Bitcoin is the first and most well-known cryptocurrency. It facilitates peer-to-peer exchange of value in the digital environment by utilizing a decentralized protocol, cryptography, and a strategy for obtaining global consensus on the state of a generally made public transaction report known as a "blockchain".
Practically speaking, Bitcoin is a type of digital currency that doesn't belong to any state, nation, or financial institution can be transferred internationally without the help of a centralized mediator, and has a well-established monetary system that arguably cannot be changed.
Bitcoin can be seen as a system that combines politics, philosophy, and economics. This is due to the mix of technological characteristics that incorporates, the large number of stakeholders and participants it includes, and the protocol modification process.
The Bitcoin network is entirely open, which means that anybody in the world with an internet connection and a device that can connect to it may join without limitation. Additionally, it is open-source, which allows anybody to access or share the source code on which Bitcoin was created.
Who manages it?
A network of devices running open-source software
It is issued by the government
How does it maintain its worth?
Initially determined by supply and demand
Primarily dependent on trust in the government issuing it
How is it secured?
Anyone with an internet connection can participate because of a network of computers that verifies every transaction
Only a limited few are allowed to participate by third parties like banks and governments
Are there actual coins or bills?
Satoshi Nakamoto is widely considered the person or group responsible for the invention of Bitcoin. However, Nakamoto is a pseudonym, and his true identity is unknown.
On October 31, 2008, Nakamoto released Bitcoin's whitepaper, which explained how a peer-to-peer, online currency could be implemented. The whitepaper was titled "Bitcoin: A Peer-to-Peer Electronic Cash System." They suggested using a decentralized ledger of transactions organized in batches (referred to as "blocks") and protected by cryptographic techniques; the entire system would eventually come to be known as "blockchain."
Just two months later, on January 3, 2009, Nakamoto mined the first block on the Bitcoin blockchain, known as the genesis block, introducing the world's first cryptocurrency. When Bitcoin was first launched, the price was $0, and the majority of Bitcoins were obtained by mining, which required just moderately powerful equipment (e.g., PCs) and mining software. Programmer Laszlo Hanyecz traded 10,000 Bitcoins for two pizzas on May 22, 2010, making it the first known commercial Bitcoin transaction. The initial Bitcoin trading took place in July 2010, with prices varying between $0.0008 and$0.08.
Nakamoto left the project in 2010 without disclosing anything about who they were. However, the departure of the person or group behind bitcoin has little impact on the remaining developers and programmers. According to bitcoin's website, "the identity of bitcoin's inventor is probably as important today as the name of the person who made paper."
Many of the most widely used currencies in the world during the 19th and 20th centuries were changeable into fixed amounts of gold or other precious metals. However, between the 1920s and the 1970s, the majority of nations abandoned the gold standard, in part because of the difficulties of financing two world wars and the failure of global gold production to keep up with economic growth.
Additionally, tangible assets like gold and silver were formerly exchanged for goods and services. However, because tangible assets were difficult to carry and prone to loss and theft, banks kept them for users, generating notes certifying users' bank holdings.
Users rely on banks to keep their currency's value stable and their cash protected. Unfortunately, some banks and other financial institutions collapsed globally in 2008 and 2009, enabling governments to bail them out at taxpayer expense.
Bank failures revealed how unstable the present financial system can be, as well as the necessity to decentralize financial services in order to improve user experience. As a result, Bitcoin was viewed as a response to the Great Financial Crisis and the financial world's dependency on banks as financial transaction mediators.
Satoshi Nakamoto proposed replacing banks in financial transactions with a peer-to-peer (P2P) payment system that does not require third-party confirmation, hence eliminating the need for banks to facilitate every transaction. Bitcoin and other cryptocurrencies gain trust through a network-based ledger known as the blockchain.
The blockchain was formally established on Jan. 3, 2009, when the first block, defined as the genesis block, was mined and had a reward of 50 bitcoins. Hal Finney became the first Bitcoin user when Satoshi Nakamoto gave him 10 bitcoins on January 12, 2009, marking the beginning of the cryptocurrency. For the first few months of its existence, the Bitcoin blockchain was only accessible to miners validating Bitcoin transactions.
Bitcoin is an autonomous public-key cryptosystem that permits the exchange of digital value among peers through a series of digitally signed transactions instead of messages. A Bitcoin transaction follows the same basic process flow as a series of encrypted messages in public-key cryptography and digital signatures’ diagram.
Public-key cryptography encrypts and decrypts data to protect it from unauthorized access or usage. A digital signature is an electronic signature that verifies the validity and authenticity of a digital message by using a mathematical procedure. Bitcoin is therefore a series of digital signatures.
Bitcoin is transferred from one owner to the next by digitally signing the previous transaction's hash and the new owner's public key, and then adding them to the end of the coin. The payee can confirm the ownership chain by checking the signatures.
Users must have access to the related public and private keys in order to send the required amount of Bitcoin. When someone says they possess Bitcoin, they really mean they have access to a key pair that consists of public and private keys.
A public key is an address to which some Bitcoin has already been transferred. Once Bitcoin has been delivered to the above public key, the associated unique private key (a password) enables it to be sent elsewhere.
Bitcoin addresses often referred to as public keys, are random collections of letters and numbers that function much like an email address or a username on a social media platform. As their name suggests, they are open to the public, so users can safely share them with others. In reality, users must give their Bitcoin address if they want someone to send them Bitcoin.
The private key consists of a unique set of letters and numbers generated at random. Private keys, like email and other service passwords, should be kept private. Never share your private key with anyone you don't have complete faith in to keep your information secure.
A Bitcoin address is comparable to a clear safe. Others can look inside, but only the owner of the private key can unlock the safe and get access to the money.
It is essential to realize that Bitcoin is made up of three distinct parts that work together to form a decentralized payment system:
· The Bitcoin network
· The Bitcoin network's default cryptocurrency known as bitcoin (BTC)
· The Bitcoin blockchain
Bitcoin operates on a peer-to-peer network where users — generally individuals or organizations who desire to trade bitcoin with others on the network — do not need the aid of mediators to carry out and authenticate transactions. Users have the option of directly connecting their computer to this network and downloading the public ledger, which contains a record of all previous bitcoin transactions.
This public ledger makes use of "blockchain," also defined as "distributed ledger technology." Blockchain technology enables bitcoin transactions to be verified, stored, and arranged in an immutable and transparent manner. Immutability and transparency are critical attributes for a zero-trust payment system.
The network updates each user's copy of the ledger to reflect the most recent modifications whenever new transactions are completed and added to the ledger. Consider it an open Google document that constantly changes when anyone with access edits its content.
The Bitcoin blockchain, as its name suggests, is a digital compilation of chronologically organized "blocks" – chunks of code that hold information about bitcoin transactions. However, it is crucial to note that transaction validation and bitcoin mining are two distinct processes. Mining can still take place whether transactions are added to the blockchain or not. Similarly, an increase in Bitcoin transactions does not always enhance the rate at which miners discover new blocks.
The blockchain's openness allows all network users to view and assess bitcoin transactions in real-time. This infrastructure decreases the risk of an online payment problem known as double-spending. Double spending takes place when a person attempts to spend the same cryptocurrency twice.
Double spending is avoided in the traditional banking system because reconciliation is handled by a centralized authority.
However, because Bitcoin includes thousands of copies of the same ledger, the entire network of users needs to universally agree on the authenticity of each and every bitcoin transaction that occurs. This agreement among all parties is referred to as "consensus."
Bitcoin mining refers to the process of adding additional transactions to the Bitcoin blockchain. It's a tough thing. Bitcoin miners use the Proof-of-Work (PoW) method, in which computers compete to solve mathematical issues that validate transactions.
In general, miners try to create a hash, which is a 64-digit hexadecimal number, that is less than or equal to the target hash. The Bitcoin hash rate represents the projected number of hashes produced by miners trying to solve the current Bitcoin block or any given block.
Bitcoin's hash rate is calculated in hashes per second or H/s. Miners require a high hash rate, which is measured in megahashes per second (MH/s), gigahashes per second (GH/s), and terahashes per second (TH/s) to mine efficiently.
Hashes per second
The Bitcoin code offers miners extra bitcoin as an incentive for continuing the race to crack the codes and keep the network functional. This is the way new blockchain transactions are integrated into the network.
Bitcoin mining is far less profitable than it once was, making it even more difficult to recover the additional costs associated with acquiring computational power and maintaining it by consuming electricity.
When the method was first implemented in 2009, miners earned a stamp every time they received more Bitcoin than they do now. Every 210,000 blocks, the block reward is reduced in half (roughly every four years).
For instance, when Bitcoin was first mined in 2009, each block was worth 50 BTC. In 2012, it decreased to 25 BTC. It was again halved at 12.5 BTC before the end of 2016. On May 11, 2020, the award was again decreased to 6.25 BTC.
The amount that miners are paid for each stamp falls as the volume of transactions rises. It is predicted that by 2140, all Bitcoin will have been released into circulation, leaving miners with no option but to depend on transaction fees to benefit from validating the network.
There are some concerns regarding the POW consensus. Bitcoin mining has been accused of utilizing a significant amount of energy, with comparisons often made to the energy usage of nations or big corporations. Bitcoin mining uses a lot of energy, which raises electricity costs for customers, leaves a big carbon footprint, and has an impact on the ecosystem in local areas.
When people refer to a "bitcoin fork," they could be referring to one of two things.
First, they might be referring to a "software fork," which is a modification to the Bitcoin software itself.
Second, they might be referring to a "blockchain fork" in which the Bitcoin blockchain splits. To properly discuss bitcoin forks, let's begin with software forks, which may be classified as either a 'soft fork' or a 'hard fork.' In a "soft" software fork, the new system is still "backward compatible" with the previous one.
What does the term "backward compatible" mean? In this case, it means that the new, modified blockchain will be in charge of validating transaction blocks, but the old blockchain will still recognize and store these transactions. However, the new blockchain will not identify any blocks mined using the old programs on the present blockchain.
A 'hard' software fork takes a step further by releasing new software that is incompatible with the legacy network. This means that all transactions must be executed on the new blockchain, and any miners who are still using outdated software must upgrade.
At its most basic level, Bitcoin is helpful for value exchange outside of the established financial system. People use Bitcoin to make international payments that are processed more quickly, more safely, and with lower transaction fees than with conventional settlement systems like the SWIFT or ACH networks.
In the initial years, when network adoption was limited, Bitcoin could be used to settle even small-value transactions, competing with payment networks such as Visa and Mastercard. However, as Bitcoin became more popular, scaling problems reduced its competitiveness as a means of trade for low-value commodities. In other words, the scarcity of second-layer solutions and the restricted throughput on the ledger made the settlement of small-value transactions extremely expensive. This strengthened the idea that Bitcoin's primary value is as a replacement for gold, or 'digital gold,' rather than as a payment network.
The idea here is that the value of Bitcoin comes from a mix of technological developments it contains, its capped supply with 'built-in-the-code' monetary policy, and its strong network effects. In this aspect, the investing thesis is that Bitcoin could eventually replace gold as a kind of "pristine collateral" for the world economy.
Another widely held belief is that Bitcoin promotes economic independence. It is claimed to accomplish this by offering, on an opt-in basis, an alternative form of money with significant protection against
(1) monetary confiscation
(3) devaluation through uncontrolled inflation.
Money has always been regarded as a tool that allows value exchanges between participants in an economy, beginning with the usage of commodities like grain and advancing to precious metals like gold and then government-controlled fiat currencies.
The definition of money has evolved over the years to include a few key features such as fungibility, durability, portability, divisibility, and stability; all of these aspects apply to bitcoin, with the exception of stability for the time being.
Bitcoin is almost the most ideal form of money ever developed when we consider scarcity and other characteristics like censorship-resistance, programmability, and decentralization, as shown below.
Bitcoin can be useful to a large number of individuals. Since it is a global currency, people can use it anywhere without having to exchange currencies. The Blockchain is extremely safe, allowing you to ensure that your money is going to/coming from the right individual. People receiving Bitcoins will not have to pay anything for the transactions, and Bitcoins have a significant amount of support. All of these will undoubtedly help Bitcoin gain more users. And if everyone uses Bitcoin, it may probably replace official currencies. Although Bitcoin has been on the market for a while, there are still certain concerns regarding cryptocurrency, which will undoubtedly be addressed in the near future, as the small ones are avoidable concerns.