This review is examining the title “What is Bitcoin” and is an actual guide from the Bitcoin basics to its entire structure. Bitcoin is a digital cryptocurrency that came to life in January 2009. Its invention is linked to a “Satoshi Nakamoto”. Moreover, the identity of Satoshi Nakamoto is still a mystery. Trading in Bitcoin has proven that it is cheaper than trading in the traditional online payment methods. Bitcoin is decentralized in contrast to fiat money which is duly controlled by governments and federal banks. It is not a physical currency since it balances on public ledgers that are transparent and open to everyone. Bitcoins are not backed or issued by the government or banks, nor are they valuable the way commodities are. More so, its popularity is gradually growing, despite it not serving as a legal tender. It has triggered the launch of numerous Altcoins and been part of the journey in the cryptocurrency world.
Bitcoin definition comes in different but related versions. The system is a computer collection that runs all Bitcoin codes and stores their blockchain. Since all those computers running the blockchain have similar block lists and transactions, and can clearly see the new blocks getting filled with these new transactions, there is transparency and trust. Everybody, running the Bitcoin node or not, is able to see the live occurrence of the transactions. To achieve, a despicable act, a villain would need to operate 51% of the Bitcoin computing power. Bitcoin has almost 12,000 nodes, and the number is gradually increasing, making that kind of attack quite impossible. In case there is an attack, the Bitcoin miners or those people who operate the Bitcoin network would shift to a new and secure blockchain making it difficult for an attacker to achieve their goal. Bitcoin token balances are kept using private and public keys that are long string letter and numbers linked through the algorithm of mathematical encryption used to create them. When you compare the public key to a bank account number, one realizes that it serves as the address that is published globally and any other person may send their Bitcoins. The private key is a critical guarded secret that is only accessed in authorizing Bitcoin transmissions. The keys are different from the wallet, which is a physical entity which facilitates the Bitcoin trading and allows users to track coin ownership.
How Does Bitcoin Work?
Understanding how Bitcoin works is an important step towards accepting and adopting it.
A new user’s basics
New users might start without adequately understanding all details in entirety. Once one installs a Bitcoin wallet on their mobile phone or computer, it generates their first address and they can create more of that kind whenever they need. It is prudent that they disclose their identity to business partners or friends so that they can receive their pay via this. It has the basics of email operation, only that the Bitcoin address is only used once.
It is a shred ledger where the complete network relies and all effective transactions are part of the block chain. More so, it allows the wallets to adequately make calculations of their spendable balance for new transactions to be verified thus ensuring that it is the spender who owns them. Cryptography enforces the chronological order and the integrity of the blockchain.
Transactions – private keys
This is a value transfer from a wallet to another which is taken in the specific blockchain. The wallets keep confidential data called seed or private key, used for transaction signing, as provision of mathematical proof that the coins are from the said wallet. The signature safeguards the transaction from any alterations after issuance. Through mining, all transactions are publicized within 10 to 20 minutes after the transactions.
Processing – mining
It is a consensus system distributed to confirm all unconfirmed transactions through counting them in the blockchain.
The mining enforces chronology in the blockchain, protects network neutrality, and allows diverse computers to be part of the system state.
All transactions should be packed in carefully fitting blocks, within strict rules of cryptography which will get network verification. The rules prevent earlier blocks from modification since this will consecutively invalidate all successive blocks to the block chain. This way, no individual or groups can control what blockchain comprises or replace sections of it to revert their spending.
It has features similar to that of money. They include fungibility, durability, scarcity, portability and recognizability based on mathematics properties and not on physical properties like silver and gold or trust in central controllers (like fiat money). In summary, it is backed by arithmetic. With the mentioned attributes, all that is needed for any money form to be valuable is adoption and trust. Bitcoins’ trust can be determined by its ever-growing user base, startups, and merchants.
History of Bitcoin
This new era currency has a journey that does not go back many years. It is in 2008 that this narrative commenced, leading to a totally new currency phenomena called crypto. Below is a chronological sketch of the starting of this popular crypto.
Aug. 18, 2008
On this day, the Bitcoin.org domain name is registered. Currently the domain, “WhoisGuard is protected”, such that the identity of the individual who registered is confidential.
Oct. 31, 2008
An individual by the name Satoshi Nakamoto announces on metzdowd.com, a cryptography mailing list that he had been working on a new electronic cash system which is entirely peer-to-peer, and has no trusted third party. It is now the famous whitepaper on Bitcoin.org domain. It is the Magna Carta today for the way Bitcoin operates and is entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”.
Jan. 3, 2009
Block 0, the very first Bitcoin was mined. It is famously known as the genesis block and has the text: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks,” maybe as proof that it was mined after or on that date, and as a relevant political commentary, probably.
Jan. 8, 2009
The Cryptography Mailing List announces the first version of the Bitcoin software.
Jan. 9, 2009
In earnest, Bitcoin mining commences as Block 1 is mined.
Who Is Satoshi Nakamoto?
No one conclusively knows who the inventor of Bitcoin is. As much as Satoshi Nakamoto is the name linked to this unique invention, he must have built his invention on existing research. From 2008, many individuals have claimed to be behind the pseudonym Satoshi Nakamoto. But as of January 2021, his true identity still remains obscured.
Such an innovation, obviously, did not emanate from a vacuum; there must be a force or a brain behind it as much as their identity is yet to be revealed.
Some common precursors to Bitcoin include Adam Back’s Hashcash, a 1997 invention, and later Wei Dai’s b-money, then Reusable Proof of Work by Hal Finney, and bit gold by Nick Szabo. The whitepaper cites b-money and Hashcash and other previous works that span numerous research fields. Unsurprisingly, most of the names behind those other projects have also been speculated to be part of the engineers behind the creating of Bitcoin.
- Inventors of Bitcoin might have chosen to remain anonymous for privacy. As Bitcoin has swept the globe by storm, Satoshi would possibly garner excess government and media attention, something he might not like much.
- Another motivation could be bitcoin’s potential to disrupt current monetary and banking systems. If it was to gain massive adoption, it would definitely surpass most country’s fiat currencies. As a threat to the currency sovereignty of nations, it could motivate sovereign states to think of legally battling the creators.
- Safety is the other reason. Considering 2009 alone, investors mined 32,984 blocks with a 50 Bitcoin reward per block. This totaled 1,624,500-Bitcoin payout in 2009.
- An individual may conclude that solely Satoshi and some few other individuals were mining in 2009 and therefore, possess a major share of the stash Cryptocurrency.
- An individual possessing much Bitcoin would be targeted by criminals given they are more like cash and less like stock, where those private keys required for authorizing spending could simply be printed out and kept in a drawer or under the mattress. However, it is quite unlikely for the inventor to take precautions in making extortion-induced crypto transfers easy to trace, choosing anonymity is the best way that Satoshi needed to limit exposure.
How Are New Bitcoins Created?
The new ones are mined through special computers that are programmed to generate them. For the system to perfectly work, individuals can program their computers to automatically process everyone’s transactions.
They calculate superbly difficult sums and are rewarded with a Bitcoin specifically meant for the holder. The setting up of powerful computers for acquiring Bitcoin is labeled mining.
The calculations are becoming challenging hence more Bitcoins are generated. In case one starts mining now, it could take years before they get 1 BTC. You can even spend more cash on power for your machine than the value of the single BTC.
- First stage: Transaction- it begins when a user has to send a given amount of crypto to another user.
- Second stage: Compilation– The transactions pending are grouped into transaction blocks through mining nodes. Numerous miners are likely to collect the very transactions. They remain unconfirmed until the block mining is duly done.
- Third stage: Training- Each miner selects the transactions they require for building individual blocks. In case some are already added, after validation, in the previous block, they are automatically eliminated. The newly created block is referred to as candidate, since it is still invalid for lack of a valid PoW- proof of work.
- Stage Four: Proof of Work- After forming a block, the miner should find a valid signature for that block.
- Fifth stage: Transmission- once the node gets output hash for the formed block; it transmits it with the signature to the rest of the nodes within the network for validation.
- Sixth stage: Verification– The rest of the network nodes validate and verify that the hash and the block comply with the system conditions, verifying the legitimacy and confirming that it has the ascertained number of zeros. All proof of work is confirmed here. It includes the computational power engaged to get the solution, and it’s recorded that the discoverer of the block can efficiently, comfortably and effectively use the just received Bitcoins.
- Seventh stage: Confirmation– Once the new block is included to the chain, all the rest are added to the same will count as confirmation. At that point, one can think that since each miner began the process with their own block, they can keep on mining, which is not the case. After the generation of the block, all nodes start the process of creating new blocks of transaction. Miners won’t continue mining the preceding block since each one must add the preceding block output hash.
Why is Bitcoin Valuable
It offers an effective means of cash transfer across the internet and is under the control of a decentralized authority with transparent rules. This makes it present an alternative to fiat money controlled by the central bank. There are many discussions on how to value Bitcoin and this review will explore what its price and value will look like, in case it enhances its widespread adoption across borders.
First, it is imperative to note that crypto has been deemed as an alternative to the use of fiat money.
Using it as a payment form for services, or products sold gives it the popularity it deserves. Numerous physical shops and stalls choosing to display the sign “Bitcoin Accepted” shows that the world is gradually accepting its use.
All transactions can be done with wallet address or requisite hardware terminal through touch screen apps or QR codes. Online markets easily accept their use though adding it as a payment option other than the usual PayPal, and credit cards.
Its employment opportunities also add to its value to individuals and investors across the globe. Employees can get their pay through it by creating an internet service and adding the Bitcoin wallet address to the internet site. Moreover, there are numerous job boards and websites that have allegiance to digital currencies.
It matters and is significant because of its safety in the face of immense uncertainty on the globe. Individuals buying it diversify their assets. Its value on the market is comparable to other go-assets like gold, which shine whenever there is a recession. In case of a pandemic, it is quite possible for many to view this Altcoin as a better alternative to the dollar.
It also tethers into ideologies that are privacy oriented since it is ideologically and politically neutral. Curved in the internet era, and is plagued with utmost concerns of privacy.
Its ideological and intellectual origins are in the 90s and 2000s cypherpunk movement. Online record forums reveal that it was lobbied for as some anonymous digital currency which allowed individuals’ online interaction without corporation or government tracking. Consequently, it offers an alternative for people who don’t trust the fiat banking system. Its value that makes it boom lies in its hope, social sentiment and ideology. Its design makes it increase in value as a consequence of the software codes that Nakamoto wrote.
How to secure Bitcoin
On top of the financial benefits that come with crypto, Bitcoin has several elements that keep it secure from theft. Cryptography authenticates the creation and transfer of all crypto, and the Bitcoin underlying protocols are robust. The use of blockchain or distributed ledger gives investors and holders a record of transactions which cannot be tampered with since there is no any failure point.
However, it has stopped attackers from the exploitation of vulnerability within wallets and exchanges- as the software used in the storage is smartphones or computers.
The government does not regulate its exchanges and they do not generally provide adequate security and insurance for use in the storage of fiat money as banks do.
For instance, the” Flexcoin” and “Mt. Gox” exchanges shutdown after an intrusion by hackers who allegedly stole Bitcoin, in thousands, during separate attacks. Despite the emerging cyber attacks, crypto wallets still stand as the safest in securing Bitcoin wallets. The software, ideally, should be installed on a live CD or bootable USB to ensure that the OS doesn’t cache and is free from virus, store or log wallet keys anywhere.
It is prudent that users treat their online wallet the way they treat a physical wallet, and it is best when one decides on using two wallets. The wallet having a small amount of Bitcoins can either be on a smartphone or a computer for daily use, with the balance kept separately in offline wallets.
It entirely safeguards them from malware that might try to intercept the passwords used in accessing the wallets or trying to find, from the device RAM, encrypted data.
The offline wallet should be secured since the theft or loss of a wallet means the permanent Bitcoin loss, contained in it.
Cold storage services or offline are available but they are not regulated by the industry’s financial services. Additionally, in case there is encryption of an offline market, it is imperative that one does not forget the passphrase. Some experts do not prefer encrypting offline wallets since, in case they die, descendants might be unable to access the inheritance.
Keeping bitcoin secure
- Having regular backups of a wallet are essential to save them against any computer theft, failure or human error, however, never have them stored online, especially when the backup is not properly encrypted. Finally, it is crucial to use the latest software for enhanced security, with a password that is not less than 16 characters.
- Despite Bitcoin being a digital currency, it can securely be kept in the form of analog. Consequently, paper wallets can be sufficient in their offline storage, which drastically hacking, viruses and theft.
- When a user prints the contents of their crypto wallet, their private keys and corresponding public ones, creates a “physical” record that must be securely kept.
- It is time consuming and complex keeping them secure, but it is worth the trouble especially for those with reasonable amounts. Ease of use and security are the most critical issues to consider when handling Altcoins.
It is not fully anonymous and is pseudonymous since each user has a public address that one can track to an exchange account or IP address, and an actual identity, by proxy through adequate analysis of the network. It is better to ask the extent to which the anonymity goes and not whether it is anonymous or not.
Its anonymity counts with the components like public and private keys and addresses, are read in text strings like public addresses which in no way directly links to the personal identity of anyone.
At the onset of Bitcoin, the general comprehension of blockchain expertise by the public wasn’t much prevalent.
It has always been believed that Bitcoin is safe criminal haven and that of terrorists because it was entirely anonymous and untraceable. As the public and organizations get to know the technology more, it has become quite apparent that its mass public ledger was in reality a rich government and authorities’ source of information. Any of its transactions are eternally stored in a ledger.
All transactions are publicly broadcasted on the blockchain since they are public and permanent, a substantial map that allows tools of analysis to show the destination of BTC, is created.
The addresses used are anonymous but where they can be in any way connected to an identity in the real world, they offer no privacy.
Several ways of linking the addresses to actual identities, through either “Anti-Money-Laundering-AML or Know Your Customer-KYC” policies at blockchain analysis and exchange exist.
How to Get Bitcoin
They are basically computer files stored or safely kept in digital wallet apps on a computer or smartphone. Individuals can send them to your digital wallet and one can subsequently sent them to other people.
Each transaction is recorded in a blockchain which is a public list. This necessitates the tracing of its history to stop holders from spending what they don’t own or undoing earlier transactions.
Bitcoins are mined like gold and act like cash. When done well and the investor takes the risk of investment, individuals could wind up using some from their own wallets.
There are basic ways of obtaining them, either through an exchange buying, mining or accepting them as payment for services or goods. Discovering new coins is referred to as mining- the same way gold is found.
Individuals try the verification of their transactions as they are entirely gathered into virtual padlocked boxes called blockchains. Miners load softwares trying to find the key which will open the padlock. There is a pop on the computer once it finds the key and that opens verified transactions.
People can buy them using real cash or can sell stuff then allow others pay through Bitcoin. Moreover, some Bitcoin can be created by special computers.
How to mine on a budget?
The mining can be accurately done by a novice- requiring specialized software and basic software. The software needed for mining is open source and straightforward to use. Anyone can freely download and run it. A probable miner needs a wallet, “an encrypted online bank account”-for holding the earned coins.
Bitcoin Use Cases
In case one had to urgently send $2000 to a brother living in a different country, the banking system would prove to be a nightmare. Especially now that urgent situations can’t fit in the banking schedule of waiting for 3 to 5 days, or even more for the transaction to be effected.
With crypto like BTC, one can transfer funds to a brother, friend or sister while they are both still conversing on a call. This proves how fast this is. Within 10 minutes of sending, the transaction will be done.
Store of value
Crypto are safer than traditional currencies, which are inflammatory since they keep losing value over time as BTC gains more value. That’s why a kilo of sugar is way more expensive now than it was 5 years ago. Sugar isn’t becoming expensive; it is the fiat currency that is losing value.
Crypto can also employ better mechanisms of supply which restrict inflation and may expand in value with increasing demand. When funds are stored in crypto, they have the potential of gaining value over time.
Borrowing and lending
In case one has ever queued to get some paperwork approve for a loan, they know how painful it is. With crypto you can get a digital loan without a form or signing any contract. Decentralized application of finance has made the borrowing and lending process easy, as it is quite instant using crypto. Additionally, since crypto is borderless, one can lend or borrow from it irrespective of their location.
Crypto has eased the tokenization of assets in the real world. Everything from real estate to copyrights and art pieces to household commodities can be presented in form of crypto token. For instance, with blockchain a luxury estate can be tokenized as worth $100 million and presented as ten million crypto tokens worth $100. This increases liquidity to an illiquid asset and makes it convenient to exchange, even non-liquid assets. More so, the purchase and sale of the same becomes fast, cost effective and more transparent.
Crypto in the form of non-fungible tokens is currently disrupting the gaming world. The NFTs, in the gaming industry, are crypto tokens which represent a sophisticated digital asset in a game. Given each NFT represents a unique thing, they are valued differently hence aren’t interchangeable. It gives all users an authentic and unique in-game item, owned by then and no one else. The best blockchain-based examples in NFTs are Crypto Kitties or digital cats.
Blockchain use has decentralized storage and created free room for storage to curb the many shortcomings of centralized fiat systems ranging from excess fees to server outages.
Pros & Cons of Bitcoin
|Very accessible – crypto exchanges make it simple to start purchasing Bitcoin||Its use is unregulated, leaving one legally unprotected in case something goes amiss.|
|Have potential high returns since Bitcoin have a tendency of peaking at high prices.||It has limited practical use since it has to be converted to money before a purchase.|
|Guaranteed security because one will always know where their coin is.||It is very volatile- its prices can quickly drop and reach very low levels.|
Despite the many uses associated with crypto, they are considered to be complex but with appropriate solutions and accurate information, it can be easy to have, manage, and spend easier than fiat currency. The ledger is pertinent in making one reap the crypto benefits in a secure and user-friendly environment. Through educating more about cryptocurrencies, ledger will make it able for people to claim their own money and have unlimited access to its use cases. Ideally, crypto must be made easy for everyone to access and use without facing numerous hitches. This is the only hope that the bigger population has of having financial independence solely in their reach. The pros outweigh the cons by far. New users might start without sufficiently understanding all details in entirety. After one installs a Bitcoin wallet on their smartphone or computer, it generates their first address (wallet) and they can create more similar ones whenever they require.
With the changing economy, people need to understand Bitcoin and embrace it. It is secure, portable, transparent, and valuable, just to mention a few of its niceties. Conclusively, this ultimate guide should have by now enhanced your understanding of Bitcoin and made you think of either investing in it or adopting it in your ventures and transactions.
Finally, it is valuable in that it offers an effective cash transfer across the world via internet with transparent rules under a decentralized authority.