Bitcoin 101: What It Is, How It Works, And Why You Should Care
Ah yeah, Bitcoin. That crypto stuff. I just can’t be bothered…
Have you caught yourself saying that before? Bitcoin has been making waves since it was announced about twelve years ago and went live. Who would have thought that in only twelve years that central banks of various countries would be scrambling to create their own Central Bank Digital Currencies (CBDCs)? It is not too late to gain some understanding of Bitcoin. Bitcoin 101 is here!
If you felt like you need a Bitcoin 101 and it’s all a bunch of technical, programming mumbo-jumbo and an exchange trader kind of thing, you’re going to have to think again about that. The possibilities for using Bitcoin are nearly endless.
You’re going to learn the who, what, why, and how of Bitcoin in an easy-to-understand way. We’re sure by the end, you’ll be able to use it, explain it, and see why it really is for anyone and everyone.
Take your desks, everyone. Bitcoin 101 is now in session, mumbo-jumbo not included!
BITCOIN 101: WHAT ARE CRYPTOCURRENCY AND BITCOIN?
Cryptocurrency is a type of currency secured by cryptography. Its transaction validation, creation, and use is facilitated by solving complex mathematical problems. Bitcoin is a kind of cryptocurrency, which is a currency that exists entirely in the digital form.
Bitcoin runs on a type of concept called a blockchain. A blockchain can be imagined very similarly to a real chain. Every time that a computer does the math to add a new link, the whole chain becomes “longer.” However, in this case, the size of the hash itself never gets longer.
Blockchain is the underlying technology which makes Bitcoin viable, but some consider it to be a bigger invention than Bitcoin itself.
Indeed, blockchain is what gives Bitcoin its security and its value. The only way a bad actor (a technical term for a malevolent party in banking) can commit fraud is by doing all the math from a previous link until the current one, and then the next one after that.
It doesn’t sound like a big deal, but they have to do all that work before a network of other high-powered computers finishes only one link in the chain. With every transaction, it becomes increasingly more difficult for someone to cheat.
To make a long story short, Bitcoin is a distributed peer-to-peer system that has no central ledger. Rather it has what is called a distributed ledger that many people check at once (miners).
BITCOIN 101: WHO STARTED BITCOIN?
One person or a group of people who might have known what was to come with CBDCs and more was the founder and originator of Bitcoin, Satoshi Nakamoto—purely a made-up pseudonym.
The jury is still out on who “Satoshi” is, but it’s been 12 years and no one has come forward with any credibility. Some have pointed to figures like Wei Dai, who came up with the idea of a kind of “cryptocurrency” in 1998.
Nick Szabo is the latest in the crosshairs as the inventor of Bitcoin. Although, no one really knows.
The honest truth of it is that it doesn’t matter who came up with the idea and started the first block. Bitcoin is made so that it isn’t in the hands of any single person or entity. Even the miners who work on the network only facilitate the process, and don’t own anything at all except for their own machines to process the hashes.
Everyone who owns Bitcoin owns a part of the future of the world economy.
HOW DOES BITCOIN WORK?
We’ve already covered it a little, but Bitcoin uses blockchain technology to create a valid block. To do that, it uses your public key to verify, and your private key to as a signature, which only you know. For this reason, it is considered a pseudo-anonymous currency system.
What it means for you is that you only need a digital wallet for bitcoin to go in and out of, and the network does the rest. All you need to do is keep your private key handy to manage the transaction signing.
What happens behind the scenes is that a bunch of high-power computers run the math to verify the block and your added public key. Depending on the size of the transaction you only need to wait long enough for one “miner” to verify it.
If it’s a transaction of US$10,000 or more it needs six verifications and it could take longer, with larger transaction fees.
Miners are ones who “find” bitcoins, verify transactions with on the public ledger, and keep it secure against attacks. The way they do this is with a lot of maths called a hash.
The hash algorithm being used is an SHA-256 algorithm, a modified version of a cryptography algorithm called Hashcash. Basically, it is a way to encrypt data, and miners look for the key, hoping they’re lucky.
The Bitcoin network itself makes new bitcoins every 10 minutes or so, and the miners are out looking for them. The real day-to-day money for miners, though, is in handling transactions and taking transaction fees in proportion to the work they do in adding links to the chain.
WHY WOULD I CARE?
Bitcoin isn’t going away, and it started an avalanche of thousands of digital currencies and cryptocurrencies. In fact, as of January 2020, there were more than 2000 cryptocurrencies to choose from.
Some are scams, some are freshman attempts, and almost all of them are a waste of time.
The proof is in the pudding, or in this case, the proof-of-work pudding that Bitcoin builds on. It’s an unbreakable system that doesn’t rely on trust. It’s owned by no one and everyone at the same time.
Thousands have made millions with Bitcoin, especially during halving times. Approximately every 4 years Bitcoin halves, and on May 11 of 2020, it did just that. So far, every time Bitcoin has halved 150 days later the price is always substantially higher.
Don’t miss out!
BITCOIN 101: CLASS DISMISSED
Bitcoin and cryptocurrency can be a bit tough to wrap your head around. Blockchain technology is another toughie. We’re sure this guide can get you through it.
Don’t be shy to read it a few times, and don’t worry. There’s no pop quiz to take either. Just trust that the real maths are being done by some hardcore computers, so you don’t have to.
The best way to make money by using Bitcoin is to exchange it. In 30 seconds you can create an account. After making your first AUD deposit, you can start buying Bitcoin in just a few clicks.
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