Welcome to our What is Bitcoin guide!
Even outside of the cryptocurrency space, Bitcoin is somewhat of a trending topic. In fact, one of the most searched ‘what is’ questions in all of 2017 was, ‘what is Bitcoin’.
With all this hype floating around about Bitcoin, a lot of assumptions are made, and a lot of the truth becomes misconstrued — it’s almost like a playground game of Chinese Whispers.
Not to worry, though: we’re here to clear it all up and answer all your questions.
Let’s jump right into it!
An Introduction to Bitcoin
So, what is Bitcoin? I’ll summarize it in one paragraph.
Launched in 2009 by an anonymous creator, Bitcoin is a peer-to-peer digital currency that operates on a blockchain (a form of DLT/Distributed Ledger Technology). Its purpose is to enable us to transition to a cashless society that doesn’t rely on central authority/services (i.e. banks and payment processors).
Now, that definition and brief summary is all good and well for those who understand what DLTs are. For those who don’t, though, I should imagine I’ll need to simplify it a little.
The things you need to know:
- Bitcoin is a digital currency
- It was the first ever cryptocurrency
- Blockchain is the technology it uses
- Blockchain is a form of DLT (Distributed Ledger Technology)
- A ledger is a database, which in Bitcoin’s case records transactions
- The blockchain protects each Bitcoin with cryptographic encryption
- Bitcoin’s blockchain/database is decentralized, which allows Bitcoin to operate in a completely decentralized manner
- Being decentralized means that it is completely P2P (peer-to-peer) as no central parties are required, i.e. banks, PayPal, VISA etc.
- It also means no single entity has control over the network
For more on blockchain technology, read our Blockchain Explained guide.
What Bitcoin Is All About
The bottom line regarding Bitcoin is that it is decentralized. That is the key point that the anonymous creator — going by the pseudonym of Satoshi Nakamoto — wanted to be paramount.
By being decentralized, Bitcoin offers a wide variety of revolutionary benefits, including the following:
- Fast & Cheap International Transactions
Using banks, international transactions take multiple days to complete. This is because they need to be processed by banks (the sender’s bank and the recipient’s bank) and the currency must be converted in most cases.
With Bitcoin, the transactions take around 10 minutes regardless of location — Bitcoin transactions are borderless.
With Bitcoin transactions recorded on the blockchain, they cannot be reversed or edited. This renders double spending impossible.
- Secure — No Central Server
As there is no central point of authority or failure, there is no central location in which the funds are stored. This means that, unlike traditional banks, your Bitcoin is not vulnerable to hackers that compromise the security of one of the servers.
Imagine a centralized sever: it contains its data in one location. Now, imagine a decentralized sever (like that of the Bitcoin network): the data is stored across the entire network and a hacker would need to possess more than half of the computers in the network to tamper with the data and forge transactions.
This will make more sense once you’ve read the Bitcoin Transactions section of this guide. If you wish, revisit this point once you’ve read the aforementioned section.
- No Third-Party Control
There is no single entity that has control over your funds.
This heavily contrasts traditional banks and centralized payment systems, in which the central authority can freeze your account whenever they wish, or simply refuse your transactions.
- Accessible to Everyone with Internet Access
Two billion people remain unbanked. With Bitcoin, you can send and receive payments without the needs for banks.
If you have an internet connection, you can get started using Bitcoin without any government identification. You do not need a residential address, nor a name, nor any other personal details. Bitcoin is for the people.
To gain a full understanding of Bitcoin (one that’s deep enough for you to answer the question ‘what is Bitcoin?’ without stuttering or sweating), you should learn about how Bitcoin transactions work too.
So, that’s what I’ll explain next — Bitcoin transactions.
The first thing you need to know regarding transactions is that each and every user of Bitcoin has what’s known as a Bitcoin address. Despite using the same name, it doesn’t share any similarities in appearance with a street address — in fact, a Bitcoin address just looks like a series of 26-35 random characters.
This address is the user’s identity on the Bitcoin blockchain; it is what you give to others so that they can send Bitcoin to you.
To send Bitcoin to someone else’s address, you’ll need to use a Bitcoin wallet. A Bitcoin wallet is essentially just an interface that allows you to interact with the Bitcoin blockchain — sending commands using your private key.
Note: While an address is public (anyone can see it), a private key is only visible to the user it belongs to. Each private key cryptographically belongs to one address exclusively. It is what is used to send transactions from that address to another address — think of it as a super-secure password. Just like the address, it looks like a series of random numbers, only a private key is 64 characters versus the 26-35 that an address consists of.
Most downloadable wallets store your private key for you, so that you don’t have to copy and paste it every time you want to use it. This keeps it much more secure.
It isn’t stored to the wallet’s database, though, but the memory on your device in an encrypted format. This means the company that developed the wallet do not have access to your private key — only you do.
(This isn’t the case in all wallets, though, as wallets that are on centralized exchanges, such as Coinbase and Binance, store your private key on their servers. This is why we strongly advise against storing any crypto on exchanges unless it is an amount you can comfortably afford to lose).
Example of a Bitcoin Transaction
If we were to see an example of a Bitcoin transaction written in plain English rather than lines of code, it’d look something like this:
- Mike has 10 BTC (Bitcoin). He wants to send 1 BTC to James.
- He opens his wallet (which stores his private key) and writes out a transaction stating he’ll send 1 BTC to James’ address.
- When he clicks ‘send’, the wallet signs the transaction with Mike’s private key and submits it to the blockchain.
- As the private key used matches the address assigned to that Bitcoin, the blockchain knows that the transaction is legitimate — Mike really did own the Bitcoin that he is sending, as he had the private key to prove it.
- The transaction is permanently recorded in the blockchain with the Bitcoin now being assigned to James’ address.
If there are no central parties (i.e. banks) processing Bitcoin transactions, how are they processed? Surely if there is nobody to process/verify the transactions, fraudsters can easily abuse Bitcoin?
Well, yes. That’s why there is somebody processing and verifying Bitcoin transactions. However, unlike banks, it is not done centrally, as there is no central point of authority in Bitcoin.
Instead, it is done by the community themselves — the authority is spread across many different entities so that everything is done fairly, and nobody has the chance to abuse power (as is possible in centralized operations).
The verification process is often referred to as Bitcoin mining.
In the Bitcoin ecosystem, there are miners. These miners (also referred to as nodes) are clusters of computers set up by users to process transactions on the Bitcoin blockchain.
The users install Bitcoin mining software to the computers which allows them to process Bitcoin transactions. To do so, the computers must solve complex math problems.
The transactions submitted to the blockchain are grouped into blocks. Only so many transactions can fit into one block. Once it is full, the miners begin to check the validity of the transactions within it by attempting to solve a complex math problem.
Solving the math problem determines whether the transactions all used the correct private keys or not and prevents double spending.
Once the problem is solved, the solution is checked by the rest of the nodes in the network. If more than 51% of the nodes agree that it is correct, the block is confirmed as valid and recorded onto the blockchain.
The miner that found the solution to the problem first is rewarded in the form of Bitcoin — this is how new Bitcoin are created.
The logic behind this is simple: miners use a lot of electricity to mine Bitcoin, so they need to be rewarded to cover their costs (and hopefully turn a profit too).
For more on mining, see our What is Mining guide.
Only 21,000,000 Bitcoin can ever be created.
Every 4 years, the mining reward (the amount of new Bitcoin created and awarded to a miner per block) halves. It is currently 12.5 BTC per block, so when the current 4-year period is over, the mining reward will be halved to 6.25 BTC per block.
The current block time (amount of time it takes to mine a block) is approximately 10 minutes.
It is thanks to this reward system that Bitcoin is able to avoid deflation: in centralized currencies (such as GBP, USD etc.), the government can order more money to be printed whenever they want, but in Bitcoin it is limited, and nobody can change it.
What is Bitcoin — Final Words
I tried to keep this What is Bitcoin guide reasonably concise, so as I’m sure you can understand, not every single detail on Bitcoin is explained in this guide. I hit all the fundamental points and components, though, and I hope you have a much better understanding now than you did before you started reading.
If you have any further questions, please do not hesitate to ask. At Tokenleak, we’re always happy to help and we encourage you to ask us whenever you’re uncertain about anything.
If you’d like to read about the 2nd largest cryptocurrency, Ethereum, see our What is Ethereum guide.