An introduction to the first and global leader in cryptocurrencies. Get to understand why it exists, how it works and why it has created so much waves in the financial services sector.
What is Bitcoin?
Bitcoin is the brainchild of the person (or group of people) known as Satoshi Nakamoto. Till today, it is not public knowledge who Satoshi is, and whether it was a single person or a group of individuals who came together to create Bitcoin. What we are sure is that the first Bitcoin transaction happened in January 2009, when Hal Finney received 10 BTC from Satoshi, after the first block was mined, known now as the Genesis Block. It has taken many years for bitcoin to become mainstream, and mostly due to its nefarious background in the criminal underworld, with many news agencies reporting the coin as the go to currency for illicit transfers online.
What people failed to realise at the time was that the technology created to run Bitcoin, the blockchain, would go on to create a $1 Trillion as of 2017 and a future full of possibility.
Bitcoin acts like any other currency we are used to, though it is not controlled by an entity or a government. Most currencies are controlled by a central bank, and this was seen as a concern by Satoshi, who believed that there shouldn’t be a single entity that could control the currency. This was the idea of the blockchain, a Distributed Ledger, that could not be modified in any way, and was public for all to see.
How does Bitcoin work?
This is where the confusion begins. Just like the complex banking systems already in place which many do not question, Bitcoin runs on a technological backbone that has been proven to not only be
Just like when using online payment portals, example PayPal, Bitcoin works by using digital wallets that can be downloaded and installed onto your PC, Laptop, Smartphone or used Online. This wallet offers you a public address, much like an email address, that you can share with your family and friends, attach to invoices or online purchase buttons, and acts as the routing technique for getting money from someone else to you.
But how is my money safe online?
This is the power of the blockchain, a publicly distributed ledger which is the backbone of the Bitcoin Network. Every transaction has to be confirmed, and once they’re confirmed they are added to the blockchain. Once the update in the blockchain happens, your wallet is able to read the data and calculate your new balance, thus allowing you to make more transactions. Each transaction is added to the blockchain in chronological order, and whilst a transaction is being evaluated your wallet is not allowed to modify that transaction in any way or allow you to transfer more bitcoin than is currently being verified and what’s left in your balance. This also does not allow a user to spend any bitcoin that has not been confirmed yet. All this information is enforced through the blockchains robust cryptographic base.
How do transactions happen with Bitcoin?
Transactions are done through the initial wallet that was created. Apart from a Public Address, the wallet issues you a randomly generated private key that is only ever seen by the owner of the wallet. This private key is unique and close to impossible to guess, and it acts as the security gateway to transfers. Without this private key no transaction can be added to the blockchain. The key also protects the transaction from any changes using cryptographic principals which would corrupt the data if a change is made before the transaction is recorded in the blockchain. At today’s rate, transactions are transferred within 20 mins of transfer, for any value up to the maximum held in your wallet. The process of confirming transactions on the blockchain is called mining.
What is Bitcoin Mining?
Think of mining as a big puzzle that supercomputers are competing to solve. Since the whole system uses the same blockchain, every mining setup is trying to find the solution to a secret code that is imprinted into every block that is pending confirmation. Each block has to be dealt with chronologically which protects the network, whilst also getting all the computers on the network to work and agree on the same information. If one of the computers creates a block that does not conform to the network, either by violating the very strict cryptography rules on how transactions are placed into blocks or if any previous blocks have been modified then the whole block is removed and the next block is tackled. The transactions in the offending block are cancelled and would need to be redone. The initial mention of a big puzzle is the solution to the last possible flaw whereby one computer manages to make a number of simultaneous changes to the blockchain, and thus be able to historically change information since the other computers would not be able to catch up. The system of the puzzle acts as a very difficult lottery which would be highly improbable for one system to be able to win consecutively.
For their work, miners are rewarded with an ever-diminishing mining reward, which halves every number of transactions, whilst also facing harder and more complex cryptographic puzzles to confirm blocks on the blockchain and receive their rewards. This has led to highly optimised ASIC machines that have no other use than mining specifically the Bitcoin b