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What is Bitcoin and Where Did It Come From

What is Bitcoin and How Does It Work

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The curiousity continues to grow around what Bitcoin is, and why there is so much hype around the online currency. 

In short, Bitcoin is a digital currency, created in 2009 and it works with a decentralized network which means that no single entity controls it and eliminates the need for intermediaries like with cash transactions.

 

What is Bitcoin

Bitcoin was created to create a peer-to-peer (no central authority) network that enables users to perform their day-to-day transactions fast, with ease, and without the need of a middleman.

Cash transactions have to go through your bank and sometimes take days before it is received at the intended destination, and this can be frustrating for many.

Bitcoin works with a network where your transactions are private, secure, fast, and personal. To understand Bitcoin better, we can’t do without discussing what Blockchain is. Blockchain is the mechanism or technology behind all Cryptocurrency through which they operate.

Before the era of cryptocurrencies, data of transactions were stored in a central authority. With the discovery of Blockchain, the history of transactions is transferred across nodes of servers all over the world.

You might start to wonder such extensive data stored all around might be susceptible to manipulations and also how is this data held together? 

Blockchain works with a security system known as “Cryptography” for holding this data in a block array and even prevents this data from being accessed by third parties.

With Cryptography, any attempt to alter this data renders this data invalid and useless. Also, with the open-source code used in the creation of Bitcoin, such alterations are easily detected by programmers. 

Attributes of Blockchain

Key things Blockchain provides, which shows it’s better than traditional means of storing data:

  • Decentralization: data from transactions is spread across the whole network, which increases the difficulty of manipulation.
  • Peer to peer: Blockchain works with no intermediaries (no central authority). This makes transactions more accessible, faster, and safer.
  • Security: the use of cryptography makes your data more secure and reduce the risk of manipulation or being hacked.
  • Add-only: new data are added to the building block, and once this data is added, they are non-editable.
  • Consensus: an agreement has to be reached between active peers or nodes on the network before new data can be added to the Blockchain. There is no central control for updating ledgers; instead, it is spread across participating nodes as equations generated via cryptography. This is perhaps the most essential feature of Blockchain.

 

Where Does Bitcoin Come From

Bitcoin, a cryptocurrency created in 2009, was created by a person or a group under the alias “Satoshi Nakamoto.” Similar to all Cryptocurrencies, Bitcoin had a low value and was mostly held by Miners at the time. 

There have been many failed attempts to figure out the identities under the name of Satoshi Nakamoto. A report later claimed Satoshi to be a Japanese man, but with no concrete evidence to back the claim so, no conclusions can be drawn at this point.

But generally, Bitcoin was invented by Satoshi in 2009, and it was created using open source code which means that the code is available to any programmer for inspection.

It also shows the limitation of the influence of the creator towards the operating process of the Cryptocurrency.

Bitcoin is a digital currency and can only be obtained through mining. There is a limited number of it as only 21-million bitcoins can be created. Satoshi owns an estimate of 1-million Bitcoin out of the 21-million Bitcoin available for mining.

In mid-2010, Management of Bitcoin was left in the care of Gavin Andresen, a famous and influential member of the Bitcoin community. When Gavin took charge, he worked on making Bitcoin More Decentralized.

New bitcoin is introduced into the Crypto world when a Miner successfully mines a valid Bitcoin block. To get a legitimate Bitcoin, the Miner needs to make a highly educated and constrained guesses which are power intensive.

Humans can not make these guesses as they are advanced mathematical algorithms so, there are specially designed systems manufactured to carry out this task.

 

 

 

How does Mining Work?

Mining performs two functions in the Cryptocurrency world; it is used to verify transactions and add data to the Blockchain and also to make new Cryptocoin available.

New Bitcoin currency is released through mining but, what is mining? Bitcoin Mining is a power-intensive method of bringing new Bitcoins into the Crypto world. Bitcoin had become relatively difficult to mine as compared with when it was newly created.

 

What is Bitcoin Mining Actually Doing

Formerly, all you needed to start mining Bitcoin is your Domestic Computer and a few years later, a graphics card. In recent times, this gadget will only mine you a little coin after a very long time.

Nowadays, due to increased competition, mining is done only by Special hardware manufactured mainly for that purpose. 

Explaining the Mining process in a non-technical way is just like the normal gold mining process. To successfully mine a block, a Miner must successfully guess an advanced mathematical algorithm.

This is not random guesses but calculated and educated guesses which are mostly wrong most times. The guessing process is consuming a lot of energy and wastes time; however, every 10 minutes every day, a Miner successfully mines a block.

The Miner is therefore granted access to add the new block to the Blockchain, and he receives the allocated mining reward. The allocated reward for successfully finding and adding a new block to the Blockchain is 12.5 newly created Bitcoin.

The reward was much higher back when the coin was created; the reward was 50 freshly created Bitcoin. 

The Bitcoin halving takes place approximately every four years when the block reward is cut in half. There are many benefits to the halving, and we discuss it in more detail in our post, “What does Bitcoin Halving Mean?

In-order to explain the Mining technical process, some technical terms must be explained first:

 

Hash Function 

Bitcoin makes use of the SHA-256; this mathematical function takes an input of any size and generates a fixed-length output every time. The generated output is called Bitcoin Hash.

 

 

 

Merkel Tree & Merkel Root

The Merkel tree is similar to a tree but is a tree of hashes and the last hash on the tree is called the Merkel root. This is a concept in informatics and Cryptography, which is based on Bitcoin mining. 

 

 

 

Target and Difficulty

Target is a 256- bit digit extracted by hashing the previous block’s header in a particular method, that every Bitcoin user shares while difficulty is a measure of the difficulty it takes to generate a hash below or equal to a provided target. The difficulty is measured in Hash Rate.

 

 

 

For a Miner to successfully mine a block, the Miner is required to hash the block’s header in a style that is less or equal to the “Target.”

If you don’t understand much of this terminology, we created a helpful A-Z Crypto Glossary to help you learn called, “Crypto Terminology | A Helpful Crypto Glossary.”

 

What is Decentralization?

Decentralization as said earlier, is the way to eliminate central authority is Bitcoin. It is the method of distributing control over Bitcoin to all its users rather than with a particular group.

The elimination makes Peer-Peer transactions faster and secures as no single entity can manipulate the process.

The failure of the Cryptocurrency doesn’t depend on a single person, but all the Holders of the coin.

Also, with the use of the Decentralization process, transaction charges associated with transactions are practically removed, saving cost for the parties involved in the case of frequent cash transactions.

Another critical advantage of decentralization is that the history of transactions is safely kept, spread across nodes of all servers rather than in a central place.

Therefore, the risk of manipulation is reduced, and also, the data cannot be lost. Anyone can join the Blockchain network to download a part of the Blockchain data.

 

What are the Advantages and Disadvantages of Decentralization in Cryptocurrency?

Just like with everything there are advantages and disadvantages. Decentralization is no different.

The question we help you determine below is if the advantages outweigh the disadvantages.

 

Advantages

Fraud prevention: since the Decentralization of Blockchain operates with an open-source system, and it contains every detail of transactions, it is straightforward to detect any act of fraud. The integrity of Blockchain is ensured by Miners who confirms the details of every transaction. With decentralization, it is nearly impossible to perform an act of fraud undetected.

Protection from Government Interference: Since Blockchain is not controlled by the government and details of every transaction is private and cannot be viewed, Interference of Government in the daily running of the business has been eliminated. The government is known to have an enormous influence on the traditional currency, but with Bitcoin, you don’t have to worry. 

Faster transaction times: For most bank transactions, it can take days before the transaction is verified and received. However, with Blockchain technology, your transaction only takes minutes; it is faster and easier since there are no intermediaries to verify and process the transactions. 

Improved financial Efficiency: Decentralized Blockchain ensure the transaction is made through the Peer-Peer system, removing the need for a third-party. This allows users to rely less on financial institutions, and this can save people from a lot of cost from transfer fees associated with using banks.

 

Disadvantages 

Crime: Due to the increased attention in Bitcoin, it has become a ground for fraud. It has also been used by people to purchase illegal goods online.

Volatility: A large percentage of the Cryptocurrency that uses the Blockchain is very volatile. However, with the volatility, the price of Bitcoin has increased considerably over the years.

Storage Issues: For people who are not tech-savvy, where to securely store Bitcoin might be an issue. The most secure storage for Bitcoin is known as the “Cold Storage,” such as Trezor Hardware Wallet. The cold storage is a storage that can’t be accessed by the internet, therefore, decreasing the risk of hacking. Alternatively, you can also store your Bitcoin on Exchanges such as Coinbase if you are not comfortabel maintaining your own crypto at the start. (Find a cold storage solution as soon as possible!)

Recommended Crypto Tools

 

Who Controls Bitcoin?

No one has absolute control over Bitcoin. Due to the decentralization in the system, no one is responsible for the overall control of the system. It also means the success and failure depends on everyone from the:

Users– the day-to-day trader of the coin (people who buy and sell Bitcoin).

Miners– who process confirmation of transactions and make new Bitcoin available in the market.

Developers– this is people who work further improving the system and the open-source nature of the network.

Companies and their Shareholders– Platforms that make the trading of Bitcoin possible. They provide wallets upon Sign up. Examples of these companies are Coinbase, Changelly, and Trezor Wallet.

So the failure and success of the system depend on all the sectors. Now back to the question “who controls Bitcoin?”, the sector that carries the highest Vote Controls Bitcoin; could be the Users, Miners, Companies, and Shareholders, or developers.

 

How does Bitcoin Work?

Bitcoin works like the usual day-to-day transaction and the only adoption being decentralization in its transactions.

Bitcoin is created through mining, and its information is protected using Cryptography. To own or perform any Bitcoin transaction, you need to have a Crypto wallet to keep the coin; this coin works like a bank where our cash is kept.

The only difference between the two is that a Crypto wallet is accessed online. You need to open a Crypto wallet to be able to maintain and trade Bitcoin.

How does a Crypto wallet work? In the real sense, your Crypto wallet doesn’t keep your Bitcoin, but it keeps the history of your transactions, your Bitcoin is kept in the Blockchain. Crypto wallet works with three main components, namely:

  • Wallet address: as I have said earlier, your Cryptocurrency wallet is similar to your bank. Your wallet address is your account number. You don’t need to give all the details of your bank to receive cash from someone; all you need to provide is your account number which doesn’t give out any information about you. Similarly, your wallet address is harmless; it can be given out without any fear.
  • Private Wallet Key: This is a secure pin only you have access to. If you want to make a cash transfer from your bank, you are required to enter a private and secure key to conform to the transaction solely for verification. The private wallet key operates in the same capacity; it proves you are the owner of the digital currency in the Blockchain. Without this, you cannot have access to your Cryptocurrency. 
  • Public Wallet Key: this works hand in hand with your private key, and the two keys have to match for any Cryptocurrency transaction that can occur. It is different from the private key and is used to receive Cryptocurrency. The private key is used to send out Cryptocurrency.  The codes of the private and public keys are different, but the Blockchain operates with a mathematical software that matches these two keys before any transaction can be verified.

Every Bitcoin available after mining is stored in the Blockchain and the evidence of Bitcoin you own is available in the Bitcoin Wallet. The process involved in the Mining process is listed below:

  • The miners start the transaction by firstly creating a digital log in with its security key. In Blockchain, transactions are represented as a data structure that denotes the transfer of value.
  • The Miner that validates transactions makes use of gossip protocol which is a computer-to-computer communication protocol. It’s a code for miners to communicate without disseminating information. Consensus has to be reached between at least three miners for a transaction to be approved.
  • After validation, the transaction is included in the block, which is then generated onto the Blockchain network. This is when a transaction is said to be confirmed.
  • New blocks link to the older one cryptographically. This link is a hash pointer. The transaction is confirmed the second time, and the block gets its first validation.
  • Reconfirmations are done every time a new block is created. The transaction is considered final when six confirmations have been made.

 

How to Get Bitcoin?

There are mainly four ways by which you can acquire Bitcoin; the approaches are:

  • Using an Exchange: Many exchanges allow fiat to crypto transactions. You sign up for the exchange, verify your identity, and use your debit or credit card to purchase Bitcoin. Only use trusted exchanges. We recommend you strongly consider Coinbase or Changelly for your fiat to crypto transactions.
  • Buying Bitcoin with cash is commonly referred to as Peer-Peer Exchange. This method involves trading your Bitcoin for cash by selling to another person interested in acquiring the coin. This method is safe, and you get to receive your cash instantly through your preferred or mutual payment method. For this method, you have to do is to search for an interested buyer. Once all agreements are reached, the buyer sends over his wallet address. Once he receives the notification of the transfer of the coin, he would transfer the cash to any of your payment methods.  PayPal, Bank account, or even in exchange for another Cryptocurrency are commonly used to complete transactions. This approach is less time consuming and equally faster.
  • You can gain Bitcoin by exchanging goods or services for Bitcoin; you will exchange the worth of your product or service for the volume of Bitcoin agreed upon.
  • Bitcoin can also be gained by mining. This is the creative process, and the value of Bitcoin acquired from this way decreases with the increase in volume available in the system.

If you are interested in how to Earn Bitcoin without always needing to trade your fiat take a look at our article called, “How to Earn Bitcoin | Little to No Investment Needed.”

 

Pros and Cons of Bitcoin

Like investing in anything, there is always a positive and negative side. It is the same with Bitcoin, it has managed to eliminate or provide an upgrade on some areas and has fallen short in others. 

 

What are the Pros of Bitcoin?

  • Bitcoin can claim to be the most open system since it has started to be accepted to date. Payments with Bitcoin can be made at any time of the day and week.
  • International Bitcoin transfer is faster and cheaper as it eliminates all intermediaries (Central Authority) as compared to a standard Bank transfer. It takes days before international cash transfer is received at it comes with a transfer fee.
  • Since there are no intermediaries, there is no authority that can resist you from making transactions. Therefore, it is an open system that is available to everyone.
  • Blockchain protects contracts better as no part of it can be altered or deleted as any attempt makes the file invalid. Also, the contract is even more secure as it is on a decentralized network making it harder to trace for hackers. When dealing with multiple businesses, information is made available without exposing the sensitive part.
  • Smart contracts help to improve the cash flow in business transactions by making payment of invoices as soon as business transactions are concluded. Instead of waiting for different authorities to verify the payment one at a time, all the layers of authority can follow up the contract as it happens and sign at once it is completed.
  • Dealing with lesser intermediaries: the cost procured in transactions due to intermediaries, is much when dealing with a lot of cash transactions. Also, the time it takes to process these transactions can sometimes be worrisome as it affects a lot of business transactions. Blockchain provides a more effortless and secure way to deal with your transactions by eliminating the number of intermediaries you have to work with. This process is a lot faster and reliable.
  • Improved privacy and security: since transactions are distributed across all nodes in the Blockchain, Bitcoin transaction is more secure. 
  • Transparent transactions which can never be lost: transactions that take place are very open as authorized individuals can view them. Since data for these transactions are stored in millions of computers participating in the chain, there is a hundred percent possibility that any lost data is recovered,
  • Accountability and credibility: all transactions are stored in chronological order, and all the blocks are time stamped. Also, the source of any ledger/transaction can be tracked to its point of origin.
  • Since information can’t be altered in a Blockchain, tracking of records of transactions is made easier. In cases of internal audits, Blockchain technology speeds up the process as information is accurate and easily located. 

 

What are the Cons of Bitcoin?

  • Bitcoin is still under development. There is no fixed transaction rate, and also the transaction speed varies depending on internet congestion and mining efficiency.
  • Bitcoin is not yet widely accepted by every company or business. Some still reject to make transactions through Bitcoin so, you should not rely on making every day-to-day transaction with it just yet.
  • Bitcoin transactions are immutable; this means that the transaction cannot be retracted once the money leaves your Crypto wallet. This favors merchants and freelancers since it eliminates fraudulent chargebacks.
  • Recovery of the private key isn’t possible yet, which has led to many lost investments. Many investors can’t manage their private key securely, which led to them losing their coin.
  • Bitcoin is excessively volatile, and the price can vary anytime.

Based on an analysis published in The Wall Street Journal by Campbell Harvey, a finance professor at Duke University, Bitcoin has experienced a 7.5 times volatility more than gold, and over eight times as volatile as the S & P 500…

 

Is Bitcoin a Bubble?

This is a vital question, especially after the boost and fall in price from the last bull run.

 

Is Bitcoin A Bubble

Relatively speaking, since the day and age of the internet bulb in the late 1990s, the returns of Bitcoin as well as its digital partners on the crypto asset space were never seen.

Bitcoin, however, has fundamental values very distinct from early web inventories and a much successful path of development.

 Bitcoin is not a Bubble. Why?

 

Bitcoin’s growing acceptance as legal tender

One of Bitcoin’s most significant challenges until now, given its decentralized nature and its unfortunate link to the criminal activity carried out on the dark web, the acceptance of lawmakers and financial regulatory authorities.

But the “authorized” recognition of Bitcoin is growing. Japan formally announced in April 2017 that it would start to accept Bitcoin as a legally accepted method of payment.

Which increased the value of bitcoin instantly and led to a significant rise in commercial implementation throughout Japan.

Citizens in the Philippines are more and less sending and receiving low-cost transfers using Bitcoin.

The central bank in February 2017 declared that it would allow the Bitcoin to be used as a formally approved transfer method. This allowed Bitcoin to have complete political and legal status.

 

Bitcoin has become a wealth outlet in plagued economies increasingly

Another reason why Bitcoin is probably not a bubble is that it has a much needed real-world implementation in economically disadvantaged nations.

Bitcoin, for instance, has been a fruitful exchange and an alternative investment currency in locations like Venezuela, Bolivia, and Zimbabwe, when national currencies become low in value.

This can be seen through growing amounts of Bitcoin trade that are adversely linked to national currency output and financial development in affected areas.

 

Bitcoin supply is constrained

Finally, one of the main reasons why Bitcoin is significant is that a restricted supply meets its growing demand.

Just 21 million coins can ever be mined due to how Bitcoin was made.

This leaves plenty of room for upside if you plan to trade or get Bitcoin and hold for a while.

For an even more in-depth look at the topic of Bitcoin being a bubble check out our article called, “Is Bitcoin and Bubble | Both Points of View.”

 

Final Thoughts On Bitcoin

We are at the beginning of the shift in the way we handle our transactions and secure our data. 

Bitcoin is reveloutionary and the signs of world wide acceptance is showing more and more as time goes on.

If we look at history the price of Bitcoin has the potential to continue to rise and give investors of all ranges a chance to capitalize on getting involed early. 

Time will tell!

Just be sure to use only trusted, secure crypto tools to keep your crypto as well as your identity safe from the growing scams and hackers in the crypto space.  See our list of battle-tested recommended crypto tools for all-around protection.

About the author

I am the Founder of FutureofCrypto.io, a Crypto Investor, Crypto Researcher, and Enthusiast! I have been involved in the crypto space for several years and enjoy the hunt to find a low market cap coins that have huge upside potential!

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