Laymen’s Guide to Bitcoin
A friend asked me this question “Do you think I should invest in bitcoin?” and I promptly counter asked her “Do you know what it is?” She vaguely muttered something. I believe we shouldn’t bet on our hard earned money until we know what it is and how it makes money for us. This blog post intends to answer what you need to know about bitcoin.
“Sorry to be a wet Blanket. But, writing a description of Bitcoin for general audiences is bloody hard. There is nothing to relate it to” — Satoshi Nakamoto
This is what Satoshi Nakamoto the inventor of Bitcoin protocol had to say about it. Trying to explain bitcoin is like trying to explain the internet to someone in the 80’s, it’s a brand new concept. But, let’s dive in!
What is Bitcoin?
It’s a Cryptocurrency, meaning a digital currency. They’re traded by people running computers connected through a network all around the world. The System is protected and run based on mathematical algorithms. Solving these algorithms creates new bitcoin’s that can be then used to exchange for goods, services and even cash.
How did Bitcoin come into existence?
Satoshi Nakamoto the inventor of bitcoin never revealed his true identity and still remains to be just a name on the internet. In 2008, the domain name “Bitcoin.org” was registered and a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published. This is how bitcoin came into existence.
The vague concept of a cryptocurrency has been around since 1980’s But, It wasn’t a coincidence that bitcoin, as an idea was born in 2008 amid the turmoil of the financial crises. During the crises, there was lack of trust and anger amongst the people for the big centralised organisations who had the financial power restricted to themselves. It’s the necessity of people wanting the decentralized financial freedom that gave birth to Bitcoin. Satoshi turned the binary 0’s and 1’s into money.
What are the Units of Bitcoin (₿)?
Small amounts of bitcoin used as alternative units are:
Millibitcoin (mBTC) (0.001 Bitcoin)
Bit (0.000001 Bitcoin)
Satoshi (sat) (0.00000001 Bitcoin)
What is the value underlying Bitcoin?
Conventional currency is based on gold, silver. But bitcoin is based on mathematics. It’s an open source code, freely available to anyone who wishes to check the mathematical formula. Bitcoin is generated /rewarded for the process called as mining.
What is Bitcoin mining?
Mining means solving the mathematical hash algorithm to arrive at the correct answer before anyone else does while verifying previous transactions. When one successfully does the above they generate new bitcoin’s in circulation which becomes their reward. Mining is similar to minting the currency. In 2009 Satoshi solved the first algorithm in the chain, which is called the genesis block. Ever since then miners have been solving the blocks and generating bitcoin and the chain continues. These solved ‘blocks’ gets added to the network, known as the Blockchain.
By mining, you can earn bitcoin without having to put down money for it that said you certainly don’t have to be a miner to own bitcoin you can also purchase them with fiat currency (USD, EUR etc) on various bitcoin exchanges.
You may ask, what are miners doing so important that they get free bitcoin?
Miners work as auditors, they are verifying previous transactions. In turn, keeping the system users honest and preventing the double-spending problem. These mathematical problems are not complex, but require a lot of guesswork to arrive at the conclusion before anyone else does.
Does that mean you can create unlimited bitcoins?
No. Bitcoin inventor Nakamoto set a monetary policy at bitcoin’s inception that there would only ever be 21 million bitcoin in total. Their numbers are being released roughly every ten minutes and the rate at which they are generated would drop by half every four years until all the currency is in circulation. The real-time bitcoin circulation data can be known by bitcoin clock.
Bitcoin Data (As of February 2018)
Total Bitcoins in circulation: 16,891,300
Total Bitcoins to ever be produced: 21,000,000
Percentage of total Bitcoins mined: 80.43%
Total Bitcoins left to mine: 4,108,700
Bitcoin price (USD): $10,060.00
Bitcoins generated per day: 1,800
Bitcoin inflation rate per annum: 3.97%
Total blocks: 511,304
Approximate block generation time: 10.00 minutes
Approximate blocks generated per day: 144
(Source: bitcoinblockhalf.com)
How does the record keeping happen?
Normal currencies use a middleman like a bank to hold the records of all transactions, commonly known as a ledger. For Bitcoins the ledger is held publicly by a peer to peer network of computers across the world. The ledger is similar to an audit trail where you can trace back right unto the first block ever created, and anything outside of the trail is not part of bitcoin ledger. Every time a transaction occurs the ledger is updated across the network.
What makes it different from our normal currency?
It’s different because no one controls it. It’s decentralized and does not belong to any one country. Every machine that mines bitcoin and processes the transactions are part of the network. The apex banks in various countries control the money flow in the economy but with bitcoin, nobody can alter the flow or control it. No one computer or even group of the computer can decide to control it as it will be racing to do so against the whole network spread across the globe. Even when some part of the network goes offline for some reason, the money keeps flowing. This means that no country can devalue this cryptocurrency and no one can freeze your accounts.
Why is bitcoin so much in news for?
The overall market capitalization for Cryptocurrencies is $475.3 billion, as of this writing. Over 100,000 or more merchants and vendors accept bitcoin as payment. Research produced by the University of Cambridge estimates that there are 2.9 to 5.8 million unique users will be using a cryptocurrency wallet, most of them using bitcoin, as of 2017.
The above statistics clearly state that bitcoin holds the road to the way we handle our finances in the future. But there are still some problems. Bitcoin has a reputation for being the preferred payment method of criminals due to the anonymity it renders to its users. There have also been instances where the bitcoin network has faltered. In 2014 the biggest exchange for bitcoin Mt.Gox suddenly shut down, investors collectively lost around $460 Million in worth.
Amidst all the chaos around the bitcoin, its prices still show a rising trend. Satoshi’s masterstroke was to eliminate the cash in the currency. The consensus of millions replaced the decisions of few. Its permission-less innovation — no need to ask to use it, no fees for employing the technology, no oversight needed to prove a transaction. It’s ironic that he created a transparent software and system by keeping his identity under wraps. Only time will tell if bitcoin is going to take over the world as a global currency. I leave it up to you if you wish to “cash” in on bitcoin or wait until the bubble bursts to reveal the ultimate truth about Bitcoin.
Thank you for reading! 😊 If you enjoyed it, test how many times you can hit 👏 in 5 seconds. It’s great cardio for your fingers and will help other people see the story.
Disclaimer: This information should not be interpreted as an endorsement of cryptocurrencies or a recommendation to invest. Historic performance is no guarantee of future returns. The above views are purely educational and my own.
