Bitcoin Beginner’s Guide
Bitcoin is an invention that, for the first time in history, has allowed a group of software users to create and manage digital money that is not controlled by any government or bank.
A revolutionary idea when it was introduced in 2009, Bitcoin continues to have implications that technologists and economists are beginning to understand and explore today.
This means that depending on who you ask, you may get different answers to questions like “What is Bitcoin?” and “Why are bitcoins valuable?”
For starters, it’s good to think of Bitcoin as a software protocol that you interact with every day: think of SMTP (which helps route email messages) and HTTP (which ensures that servers deliver the web content you request to your browser).
The Bitcoin protocol allows computers running its software to manage a set of data (blockchain) and enforce a set of rules that make that data (bitcoins) rare and valuable.
The Bitcoin blockchain is a complete record of network history, verified by the people who run the Bitcoin software (us). This ensures that, unlike most digital data, which can be freely copied and modified, bitcoins cannot.
Since bitcoins are rare, divisible, and transferable, bitcoins are used as currency.
How does bitcoin work?
By design, bitcoins can be sent between two users without a trusted intermediary.
If you give someone a dollar in person, they now have a dollar and you don’t. You gave someone something of value and they got it. The same works with bitcoin.
But you might wonder, what about all those computers using the network? What’s to stop them from breaking the program rules and stealing my money? Incentives basically.
To manipulate the ledger of
Bitcoin, a hacker must control at least one third of the mining hardware. However, since this miner would earn most of the new bitcoins, he would not be interested in attacking the network.
First, the high value of Bitcoin makes mining very expensive. To compete for new BTC, miners must use specialized equipment and cheap electricity to solve hashes and create new blocks.
This race is not easy: the computing power competing for the new BTC is now greater than Google’s data centers. In practice, this means that while it is technically possible to manipulate the Bitcoin blockchain, it is not economically feasible.
Is Bitcoin Decentralized?
To fully understand the concept of decentralization and why it is so important, it is worth considering how the banking system works today.
Your salary is likely to be regularly deposited into your bank account. In this case, the bank provides access to your money (through ATMs, credit cards, and checks) while protecting it against theft (with security guards, safes, and alarm systems).
In our example, banks act as central government institutions. They are third parties that facilitate transactions between individuals and legal entities. Basically, banks act as intermediaries in your transactions. They then offer the same services to all clients and give them control over large amounts of other people’s money.
With that kind of power, they can easily change the rules. Your bank can lend you money, not process transactions, or even deny you access to your funds without your permission. Governments and criminals can take your data and money from banks.
The idea behind Bitcoin is to create a system without intermediaries and without a central authority. Only you control your money and your transactions cannot be declined.
Bitcoin is “decentralized” because its software allows anyone to verify the authenticity and absence of incoming bitcoins. Therefore, the decentralization of Bitcoin solves the trust problem inherent in centralized fund managers. If one computer doesn’t do its job, another can replace it.
Bitcoin developers generally consider the network to be more or less decentralized based on the cost to the average user of synchronizing a node with the network, and they suggest protocol changes based on how this will affect the process.
Why Bitcoin has value BTC
Bitcoin has many of the qualities that give value to traditional goods and public money: scarcity, durability, portability, divisibility, exchangeability, and acceptability.
It could even be argued that BTC has an advantage over public money and commodities in many of these categories.
Deficit
The supply of BTC is more limited than the supply of silver and gold, with only 21 million BTC entering the network economy.
When the first block was mined in 2009, 50 BTC was released. This process made more than 18 million BTC available by 2020.
The amount of BTC released in each block is halved roughly every four years to keep the entire supply limited, in an event called a halving.
Stability
All money must be durable enough to be used over and over again. BTC private keys are numbers and letters that can be stamped into stainless steel, stored, or split into multiple parts, increasing their durability.
Portability
With BTC, you can store all your wealth on a USB stick stored in your brain or instantly transfer it to the internet.
Divisibility
All currencies have denominations so that people can buy goods of different values. For example, a US dollar can be divided into cents on a $100 bill.
BTC is also divisible and can be divided up to eight decimal places. The smallest monetary unit is called a satoshi, after the creator of Bitcoin. 1 BTC is equal to 100,000,000 satoshis (sats).
substitutability
All monetary units must be equally homogeneous and interchangeable.
Just like paper money or gold, depending on how you got your BTC, they are interchangeable to varying degrees. For example, exchanges or merchants may not accept Bitcoins involved in crimes. (This is still an active area of research for Bitcoin developers.)
For something to have value, people must recognize and accept that it has value.
Thousands of people and vendors now accept bitcoin payments, from Microsoft to thousands of other small businesses accept bitcoin payments and donations.
You can also buy and sell BTC for other cryptocurrencies as well as more traditional currencies on exchanges.