Bitcoin… Bitcoin… Bitcoin. You’ve probably heard it a billion times by now.
Confused about what Bitcoin is and how it exactly works?
This article takes you from knowing nothing to being a walking expert about Bitcoin.
Well, Bitcoin was the one who started it all… the blockchain era.
Table of Contents
Owing to the financial crisis of 2008, the public lost its trust in the traditional systems after the failure of banks, government bailouts and stability of the financial condition of the country. People were seriously questioning how they could now keep their hard earned money safe and if there was even a solution out of this.
The turmoil was real, but there was a development in the story that started on August 18th, 2008 as soon as the domain ‘bitcoin.org’ was created.
A few months later on the Halloween event of October 31st, 2008, an enigmatic person named ‘Satoshi Nakamoto’ shared his vision with the world which would soon change the financial system forever.
On that day, a whitepaper for Bitcoin was released, which contained a revolutionary digital currency concept that aimed at removing the financial mediators and replacing paper money with digital money.
This concept talked about how the people can be the ones who control their own money, how nobody needs to know how much money you have and how you use it is completely up to you.
The idea of having privacy and less of a risk of losing money to a market crash was something that the common public deeply resonated with. A lot of people were in on the idea and wanted to learn more about how the blockchain could change the course of their life.
Nakamoto himself mined the first block of Bitcoin known as the ‘genesis block’ on January 3rd, 2009 and released it to the entire world, thus marking it as the day Bitcoin was born. The anticipation was very high, and though there were many who were not keen on Bitcoin, they were definitely curious about the concept as a whole.
After the release of Bitcoin, the first transaction happened between Nakamoto and a computer scientist Hal Finney. This transaction effectively proved to the people that cryptocurrency can definitely be a viable shift from traditional currency. Proving how fast and practical it was, there was now a bigger market of people ready to hold onto some Bitcoin.
An interesting example of Laszlo Hanyecz, a computer programmer who was holding Bitcoin at the time exchanged a whopping 10,000 Bitcoin for just two pizzas. This occurred on May 22nd, 2010 and the value of that would be in the hundred millions today…
In the wake of the 2008 crisis, Bitcoin emerged not merely as a cryptocurrency but as a beacon of hope. It offered a lifeline to those seeking an alternative. Amidst the wreckage of traditional systems, Bitcoin paved the path towards a future where wealth preservation and fund security were no longer abstract ideas but tangible realities.
Bitcoin is digital money, unlike the traditional paper cash or coins. As mentioned above, the use of Bitcoin does not require any sort of mediator while transferring funds. It all happens from one computer to another, which in this case are the individual computers known as ‘nodes’.
When a transaction takes place, the information about that exchange of value is stored in a block. When a block is completely filled, a new block is created and the same process occurs once again. With time, there are numerous blocks linked to each other forming a blockchain.
At its core, Bitcoin is a huge public ledger. That basically means that it is a public blockchain. The role of the ledger is to keep a track of every Bitcoin that has been exchanged on the network.
Here, there is not one entity (like a bank) that keeps track of the Bitcoin that has been transferred but rather an entire network of computers connected to each other. This means that there can’t be a change in the system or any sort of tampering with the data as every node is responsible to validate the transaction.
Can I Change Data on the Blockchain?
Short answer is, No, you can’t exactly change any data on the blockchain… Even if you knew how to do so, there is nobody with the capability to change the data as they would not have the hardware to do so. We’ll get to that point in a minute.
The reason it is so hard to change any data on the blockchain is because all the data is cryptographically linked to the block, which in simple terms means that it is very hard to hack even with sophisticated devices.
Let us assume you could even crack the cryptographic code, the changed data would still get rejected. The reason that would happen is because if you changed the data in a block, it would only reflect on your node, not the other nodes.
The speciality of the blockchain is that a change must be verified by the majority of the nodes for it to be approved. If the change only showed on your node and not the other nodes, it would be deemed invalid and disregarded, and also, it would be noted down as a problem in the network.
A round up of what we learnt, to change data in a blockchain you’d have to:
1. Hack the cryptographic nature of the blockchain.
2. Make sure that majority of the nodes accept the change you have made.
Let’s understand point 2 even better.
If there are 100% of computers, then you would need 51% of computers to agree with you for your change to be accepted. That becomes the majority.
How much is 51%? Let’s have a look at the numbers.
51% = 765 million devices
That’s 765 million devices that can efficiently mine Bitcoin… This is known as the 51% attack.
Sounds scary right?
Though, it would likely not happen as the amount of money, power, electricity etc. needed would be too immense. And on top of that, all the nodes are scattered across the globe, the attack is present just in theory.
Understanding Bitcoin Mining
To have a new supply of Bitcoin on the blockchain, there is a process known as Bitcoin mining. The process includes a person operating a mining rig which automatically solves complex mathematical puzzles, and once they are complete, then the person is rewarded with some Bitcoin.
When validating transactions, once again, miners will use their rigs and make sure that the transaction is valid and legit. For the energy they spend, these miners are rewarded with Bitcoin.
The most interesting part is that, like fossil fuels, Bitcoin has a limited supply, 21 million to be exact. To make Bitcoin scarce and not readily available, there is a special code in the software itself which halves the amount of Bitcoin received after mining.
This process happens once every few years and it prevents inflation. The scarcity and limited issuance of Bitcoin contributes to the Bitcoin Value Proposition.
Where is Bitcoin Stored?
There are a large number of places where you can store your Bitcoin and cryptocurrency. Mainly, it’s divided into two parts, the exchange and a wallet.
Just like your physical wallet for cash, you have a digital wallet for crypto. It has something known as a private key which allows you and ONLY you to use that wallet. You can use the wallet for anything related to DeFi, Web3, crypto trading and investing.
On the other hand, you can store your crypto on the exchange you are trading on. A lot of people prefer to have complete control and privacy of their crypto funds and therefore choose a wallet.
If you’re looking for somewhere quick where you can stash your digital gold, then the exchange is the best place to do so. Even Now Bitcoin ATMs are also introduced.
Advantages of Bitcoin
1. Global Reach – With bitcoin there is no border hindrance involved, you can freely send funds from one node to another within seconds, no matter where the person is located.
2. Cryptographic Security – Hard to hack code is what Bitcoin is made up of. It is close to impossible to hack the Bitcoin blockchain. All your data is safe and private.
3. Limited supply – Since there is a cap on how much Bitcoin can be produced, there is no inflation with Bitcoin and its value can be preserved over time.
4. Lower Transaction Fees – When compared to traditional transfer fees that institutions take, the cost for moving Bitcoin is relatively much lower. Thus making it preferable.
5. Complete ownership – You own your crypto. Nobody knows anything about what you have and how you use it. When owning crypto, you grant yourself complete privacy and zero outside noise.
6. Excellent Investment – Bitcoin still has a long way to go, and its price seems like it would increase enormously over time. This makes it a very good investment opportunity.
Disadvantages of Bitcoin
1. Extreme Volatility – Trading Bitcoin at times is very tough due to how much it fluctuates at one point in time. Many people tend to lose their capital because they do not know how to efficiently trade Bitcoin.
2. Limited adoption – Many people are skeptical about cryptocurrency due to how unregulated it is. There is a long list of people who still believe that it is better to invest into other financial markets other than crypto.
3. Energy Consumption – Mining Bitcoin is heavily dependent on how much energy you can provide. This causes global warming and is a slow poison for nature.
4. Complexity – Even though this article aims to help you understand Bitcoin in a simple way, there are many concepts out there which need a high level understanding of computer systems and new technologies which some people find difficult.
5. Anonymous Users – As Bitcoin guarantees privacy, it hides user info. In this case, it becomes hard to understand whether you are interacting with a real human or not.
6. Irreversible Transactions – If you transfer funds by mistake or fall into the trap of a scam, the money lost will be irreversible as tracking where that money went will be extremely difficult to do.
Bitcoin’s Real Life Use Cases
1. Quick international fund transfers – Expats can easily send money to their families via the blockchain in a fast and cost-effective manner.
2. Limit inflation damage – As traditional assets can experience inflation, crypto is a safe haven for those who are affected by inflation as Bitcoin is a crypto that cannot be inflated due to limited availability.
3. Donations – A lot of donation money does not reach its intended place, with crypto you can be sure that the money you are donating will reach the right location.
4. Simplify supply chain management – A lot of complex supply chains are present all over the world which track and provide items to its end user. With the Bitcoin blockchain, this process is simplified as you exactly know which package has gone where.
5. Protect Patents – With the Bitcoin blockchain, a creator or innovator can safely timestamp and verify their work. And make sure that they are incentivised as needed.
6. Digital Assets – With Bitcoin, you can buy digital assets like NFT’s which provide a long term value and can be traded with for a profit.
You’ve now learnt all the basic fundamentals of Bitcoin. The world of cryptocurrency and blockchain opens up a wide array of opportunities for people who are looking to gain control over their financial independence and generate wealth over time.
The blockchain era allows us to freely transfer hard earned money from one location to another without having a third party controlling the account and regulating it. Privacy is paramount and safety is a preeminent feature Bitcoin offers its users. The way how Bitcoin rises and potentially becomes the world’s local currency will be very interesting. Discover More about bitcoin stock-to-flow model.
Remember that even though Bitcoin offers a lot of advantages, there are people and softwares you must be aware of, to reduce any chance of hacks and theft. Since Bitcoin can be quite volatile, make sure you understand how Bitcoin trading works in order to limit losses. With this, you have now set foot into the world of Bitcoin and its applications.