You've been hearing about Bitcoin for many years now, on television, radio, in newspapers and some online banks may even offer it to you. Bitcoin is a ubiquitous electronic currency that everyone is talking about.
So how does Bitcoin work?
It is not always easy to find a simple definition of Bitcoin, in this article we will explain the concept and how it works in practice.
Bitcoin, a new currency?
You all know the 20 dollar bill that you have in your wallet and used for shopping. It's something physical, you have it in your hand and you give it to merchants to make a transaction on a daily basis. This is called fiduciary money.
But when you don't have cash, you can pay by credit card with the money in your account, in which case your transaction becomes electronic. This is called scriptural money (or book money or even cashless money).
An electronic bookkeeping entry appears on your account as a debit and another one as a credit on the merchant's account. Each transaction is recorded on a computer and the transaction goes through the Internet from the payment terminal. So far nothing very complicated and we are used to these exchanges.
The validity of the transaction relies, on a daily basis, on the confidence that users have in their currency, the dollar, which is pegged to the USA via the banking system.
But when the transaction is electronic, in reality you are trusting a digital currency, that is to say, the Internet and a computer. The dollar no longer really exists, it is simply virtual encrypted data.
What if instead of trusting encrypted data representing the dollar and linked to the USA you trust other encrypted data representing for example the euro and linked to France? Or what if you trust encrypted data representing another currency but which is not linked to any country and can be used worldwide? This was the principle behind the use of Bitcoin.
Bitcoin is a fully decentralized electronic currency, i.e. it is independent of a central monetary authority and therefore not attached to a state.
Bitcoin is a virtual currency or digital currency, i.e. a completely dematerialized money. It is also known as crypto-money or cryptographic money. These are virtual assets stored on an electronic medium, usually a computer, allowing those who use them to conduct an online transaction without having to use physical money.
It is an online version of money as discussed above. You can use it to buy products and services.
Although the principle is serious and reliable, few stores still accept Bitcoin and some countries have even banned this virtual currency altogether for fear of economic destabilization - that's how powerful Bitcoin is!
The Origin of Bitcoin
The source code of Bitcoin is said to have been invented on January 3, 2009 by a Japanese man named Satoshi Nakamoto. Then it turned out that Satoshi Nakamoto would never have existed, as a group of people took that name as a pseudonym. Since 2009, many other people have claimed to be the inventor of Bitcoin, but without ever proving it. So Satoshi could be anyone or anything that makes currency both mysterious and highly speculative.
The ambiguity of its origin and the impossibility of determining exactly who invented it suggests that this virtual currency was created by influential financial groups.
But as all traces of the creation of this currency have disappeared, no one will ever really know who created it, which becomes a formidable investment opportunity for important players.
How Bitcoin works?
Bitcoin is a monetary currency, each Bitcoin is also a computer file that is stored in an application called a "digital wallet" on a smartphone or computer.
Bitcoin is based on software in which Bitcoins are created according to a protocol that pays owners of computers that have processed these transactions. These people use their computing power to verify, secure and record transactions in a virtual registry. Each transaction is recorded in a public list called a blockchain. Powerful computers are set up and used to calculate these transactions, known as the Bitcoin network.
The owners of the computers that process these transactions are referred to as "the miners". Miners are setting up more and more computers with a lot of computing power just to check transactions and try to get Bitcoins as a reward, this is called Bitcoin mining.
When Bitcoin miners add a new block of transactions to the chain of blocks, part of their job is to make sure that those transactions are accurate. In particular, they make sure that Bitcoins are not duplicated, which is called "double-crossing". Unlike printed currency, once you have spent 20 dollars in a store, the note is in the hands of the merchant, so there is no risk of double spending. With digital currencies, on the other hand, it's a different story.
When someone makes a purchase or a sale using Bitcoins, it is called a "transaction". A transaction is a transfer of value between portfolios of Bitcoin that is included in the blockchain at different addresses. People can send Bitcoins (or part of it) to your digital wallet, and you can also send Bitcoins to other people.
The blockchain is a shared public book on which the entire Bitcoin network is based. All confirmed transactions are included in the blockchain. It allows Bitcoin portfolios to calculate their available balance in order to verify a new transaction and make sure it belongs to the owner. The integrity and chronological order of the blockchain is enhanced by cryptography.
Bitcoin portfolios keep a secret piece of data called a private key (or seed), which is used to sign a transaction, providing mathematical proof that it comes from the owner of the portfolio. The signature also prevents the transaction from being altered by anyone once it has been issued. All transactions are issued over the network and are usually confirmed within 10 to 20 minutes.
Bitcoin mining is a secure exchange system that is used to confirm each transaction by including them in a blockchain. It imposes a chronological order in the blockchain, protects network neutrality and allows different computers to agree on the status of the system.
To be confirmed, a Bitcoin transaction must be packaged in a block that meets strict cryptographic rules verified by the network. These rules prevent previous blocks from being changed, as this would invalidate all subsequent blocks.
Mining also prevents anyone from easily adding new blocks consecutively to the blockchain. In this way, no group or individual can control what is included in the chain of blocks or replace parts of the chain of blocks.
For Bitcoin miners to actually earn Bitcoin by checking transactions, two things must happen. First, they have to verify transactions worth one megabyte (1 MB), so in theory it can be a single transaction, but more often it can be several thousand, gathered into a block of transactions.
Second, in order to add a block of transactions to the chain of blocks, miners have to solve a complex mathematical calculation problem. What they are actually doing is trying to find a 64-digit hexadecimal number, called a hash, that is less than or equal to the target hash. Basically, a miner's computer calculates hashes at a rate of megahashs per second (MH/s), gigahashs per second (GH/s), or even terahashs per second (TH/s) depending on the unit, guessing all possible 64-digit numbers until they come up with a solution. In other words, it's a gamble.
Here is an example to help you understand:
Let's say I tell three friends I'm thinking of a number between 1 and 100, I write that number on a piece of paper and hide it in an envelope. My friends don't have to find the exact number, they just have to come up with a number less than or equal to the number I'm thinking of. There is no limit to the number of proposals they can make.
Let's say I think of the number 20, if friend A proposes 21, he loses because 21 is more than 20. If friend B proposes 18 and friend C proposes 16, then both of them have theoretically arrived at viable answers, because 18 and 16 are less than 20.
Now imagine that I am not just asking three friends, but millions, and I am not thinking of a number between 1 and 100, but of a 64-digit hexadecimal number. You can see now that it will be extremely difficult to guess the right answer.
In other words, the more computers that compete with each other to find a solution, the more difficult the problem becomes. The opposite is also true. If you take the computing power out of the network, the difficulty of the protocol adjusts downwards to make it easier to mine.
Why use Bitcoin?
You can buy Bitcoins using "real" money, sell things and let people pay you with Bitcoins. Bitcoin is also considered an entry point into the cryptocurrency market and most other crypto-actives exchanges are based on Bitcoins.
Many people use Bitcoin because they like the fact that the Bitcoin network is not controlled by governments or banks.
People can also spend their Bitcoins fairly anonymously. Although all transactions are recorded with addresses, no one really knows which account number was yours unless you disclose it.
The use of Bitcoin as a means of payment has become very widespread in the last five years. There are many other virtual currencies, but Bitcoin is the largest decentralized cryptographic currency, with a capitalization of over $200 billion. The unit of account of Bitcoin (BTC) is the satoshi. Eventually, 21 million Bitcoin units will be in circulation. The very large Bitcoin community offers a form of self-regulation that operates independently of the traditional systems and controls often carried out by banks.
Is Bitcoin secure?
Every transaction is publicly recorded, so it is very difficult to copy Bitcoins, make fake ones or spend the ones you don't have.
The value of Bitcoins has increased significantly since its creation in 2009 and there has been a lot of investment.
As with any investment, your intuition should be your guide and a greater knowledge of how this very promising virtual currency works. Exchange platforms like bitit.io are at your disposal to invest easily and quickly in Bitcoin and join the community very easily.