What is Bitcoin?

January 22, 2018, by Doru D
Bitcoin is the first cryptocurrency ever. Created in 2008 by an unknown developer, under the name Satoshi Nakamoto, Bitcoin is a peer-to-peer, electronic payment system, that eliminates the need for an intermediary financial institution.

Digital assets can be instantly transferred with ease, using cryptography, in exchange for a very small fee. Unlike fiat currencies that are reflected in resources of gold or silver, Bitcoin is backed by technology and mathematical proof.

It is open source and its most important feature is decentralization. There isn’t any authoritative regulator (e.g. a bank) that governs Bitcoin instead, all the transactions are being processed and verified by every member that belongs to the Bitcoin network, called Blockchain. The Blockchain is a public ledger were every single activity is being recorded (receiving or transferring Bitcoins) in the form of a block. Each block contains a hash code and is tied to the one before and the one after, creating a chain that cannot be tampered.
Bitcoin is not regulated and there is a finite number of Bitcoins that will ever be created – 21 million. This is what determines Bitcoin’s value and makes it resistant to currency dilution and inflation.

Bitcoin Mining – A Threefold Role

Mining is the process of verification of every transaction in the Blockchain while preserving its decentralization. For their contribution to the network, miners are incentivized with a fee in every confirmed transaction. This motive is expected to maintain Bitcoin miners’ interest active, even after all Bitcoins have been mined – the last Bitcoin is expected to be mined by the year 2040.

Additionally, Bitcoin miners ensure the security of the Blockchain. It could be possible that if the majority of the Blockchain was centralized (e.g. mining pool,) the network could be manipulated and old blocks could be altered, that would allow double-spending Bitcoins. In simple words, if the majority accepts a lie as truth, then this lie becomes the truth. This practice is also known as the 51% attack.

New blocks are discovered by using CPU power, to solve a mathematical puzzle. Bitcoin uses the Hashcash Proof-of-Work method to find new blocks. In other words, when a node finds a new block, it broadcasts the information in the Blockchain. The rest of the nodes then, verify that the signature of the new block is valid and that it has not been re-used previously. This is done by checking a block’s hash, that is produced based on the hash of the block before. If a duplicate block is found on another node, a fork will be created in the Blockchain. The network would then follow the longest chain that contains the most valid blocks and the invalid ones would be bypassed.

By default, the Bitcoin’s algorithm is designed in such a way, that an adjustable hash rate difficulty (that is set to change every 2016 blocks) is applied, to make the mining harder as the Blockchain grows. Because the processing power required for mining has increased significantly, solo miners’ probabilities of finding new blocks with home PCs, have been limited. For this reason, they join mining pools where a number of users contribute their CPU power, for centralized mining to increase their chances of success. The creation of a new block is rewarded by 25 new Bitcoins and the amount is distributed among the successful miners. This compensation for mining is halved every 210.000 blocks or around every four years.

Bitcoin transactions are partially anonymous, as all the blocks in the Blockchain are transparent and have the form of a key. The public addresses and their contents are visible to everyone in the network, but name identities remain hidden.

Bitcoin is extremely volatile and its price fluctuations, have created fortunes for investors. As many people believe that Bitcoin’s price has no limits, they see the much-talked-about cryptocurrency more as an asset to keep as a long-term investment and less as a transactional tool.

It is transferable from wallet to wallet or can be traded for fiat money or other cryptocurrencies, at any reputable cryptocurrency exchange. You can buy a whole or a fraction of a Bitcoin; the minimum amount is one hundred millionth of a Bitcoin which is called a Satoshi.

Disclaimer: information contained herein is provided without considering your personal circumstances, therefore should not be construed as financial advice, investment recommendation or an offer of, or solicitation for, any transactions in cryptocurrencies.