash out of the bank. Maybe the banks were no longer worthy of trust.

So what is the first lesson people learned?

They learned that keeping their money with a central authority is probably not the best thing to do.

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Then, in 2009, just when the people came out of the misery caused by the financial system, there was a whitepaper released titled, “Bitcoin: A Peer-to-Peer Electronic Cash System.”

Though it did not gain massive recognition that it has today, what it did was give people an alternative way to transact with each other without the need of any central authority.

Since then, Bitcoin has probably become the most buzzed word of the past decade, which is quite evident in the following chart.

But amidst all this hype, what exactly is Bitcoin? Why is this technology driving so much debate and discussion? To clearly understand Bitcoin, let’s cut through all this hype and get straight to the fundamentals.

Bitcoin, in itself, is much more than just a currency; it represents the technology, concept, network, digital asset, and the currency, all at the same time.

To see from a broader perspective, bitcoin has two components — one is the digital coin and the other is the bitcoin system and the technology.

From the perspective of a digital coin, bitcoin is a web-based currency which can be used to exchange value between individuals, just like the fiat currency. To be precise, bitcoin is just a few lines of code, which can even be encoded at the back of an image or an emoticon.

From the perspective of the system and technology, Bitcoin is a vast computer network spread all across the globe (called “nodes”) and a decentralized database which stores all the bitcoin transactions (called the “Bitcoin blockchain”).

NOTE: In order to differentiate the two components, we always capitalize the “B” in “Bitcoin” when talking about the system and technology, and never capitalize “bitcoin” or “bitcoins” when talking about the currency units.

Bitcoin is the first cryptocurrency to hit the market and has the largest market cap ($140,268,121,911 at the time of writing) of all cryptocurrencies which has made sending money as easy as sending an email.

You can buy and sell anything with Bitcoin and many merchants worldwide have started accepting this digital currency as a means of payment.

What’s amazing about this digital asset is that there’s no central institution such as the government or the bank, which owns and controls it.

Bitcoin transactions are made in a decentralized environment where people like you and I can transact peer-to-peer without the need for a bank, government institution or any kind of middleman.

You might be wondering, if there is no central body, then who ensures the security of the network?

The “Miners.”

The miners mine additional coins (just like the government mints currency) by validating transactions, and they get a reward (in BTC) for their efforts.

Also, it is almost impossible for a miner to add fraudulent transaction as the transactions are only added to the blockchain after achieveing a consensus between all the nodes (members) in the network. Thus, the whole network maintains the security and stability.

This virtually means that you’re your own bank and no one can stop you from transacting using bitcoin. That’s amazing, right?

But that’s not all, to add the cherry on the top, Bitcoin transactions are pseudonymous, which means that no one can track your personal data (information such as your name and ‘physical’ address) while making transactions. The only detail available on the network is your public address which cannot be traced back to you until you tell someone about it.

WHO CREATED BITCOIN?

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Well, that remains a mystery to date!

What we do know is an individual or a group of individuals by the pseudonym Satoshi Nakamoto’ who created Bitcoin. Satoshi developed bitcoin, authored the bitcoin white paper, created and deployed bitcoin’s original reference implementation. As part of the implementation, he/she/they also devised the first blockchain database.

Most importantly, Satoshi mined and owned close to 980,000 BTC in its early days. When the price of bitcoin hit $20,000, he straight away became one of the top 100 richest people in the world! If the price of bitcoin rises further, do you think he can become a trillionaire?!

Nevertheless, because of the anonymous nature of Bitcoin and the latest cryptographic technologies used, the true identity of the creator(s) is still unknown.

WHERE DID IT COME FROM?

Although many of us might think of Bitcoin as relatively a new technology, there have been predecessors to it. Attempts have been made in the past to develop a decentralized currency, however, none of them have been able to take-off from the ground. Nevertheless, Bitcoin has successfully borrowed concepts from these previous developments;

1. David Chaum’s Blind Signature Technolgy, which permitted anonymous transactions.

2. ‘How to Make Mint: The cryptography of anonymous electronic cash by National Security Agency Office of Information Security Research and Technology in 1996. This paper highlighted the core fundamentals of any electronic cash system.

3. Wei Dai’s B-money and Nick Szabo’s BitGold, which highlighted some of the similar protocols such as the proof-of-work being used by Bitcoin.

Due to their close association with digital currencies, David Chaum, Wei Dai, and Nick Szabo have repeatedly been suspected to be Satoshi Nakamoto despite their denial.

Even though Bitcoin was not one of the first decentralized currency, it became the first peer-to-peer digital currency to solve the double spending problem and take the world by a storm.

ADVANTAGES

So why even use Bitcoin? Why not just let the financial system run as it is? Here’s why;

Pseudonymity

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Each and every person on the Bitcoin network has a wallet to send and receive bitcoins. These wallets generate a public key which allows other to send you bitcoins. Thus, nowhere is your personal information included through the wallet or through the blockchain.

While doing transactions with fiat currency often requires submitting various forms to the bank to get your bank account and credit/debit card made, bitcoin has no such requirement.

This is the reason behind its pseudonymity. Users can see that a particular public address is exchanging bitcoins but no one can know that a particular address belongs to you (unless of course, you tell them).

Moreover, wallets and exchanges also provide an additional layer of security by generating multiple keys that map to your wallet. This way you can transact with different public keys each time so that there is no pattern whatsoever to identify that a particular transaction has been executed by you.

Immutability

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Transactions done through Bitcoin are immutable and cannot be changed once they have been validated and uploaded on the blockchain. The only way to null the effect is to perform a reverse transaction of the same amount with the same addresses and wallets.

The transactions cannot be tampered with as the network is secure due to the presence of multiple miners.

Speed and Global Reach

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Bitcoin enables each and every one to send bitcoins anywhere in the world. It doesn’t matter whether you send bitcoin to your friend or to some NGO on the opposite side of the globe.

The transactions do not have to go through several banks to be executed and thus the amount of fees required is also drastically lower. This opens a plethora of opportunities for the people who do not have access to banking facilities and can lead to rapid economic development.

No restrictions

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No one is stopping you from sending/receiving bitcoins. Though the rules and regulations in some countries may cause some hindrance, the network cannot be stopped unless the Internet is shut down.

You don’t have to register yourself with banks or fulfill legal requirements apart from some identification requirements by some exchanges.

Mining of bitcoin is also an open and highly competitive market. You can join the race anytime if you’re willing to invest in it.

Decentralization

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This is probably the most distinctive feature of bitcoin. If you’ve read till here, you must have a vague idea of what I am going to say but bear with me. For a long period of time, we have placed our trust in the banks that ensure proper transfer of money and prevents fraud. The banks have all our accounts and implement various security features to prevent our money. But as we have seen in 2008, the system is rigged.

With the advent of Bitcoin and blockchain, the trust was decentralized. Thus, we did not have to rely on any third-party organization to maintain trust as it was already built into the system architecture.

The ledger (the blockchain) is stored with millions of people and is updated multiple times every hour. Thus no one can fool the network by altering one copy of the ledger as it would not match other people’s ledger as a result of which, the change will be caught. By solving the double spending problem this way, Bitcoin removed the need for an intermediary and allow us to ‘truly’ transact with each other.

Divisibility

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Bitcoin is divisible up to 8 decimal places. The smallest amount of bitcoin you can transfer is 0.00000001 BTC, also known as a Satoshi. Though this feature facilitates microtransactions, it would not be feasible to transfer this value today due to the rising fees of the network.

DISADVANTAGES

As much as I like to talk about the revolutionary nature of Bitcoin, I cannot conclude this post without mentioning some of its disadvantages that might be a cause of worry for some people;

Accepted by few

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Though Bitcoin found its popularity with quite a few merchants, many of them are still not ready to accept bitcoins as a payment option. The system has a long way to go to become mainstream. Some major companies accepting bitcoin are Microsoft, Intuit Labs, Expedia, Overstock.com, Shopify, PayPal, and others.

Wallet Hacks

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Wallet hacks are common news in the cryptocurrency community. Hackers are often sitting and waiting for wallets that are not secure, to steal the bitcoins and run away. The DAO hack, the MtGox hack etc are all examples of hacks wherein the hacker has found vulnerabilities in the network to effectively transfer funds to an address of his choice.

Scams

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Whether it is the Internet or cryptocurrencies, scams have always flooded the ecosystem in its early days. Shady exchanges, Ponzi schemes, and scammy ICOs are the most popular way of getting people’s money and vanish instantly.

The U.S Securities and Exchange Commission (SEC) also launched a fake ICO site called HoweyCoins and mentioned all the features of a fake ICO, just to educate people how these scams can make up websites with jargons to impress investors but are really worth nothing.

Volatility

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The price of bitcoin is definitely volatile. One of the reasons is that the market is highly news-driven. A hack in an exchange can lead to a rapid fall in price whereas a news about J.P.Morgan exploring crypto can lead to a rapid increase in price. There is really not much we can do to be sure about the market (perhaps, no one can). The inability of bitcoin to maintain a stable price prevents it from being treated as a currency but rather as a store of value and a speculative asset.

However, proponents of Bitcoin believe that the price volatility will soon come down.

Mining of Bitcoin

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The bitcoin mining process requires machines with very high computational powers. These computational powers (hashing rate) are necessary for miners to solve the cryptographic puzzle in order to validate the block and put it on the blockchain. The higher the hashing rate the more profit miners earn. Thus, in this mining menace, the machines used by miners consume a ton of electricity.

A recent study says that Bitcoin may use 0.5% of the world’s electricity by the end of 2018, which is enough to power the whole of Austria. More surprisingly, Eric Holthaus, a renowned meteorologist mentions that by 2020, the Bitcoin network will use as much electricity as the entire world is consuming today!

Miners often move to countries such as Iceland to take advantage of lower costs of electricity to increase their profits.

The system may not take much energy as compared to the traditional fiat system, but this hike in energy consumption with the advent of Bitcoin, cannot be ignored.

Scaling

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Scaling of Bitcoin has been one of the main concerns of the community ever since its inception. With its current architecture, bitcoin can handle 3–7 transactions per second as compared to VISA, which can do thousands of transactions at the same time. For Bitcoin to be truly accepted as a currency with worldwide usage, this problem has to be solved.

Many solutions and BIPs (Bitcoin Improvement Proposals) have been proposed such as Lightning Network and Segwit which can increase the speed of the network. However, the results that they show are still questionable.

WHAT ARE THE CELEBRITIES SAYING ABOUT IT?

Let us see how famous celebrities and tech-gurus have responded to this disruptive technology.

Bill Gates (American business magnate, investor, author, philanthropist, Founder of Microsoft Corporation)

Bitcoin is exciting because it shows how cheap it can be. Bitcoin is better than the currency in that you don’t have to be physically in the same place and, of course, for large transactions, currency can get pretty inconvenient.” (Source)

Richard Branson (English business magnate, investor, author and philanthropist, Founder of Virgin Group)

“Well, I think it is working. There may be other currencies like it that may be even better. But in the meantime, there’s a big industry around Bitcoin. — People have made fortunes off Bitcoin, some have lost money. It is volatile, but people make money off of volatility too.” (Source)

Peter Thiel (American entrepreneur, venture capitalist, philanthropist, political activist, and author)

“PayPal had these goals of creating a new currency. We failed at that, and we just created a new payment system. I think Bitcoin has succeeded at the level of a new currency, but the payment system is somewhat lacking. It’s very hard to use, and that’s the big challenge on the Bitcoin side.” (Source)

John McAfee (British-American computer programmer and businessman, Founder of McAfee Associates)

“When I predicted Bitcoin at $500,000 by the end of 2020, it used a model that predicted $5,000 at the end of 2017. BTC has accelerated much faster than my model assumptions. I now predict Bitcoin at $1 million by the end of 2020. I will still eat my dick if wrong.” (Source)

Al Gore (American politician and environmentalist, 45th Vice President of the United States)

“When Bitcoin currency is converted from currency into cash, that interface has to remain under some regulatory safeguards. I think the fact that within the Bitcoin universe an algorithm replaces the function of the government …[that] is actually pretty cool.” (Source)

Ashton Kutcher (American actor,producer, investor and entrepreneur)

“Bitcoins are obviously becoming more and more relevant….I think the fact that you can buy drugs and ammo with it is actually a validator of the currency itself” (Source)

CONCLUSION

Bitcoin is a digital currency created in 2009. It follows the ideas set out in a white paper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies. [Source]

Bitcoin definitely came out as a boon after the financial crisis of 2008. It gave a new hope to people as well as, an alternative way to transact with each other.

The growth of Bitcoin was pretty much insignificant until 2013 but has kept on increasing ever since. Mass adoption and awareness of Bitcoin were also triggered by the price frenzy in late 2017.

The invention of Blockchain technology is also credited to Bitcoin which is disrupting industries like never before.

Hope you now have a basic understanding of Bitcoin!

Clap, Clap, Clap 👏 🙌 !!


About Me

I am a Blockchain and Cryptocurrency enthusiast and I’m highly interested in solving real-world problems through technology and Entrepreneurship. Apart from writing, coding and reading books, I am also passionate about fitness and sports. You can check more of my posts here. Reach out to me on LinkedIn, I’m waiting for your message!

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