Bitcoin Crash Course. What Is it and How Does it Work?
Bitcoin is a digital currency otherwise referenced as the first cryptocurrency ever to be released to the public. It operates free of any central control or oversight of banks and governments. Instead it relies on peer-to-peer software and cryptography.
What’s a Public Ledger?
In principle, a public ledger records bitcoin transactions and a copy is held on servers across the world. An open invite for anyone with a computer, can set up one of these servers, known as a node. Consensus on who owns which coins is reached cryptographically across these nodes rather than relying on a central source of trust like a bank.
All transactions are publicly broadcast to the network and shared from node to node. Around every ten minutes these transactions are collected collectively by miners into a group called a ‘block’ and added permanently to the blockchain. This is the account book of bitcoin.
Very similarly by keeping traditional coins in a physical wallet or bank, virtual currencies AKA Cryptocurrencies are held in digital wallets and can be accessed from client-software or online/ hardware tools.
Bitcoin is limited however. Only 21 Million coins can be minted abd therefore with higher demand, and higher the value Bitcoins can be subdivided by seven decimal places: a thousandth of a bitcoin is known as ‘milli’ and a hundred millionth of a bitcoin is known as a satoshi.
At the end of the day there is actually no such thing as a ‘bitcoin’ or a wallet, rather just an agreement among the network about ownership of a coin. A private key is used to prove ownership of funds to the network when making a transaction. A person could memorise their private key and would need nothing else to retrieve or spend their virtual money, a concept known as a “brain wallet”.
Can you convert Bitcoin into Fiat Money?
Yes. Bitcoin can certainly be exchanged for cash just like any asset. There are many cryptocurrency exchanges that can be found on the internet where cryptocurrency holders can do this but transactions can also be carried out in person or over any communications platform, allowing even small businesses to accept bitcoin. There is no official mechanism built into bitcoin to convert to another currency.
Nothing innately valuable supports the bitcoin network. But this concept is also deemed true for virtually many of the world’s most stable national currencies, such as the US dollar,UK pound or Europe’s EURO.
Does it Have a Purpose?
Bitcoin was originally crafted as a means for people to send money over the internet. The cryptocurrency was intended to provide an alternative payment system that would operate free of central control, like banks but otherwise be used just like traditional currencies.
Are bitcoins safe to use?
The cryptography behind bitcoin is based on the SHA-256 algorithm designed by the US National Security Agency. Cracking this is, is basically impossible as there are more possible private keys that would have to be tested than there are atoms in the entire universe.
However, there have been several high-profile cases of crypto exchanges being hacked with funds being stolen from private users, but these services stored the digital currency on behalf of customers. What was hacked in these instances was the website and not the bitcoin network.
A more realistic problem to contemplate is that bitcoin operates without any central authority. No banks or governments are involved. And because of this, Bitcoin holders making an error with a transaction to their wallet has no recourse. If you accidentally send bitcoins to the wrong person or lose your password there is nobody to turn to. You can literally cry yourself to sleep.
However, with the eventual arrival of practical quantum computing these problems could be easily solved in the future. Much cryptography relies on mathematical calculations that are extremely hard for our computers to do, but quantum computers work differently and may be able to execute them in a fraction of a second.
What is bitcoin mining?
Bitcoin Mining is a process that maintains the bitcoin network and how new coins are brought into existence.
Transactions are publicly broadcast on the network and miners bundle large collections of transactions together into what is referred to as ‘blocks’ by implementing a cryptographic calculation that’s hard to generate but extremely easy to verify. The first miner to solve the next block broadcasts it to the network and if proven correct is added to the blockchain. Once completed, the miner is rewarded with an amount of newly created bitcoins.
Inbuilt into the bitcoin software is a hard limit of 21,000,000 coins. No more coins can ever come into existence once miners have finished mining all the bitcoins. The total number of coins are said to be in circulation by the year 2140. Around every four years the software makes it twice as hard to mine bitcoin by reducing the size of the mining rewards.
When bitcoin was first introduced it was possible to almost instantaneously mine a coin using even a basic computer with basic software. Fast-forward a few years later and it requires rooms full of pretty powerful equipment, high-end graphics cards that are adept at crunching through calculations, which when combined with a volatile bitcoin price can sometimes make mining more expensive than it is worth.
Fees of varied amounts are added by the sender as an incentive for miners, who also decide which transactions to group into a block. These fees will continue as a motivator for mining after all coins have been created. Due to the fact that it supports the Bitcoin network's infrastructure, this is necessary.
Exactly who created bitcoin?
An scholarly white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System was uploaded in 2008 after the domain name.org was purchased. It outlined the philosophy and architecture of a mechanism for a digital currency that is not subject to regulation by any institution or authority.
"The core problem with conventional currencies is all the trust that's required to make it function," stated the author, who goes by Satoshi Nakamoto. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
The software outlined in the article was completed the following year and made available to the general public, kicking off the bitcoin network on January 9, 2009.
Up until 2010, when he or she withdrew from the project and left it to run on its own, Nakamoto continued working on the project with a variety of developers. Nakamoto's true name has never been made public, and they haven't spoken out in a long time.
Now that the program is open source, anybody can see, use, or contribute to the code without charge. MIT is one of several businesses and organizations that try to improve the software.
What drawbacks exist with bitcoin?
A number of things have been said against bitcoin, including how energy-intensive the mining process is. Energy use at the University of Cambridge is tracked by an online calculator, and by the start of 2021, it was projected to use more than 100 terawatt hours year. To put things in context, the UK consumed 304 terawatt hours overall in 2016.
Bitcoin has also been linked to criminal activities, with opponents pointing out to it being the best way to make black market transactions. In reality, cash has provided this function for centuries, and the public ledger of bitcoin may actually be a tool for law enforcement.