What Is Bitcoin
we’re gonna tell you guys what bitcoin is. How does it work, and why does it have value? This is gonna be a no-nonsense guide in under ten minutes, explaining to you exactly how bitcoin works and answer a lot of the major questions that you might have.
so what is bitcoin? You probably know by now that it’s a digital currency, but where is it stored? How do you know that it’s real? Why does it have any value?
Well, to give you all that information, we need to start from the very beginning. Bitcoin was first launched in 2009.
It was the very first cryptocurrency, which is a fancy way of saying money that is digital and decentralized. Decentralized meaning that there is no single entity, person, or company that controls the money.
Banks and governments do not get any control of bitcoin.
This is very important, and we’ll come back to this later. Bitcoin uses peer-to-peer technology, which simply means that there is a network of individual people that all contribute to keep bitcoin going.
These individuals on the network use software-driven cryptography, which is the science of exchanging secret information that can only be read by the person who sends the information and the person who receives it.
Now, I know this might be a little bit confusing so far, so let’s sum it up really quick. Bitcoin is a digital currency or digital money that has no single person, bank, or company controlling it. What Is Bitcoin
who create bitcoin
It’s kept alive and going by a network of individual people like you and me. Hopefully, that makes sense so far. Let’s keep going.
The person or people who created bitcoin is Satoshi Nakamoto. Nobody knows who this person or group is because it’s still a mystery to this day.
It is believed that this group is more than one person because it would be quite difficult for one single person to create such a complex and well-thought-out currency format.
When we ask what the purpose of bitcoin is, we can look at what Nakamoto wrote about.
What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. What Is Bitcoin
Nakamoto believed that we should have a way to send and receive money to each other without needing a third person to interfere or govern the transaction.
Bitcoin is a currency that is backed by code, that is controlled by nobody and public to everybody so that a transaction can be confirmed digitally.
How You identity Bitcoin
Now, for example, let’s say I wanted to give you $2, and I could just hand you this two-dollar bill.
And then once you receive a two-dollar bill, you know you have $2 because you can hold it. You can smell it, you can feel it. You know that it’s a real two-dollar bill.
How do you show that I sent you $2 digitally? You can’t just hold up the dollar and say, hey, here it is. This is the two-dollar bill that someone sent me, because you have nothing to show for it digitally.
That is why there is a public ledger, which is basically just an online database that shows all the transactions that have ever happened.
So if I sent you one bitcoin, for example, the public ledger would show that I sent you one bitcoin and validate that that bitcoin did get received by your account, also known as your wallet address.
And everyone can see this publicly, although it doesn’t give out specific information of anyone. It just shows our public wallet addresses.
But where does this public ledger reside, and how do you get your transaction verified? In other words, how do we know that someone send one bitcoin to you? Well, bitcoin is powered by an open-source code known as a blockchain, which creates this shared public ledger. What Is Bitcoin
Each transaction is contained within a block that is chained to the code, which creates a permanent record of each transaction that ever happened.
But who runs the blockchain? Who manages it? This is where the network of bitcoin miners comes into play. You may have heard of people mining bitcoin.
This mining is not quite like the traditional mining you’re thinking of where people dig into the dirt or deep underground to find things like gold or other precious metals.
However, it is similar in a way because miners put forth effort and time to get rewarded with bitcoin for those efforts. The best part is anybody can be a miner.
All you have to do is allow the blockchain to utilize your computer, typically your graphics card or your CPU, in order to solve complex puzzles called cryptographs that the blockchain attaches to each transaction. Miners are doing the work of verifying the legitimacy of bitcoin transactions.
This convention is meant to keep bitcoin users honest and was conceived by bitcoin’s founder satoshi Nakamoto.
So, for example, when I send you one bitcoin, any miner can compete to solve that transaction cryptograph and then verify that I have, in fact, sent you one bitcoin.
Miners are essentially verifying that each transaction is valid or invalid. In return, the blockchain then rewards those miners with a small payout of bitcoin as their fee for helping keep the network validated.
Now, this is a very simplified version of how mining works, and it is much more complex than this. What Is Bitcoin
But on a basic level, miners are the way that the network stays verified and continues to operate smoothly.
This is why bitcoin is considered decentralized because not one single miner verifies every transaction, much like a bank would verify transactions.
Anybody like you, me, your aunts, uncles, brothers, sisters, anyone in your family, anyone at all, can be a miner and can help contribute to the network by validating transactions.
So now we understand that bitcoin is essentially a digitally stored file that’s sent from computer to computer. The obvious question I’m wondering is why does that have any value?
Why does a random file that is worth one bitcoin worth anything in us dollars or in any other currency?
Now, if you want a full and detailed answer, why bitcoin is valuable versus gold and the US dollar? So you should probably read that article right up here.
But for today’s sake, we’re going to keep it really simple. The core reason why bitcoin has value is supply and demand.
There is a fixed amount of bitcoin that will ever exist in eternity. That number is 21 million bitcoin. While that may sound like a lot, there are over 21 millionaires in the world. What Is Bitcoin
So if every single millionaire had just one bitcoin, there would still be a bunch of millionaires without any bitcoin. Currently, there are almost 19 million bitcoin in circulation.
There are roughly 2 million bitcoin left to be mined, but those won’t get mined for another 100 years or so. And that’s a deeper conversation as well.
For now, the essential information that you know is that approximately every four years, the pace of new bitcoin creation is cut in half.
This is done on purpose so that as technology advances, miners can’t just mine up all the remaining bitcoin immediately.
As their computers get faster and faster, it incentivizes miners to continue to mine and grow the network of people involved in bitcoin. It also helps increase the value of bitcoin over time.
The cycle works something like this. Every four years, the reward of bitcoin is cut in half, which means half of the inflation, which means the lower available supply of bitcoin, thus creating a little bit, higher demand, and ultimately a higher price of each bitcoin.
The miner’s incentive still remains, regardless of the smaller rewards of bitcoin, because the value of bitcoin ideally will go up over time.
So even if miners are only mining three bitcoin each year, the value of each one of those bitcoins should go up, because it’s harder and harder to get new bitcoins.
And with only 21 million bitcoins ever existing, at some point they will all be owned by somebody. And the only way to get new bitcoins is to trade or buy it from someone else. In a similar way to gold, scarcity creates value.
We don’t actually know how much gold there is available on earth or even on the moon, but we know that it’s scarce and therefore it has value.
Bitcoin works in the same way because there is a limited amount of it. Each one of them individually is worth more over time as it becomes harder and harder to get one of those things. What Is Bitcoin
Price Of Bitcoin
If you’re reading this a couple of months or a couple of years after it comes out, that might be a really, really low price, or maybe it might be a high price.
It’s possible bitcoin goes down as well. Either way, it’s important for you to know now how you can buy bitcoin and how you can store it safely.
Bitcoin is traded on crypto exchanges in a very similar fashion to stocks or other currencies.
I personally use coinbase pro to buy most of my bitcoin because they are us based company, they are a publicly traded company, and they are one of the biggest and most trusted crypto exchanges in the world.
Coinbase & Binance
Coinbase Pro also offers really great rates and fees when trading. If you’re reading this outside of the US, I personally recommend binance.
Binance is the biggest international crypto exchange and offers really great rates as well. What Is Bitcoin
Now, the last thing I want to tell you guys really quickly before we head out is how you can store your bitcoin. You basically have three options.
Option number one is keeping all of your coins on a hot wallet, which is basically just keeping it on whatever exchange you buy it on. You buy it on coinbase or binance, you just keep it in your account on coinbase or binance.
Because these companies are so big, their security standards are extremely high, and it’s usually not the worst thing if you keep it on a hot wallet.
Unless these companies get hacked or someone gets access to your account, you won’t lose your bitcoin. But there are technically safer options.
Option two is a cold wallet option, which means you take your bitcoin offline and store it on a small device that no one else has access to but you. You will have to enter a key phrase or a seed phrase to access that device.
Only you should ever know that phrase and never ever give it to anybody else, because that is the only way to get access into the device you put your bitcoin on offline.
If you happen to forget or lose that phrase, unfortunately, you’re going to lose that bitcoin forever. It will never be able to be recovered. So if you choose this option, make sure you know your seed phrase and never forget it.
Option number three, which is my personal favorite because it’s what I like to do with a lot of my crypto you can put your bitcoin onto an app like Celsius or BlockFi, which allows you to earn interest on your crypto.
Basically what they do is they take your crypto and they lend it out to other institutions and other investors that want to take out loans with them.