Bitcoin 101: A Beginner’s Guide to Bitcoin
Bitcoin isn’t the only cryptocurrency that exists. However, you’ll agree that Bitcoin remains the most popular cryptocurrency globally. There’s so much to learn about this cryptocurrency that has successfully changed the concept of “currency” as we know it.
So, in this article, we will highlight some of the basic things you should know about Bitcoin, from its history to its features. Let’s begin.
What is Bitcoin?
Bitcoin is a type of digital currency (cryptocurrency) that relies on a peer-to-peer network and user’s agreement (consensus mechanism) instead of third -parties. Bitcoin allows the peer-to-peer exchange of value virtually through a decentralised protocol and cryptography on a blockchain.
Like other cryptocurrencies that have emerged after Bitcoin, Bitcoin exists independently of any government or financial institution. Thus, as an owner of Bitcoin, you can transfer it around the world with no need for a third party.
The Bitcoin Certainty
“Bitcoin is a certain thing in an uncertain world” — Michael Saylor. Bitcoin has a max. supply of 21 million coins, and it is Independent of anyone, unlike Gold and the US dollar.
History of Bitcoin?
Bitcoin was initially conceptualised following the 2008 Great Recession, which increased public distrust of banks and their roles in the financial system. In 2008, the concept of Bitcoin was published in a white paper written by an anonymous author under the pseudonym Satoshi Nakamoto (it’s still unknown whether this pseudonym describes an individual or a group). The white paper outlines how Bitcoin would work and addresses the centralised control of money and the trust needed in handling individuals’ money.
Bitcoin officially launched in 2009 after it was released as an open-source software when Nakomoto mined the starting block of the blockchain. The block is known as the Genesis Block and contains the first 50 Bitcoins ever created. The first known commercial transaction with Bitcoin was the purchase of two Papa John’s pizzas for 10,000 Bitcoins by a programmer, Laszlo Hanyecz (Interestingly, this is now worth over $300 million today.)
How Does Bitcoin Work?
No central bank issues Bitcoin, and neither is it backed by the government of any country. Thus, inflation rates and economic growth indicators do not affect Bitcoin as it does traditional currencies. To understand how Bitcoin works, let’s check out the following essential concepts underlying this cryptocurrency:
Blockchain: The blockchain is an open-source code that powers Bitcoin. Blockchain is a distributed digital ledger consisting of a linked body of data made up of units known as “blocks.” Each block contains information about each transaction. Examples of this information include who the buyer and seller are and the date and time of each transaction.
It creates a shared public history of these transactions, organised into blocks that are chained together to prevent any form of tampering. Blockchain technology also creates a permanent record of each transaction.
Bitcoin Mining: Bitcoin mining is the process of adding new Bitcoins to the Bitcoin blockchain through the Proof of Work (PoW) technique. Through PoW (which we’ll discuss soon), Bitcoin miners use computers to solve mathematical problems that validate transactions. The reward for solving these mathematical problems that help validate transactions and maintain the system is additional Bitcoin for miners.
Private and Public Keys: A Bitcoin wallet contains a public key and a private key which help you as the owner to initiate and digitally sign transactions. These keys are strings of randomly generated alphanumeric characters used to encrypt and decrypt transactions.
The Public key, also known as the Bitcoin address, is similar to your email address or username on Twitter. Since the public key is “public,” you can share it with others. For instance, if you want someone to send some Bitcoin to you, you send them your public key. However, your private key is similar to your email account password or social media page password, which you need to always keep confidential.
What is Proof of Work?
Proof of Work (PoW) is a type of consensus mechanism cryptocurrencies use to validate new transactions, add them to the blockchain and create new tokens. There are two common types of consensus mechanisms (Proof of Work and Proof of Stake), but for this article, we will focus on PoW. PoW is an older mechanism deployed by Bitcoin. Let’s break down the concept of Proof of Work and how it works.
PoW is a much stronger consensus mechanism for maintaining decentralisation and ensuring that there are no malicious activities on the network.
Under the Proof of Work mechanism, specific network contributors get elevated to the role of miners after proving their commitment to the network. They demonstrate their commitment by discovering new blocks which require them to spend money/resources in the form of computing power. After a new block is discovered, the successful miner gets to fill it with 1 megabyte’s worth of validated transactions. The latest block is added to the chain, and everyone’s copy is updated to reflect this new addition. The miner is rewarded with a stated amount of newly minted bitcoin and keeps any fees attached to the transactions added to the block.
Basic Features of Bitcoin
This article won’t be complete if we don’t highlight the basic features of Bitcoin. They include:
Decentralised in Nature
Bitcoin isn’t owned or controlled by any individual, agency, or government. The network consists of willing participants who agree to the existing rules of a protocol.
Record of Transactions on Blockchain
Bitcoin transactions are recorded on a public ledger known as the blockchain. The blockchain is a distributed digital ledger consisting of a linked body of data made up of units called “blocks.”
Public Record of Transactions
All Bitcoin transactions are recorded and are made publicly available. It prevents fraudulent transactions and allows linking individual identities to some Bitcoin addresses in some instances.
Bitcoin can be sent directly from one wallet to another without an intermediary, as it exists in the traditional financial system.
Bitcoin also gives room for transparency of transactions. Adding new transactions to the blockchain ledger is arrived upon through a consensus and transparently based on the protocol’s existing rules.
Since Bitcoin is decentralised, it can’t be censored or controlled by a government or corporate entity. The censorship-resistant nature makes it possible for individuals to store wealth with self-sovereignty.
Permissionless: You don’t need any approval from the government or banks to start using Bitcoin. All you need is an internet connection, a Bitcoin wallet, and some funds.
Fixed Supply: Bitcoin has a max. supply of 21 million coins.
Since Bitcoin was launched in 2009, several other cryptocurrencies have been created. However, Bitcoin has continued to be and will continue to maintain a leading position as the only truly decentralised cryptocurrency. Its acceptance has continued to spread, and its value has increased over the years. This has made Bitcoin not only an accepted means of payment by several merchants but also an asset class. Bitcoin is now commonly agreed to be a commodity.