What is Bitcoin and how it works?

Definition of Bitcoin

Bitcoin often referred as digital gold is a cryptocurrency designed in such a way so that it can act as digital form of money and payment method without control of any individual or a group of persons and any financial institution.In any normal payment systems when a person or a business sends a payment to another business or person, the transaction has to be verified by our current financial system so that the money is sent from the first person account to the receiver account. But in Bitcoin or any other cryptocurrency the payment(in the form of coins or tokens) transfer from one account to other account get record it in a digital ledger known as blockchain which is maintained by computers known as miners using special software called mining software using hash algorithm and there is not any intermediary between them.

History of Bitcoin

In the month of August 2008 domain name bitcoin.org was registered and it’s identity was kept secrect with the help of WhoisGaurd Protection which means the person who registered this domain, his identity was not available to public.

In the month of October 2008 an anominous person or group named Satoshi Nakamoto published white paper on bitcoin.org website with the title “Bitcoin: A Peer to Peer Electronic Cash System”, which become the foundational principle how bitcoin operates even today.

The first Bitcoin block (block 0) was mind on January 3rd 2009 known as “Genesis Block”. This block contains the text “The Times 03/jan/2009 Chancellor on brink of second bailout for banks”. However the proof that this block was mined on the same date or after is also a point of political commentary for some people.

Why was Bitcoin created?

In 19th century and almost all the leading currencies in the world where backed by equal amount of gold, which means every note you had was printed keep in mind the printing organisation (central bank) of the country had amount of gold worth that note in their gold reserves.But during world wars between 1920s and 1970s this gold standard was replaced and currency now became fiat mainly because the global gold production was not able to keep the economic development in uptrend.

Also these precious metals were used as a medium of trade which created a problem of carrying the huge weight of the bulk of these metals,Also these metals were prone to loss and theft.Therefore reserve banks kept this gold and printed equal amount worth notes for its users which were easy to carry in bulk.

Hence users were totally dependent on banks to maintain the value of these paper currency notes.But between 2008 and 2009 during the world economic crisis various banks and several other financial institutions worldwide failed to maintain this balance between the number of currency notes and amount of of gold in their reserves.

This failure in modern banking system led to birth of bitcoin as a decentralised financial service as a healthy option to current centralised financial system.Thus bitcoin emerged as an outcome of World Economic Crisis in order to remove this dependency on financial institutions for financial transactions.

Satoshi Nakamoto pointed out if the banks are pulled out from financial transactions and replacing them with a peer to peer payment system which does not require a third party to confirm transactions, thus eliminating the dependency on central authority for confirmation of the financial transactions.

Irrespective of these institutions, the bitcoin developed trust amoung users by using blockchain, a digital ledger in which every transaction of bitcoin or any other crypto currencies is recorded which is maintained by computers known as miners using an algorithm called mining software.

When was Bitcoin created|when was first Bitcoin used?

On Jan. 3rd 2009 first block of Bitcoin blockchain known as “genesis block” was mined and the blockchain was officially launched. In later week the first test transaction took place. Bitcoin blockchain was only available to miner to verify transactions during the first few months of it’s existence and had no real world value in it.

Miners : computer machines which solve the complex mathematical problems in order to reveal/discover new Bitcoins as a reward of verifying existing Bitcoin transactions was just done for fun during this period and in order to understand this new technology.

Bitcoin was first time used for real world value transaction after almost a year of it’s existence, When a man from Florida on May 22 2010 paid 10,000 bitcoin to buy $25 worth Pizza. This is now a days called most expensive pizza every ordered, since then this day is celebrated as Bitcoin Pizza Day among bitcoin and cryptocurrency enthusiasts.

What is public key and what is private key in Bitcoin?

In order to understand the public and private keys we need to understand what is cryptography and encryption.

Encryption is the art of coding a message or a piece of information using cryptographic symbols into a meaningless randomly arranged text. This text is the send by sender to receiver and is decrypted on receiver’s end so that no one in the middle can steal that information.

Public key acts as a bank account number but it is encrypted where we can receive bitcoins from anyone just like we receive money from someone using our account number,but in oder to safeguard the indentity of the receiver this public key reveals nothing about the receiver.

Private key is encrypted and digital version of signature just like we use the our signature while signing a cheque or we use our secret password while performing online banking transactions.

The owner of the Bitcoin sends bitcoin to someone by digitally signing the transaction using his private key and the receiver’s public key.This transaction is verified by miners and is recorded in digital ledger called blockchain and hence leads to formation of new block in the blockchain where this transaction is recorded along with the hash (address or location) previous block there by creation of chain of these blocks.

Thus blockchain is digital version of bank ledger or a chain of digitally signed transactions where public keys acts as the receiver address and private keys acts as verification signature to verify the ownership of bitcoins stored in that address.

In order words public key or bitcoin address is a transparent safe where anyone can see how much amount of Bitcoin is stored in it and only the owner who has private key can open this safe and use the bitcoin stored in it.

What is Bitcoin mining? |How to mine Bitcoin?

Bitcoin mining is the process by which miners (computers) get rewarded when a new transaction is successful added to the blockchain (digital ledger). Bitcoin miner use proof of work technique (Pow), using the method the mining computers solve mathematical problems to validate a transaction.

By solving the mathematical problem miners attempt to generate a 64 digit hexadecimal number called hash. When this hash matches the target hash, a new block is generated which stores the hash of previous block and the details of current transaction.

In other words this is a number guessing game where each participant (mining computer) guess the target number (hash).More the rate of guessing the number a computer (hash rate) has more likely it can guess the correct number(required has).

In the early days of Bitcoin the hash rate required for mining the bitcoin was very less, as the network grew bigger more and more mining computer joined the network hence it became more difficult to mine and mainly due to increased cost involved in the acquiring higher computational power required and higher electricity consumption.

The hash rate of Bitcoin is measured in Hashes per Second or (H/s) .But now a days miners need higher hash rate such as Mega Hashes per second (M/s),Giga Hashes per second (Gh/s) and even Tere Hashes per second (Th/s) in order to receive fruitful rewards in mining process.

It is important to know that the Bitcoin hash rate has no effect on the time taken to mine one block (block time). The mining difficulty value gets adjusted to ensure a constant block time.

The Bitcoin code rewards miners in two ways each time a transaction is verified and a new block is generated.The transaction fee which the sender of BTC pays goes to miners which has varified the transaction, since new block is generated so new Bitcoins are explored in the process which are rewarded to miners.

In the beginning of Bitcoin mining back in 2009, one Block mined would reward 50 BTC to the miners, as the total supply of Bitcoin is 21 million to keep the miners interested in the mining process, the mining reward get halved every 210,000 blocks mined. This phenomenon is known as Bitcoin halving.

So Bitcoin Halving has occurred as follows:

  • Year 2009 = 50 BTC per block
  • 2012 = 25 BTC per block
  • 2016= 12.5 BTC
  • 2020= 6.6 BTC

Since the number of transactions increases day by day the amount of BTC miner get paid is decreased.It is expected by year 2140 all the 21 million Bitcoins come into circulation leaving on one choice to rely on only transaction fee for validating the transactions.

What is Bitcoin Wallet and how does it work?

A Bitcoin wallet is digital form of bank account which has a public address instead of account number or routing number and a private key instead of a password or signature.

It is used to store Bitcoin and other cryptocurrencies like Ethereum (ETH). Bitcoin wallet or any other cryptocurrency wallet is encrypted and store private key which gives access to the public address associated and funds (cryptocurrency) stored in it and allows the owner of the private key to make transactions form the wallet.There are several types of Bitcoin and digital wallets viz:

  • Mobile wallet.
  • Web/online wallet.
  • Desktop wallet.
  • Hardware wallet.
  • Paper wallet.

Bitcoin Wallet or any other cryptocurrency wallet does not only store cryptocurrency but also protects them with the unique private key which only the owner know or anyone else provided with this key can access. Therefore it is always advised to keep this private key safe so that no one can steal the coins or tokens stored in it.

Whenever a crypto wallet is created a private key and a public key is generated which is linked to this wallet is provided to the user.

As mentioned earlier public key is just like a bank account number which can be shared with anyone in order to receive funds(crypto in this case),While as private key acts as password or signature which is unique and protects our crypto wallet from hackers therefore must be kept secret and secure. In case if this private key is leaked (someone got access to it)or this key is lost, crypto stored in the linked wallet will be lost.

What is a Bitcoin Exchange? |How to buy or sell bitcoin?

A Bitcoin exchange is similar to stock exchange the difference is instead of buying or selling stocks bitcoin and other cryptocurrencies are bought or sold by users. Thus a bitcoin exchange or cryptocurrency exchange is a digital marketplace where users buy or sell their crypto using fiat currency like dollar or by using other altcoins (cryptocurrencies other than bitcoin).Therefore an exchange acts as an online middleman between the sellers and buyers of Bitcoin and other cryptos.

Trader like an normal stock exchange can buy or sell by placing a limit order or a market order. In order to trade on these exchanges a user has to below process.

  • Sign up and create an account with the crypto exchange like Binance, FTX etc.
  • Go through the KYC process.
  • Send fiat (dollar, euro) to exchange.
  • Place any order (limit or market price).

Before investing your fund in Bitcoin and any other crypto you must first dive deeper into the ins and outs of the cryptocurrency like high volatility in price and other aspects. However in long run crypto has provided significant returns to its holders more than gold and stocks.

Advantages and Disadvantages of Bitcoin.

Advantages of Bitcoin

  • Decentralised that is no control of

Leave a Comment