You might have probably heard about Bitcoin by now. Perhaps you have seen articles about its rapid adoption rate, or the price of a single bitcoin skyrocketing.
Bitcoin can be complex for those who aren’t familiar with the technical aspects of creating a digital currency or a decentralized network. This article hopes to simplify bitcoins and the blockchain in a way that makes sense of the technical aspects that underpin this revolutionary cryptocurrency and payment system.
Bitcoin is a cryptocurrency. In a sense, it can be compared to stocks or gold and can be treated as a valuable asset. Bitcoin though is a digital asset. If you have a single bitcoin or a portion of one, you actually don’t hold anything physical.
You would hold digital money, which then can be used to buy an array of products or services. It can also be used as a trading instrument in which you can trade or sell Bitcoins for other cryptocurrencies or national currencies like dollars, euros, etc.
Here is an example of how you can use Bitcoin:
Let’s say you purchase a single bitcoin at the price of $4500. You now options available with this bitcoin. You can hold on to this bitcoin, hoping that it increases in value over time. You can make purchases with this bitcoin. There are now online retailers and services which now accept bitcoins as payment. Microsoft, Expedia, Overstock.com, and Dish Network are four such examples. Increasingly, there are brick-and-mortar stores which now accept bitcoins as payment. You can also trade some or all of the bitcoins you have at a cryptocurrency exchange for another cryptocurrency or fiat money such as US dollars. You can even give bitcoins to charity organizations.
Bitcoin was released in 2009 by a programmer named Satoshi Nakamoto. Nakamoto’s true identity has never been officially confirmed. Satoshi Nakamoto released a whitepaper detailing the technical aspects of Bitcoin. The Bitcoin technical whitepaper can be read here.
Bitcoins are digital currency stored on digital wallets. These wallets can be online wallets or hardware wallets. Digital wallets allow you to receive and receive cryptocurrencies and can be linked with your bank account.
They also allow you to purchases. The smallest individual unit of a bitcoin is called a satoshi, named after the creator. Each bitcoin is identified by two sets of long alphanumeric characters called a public address and private. It is a one hundred millionth of a single bitcoin (0.00000001 BTC). Bitcoins themselves are created though a process called mining. Mining involves solving complex mathematical problems in order gain bitcoins.
Mining is also how transactions are verified and added to a position in the blockchain. The blockchain is a public ledger. Think of how an accountant would have a ledger of all the financial transactions of a company.
Anytime something is sold or bought, it would be added to the ledger. That ledger is a way to keep track of all the transactions of the business. The blockchain works in a similar fashion. The blockchain is comprised of a system of networks around the world. There is no government or middleman controlling this network. Here is a high level view of a bitcoin transaction:
Chris decides to give Mary 1.5 bitcoins. He gets Mary’s bitcoin wallet address. He then transfers 1.5 bitcoins from his bitcoin wallet to Mary’s using Mary’s bitcoin address. This transaction is signed using the address private keys of Chris (known only to Chris) and Mary (known only to Mary). The bitcoin miners then vet the transaction to ensure authenticity and then put it into the blockchain, which acts as a public ledger. The status of this transfer can be checked online.
For further information about bitcoin and other cryptocurrencies, be sure to check out our guides section.