Bitcoin | How Bitcoin Works & #1 Definition | Coinlist.me

Bitcoin Explained – Coinlist.me

Bitcoin Definition

Bitcoin is a peer-to-peer electronic cash system. In the very basic sense, it is digital money however it shares many similarities to gold. A tangible asset that can be used as an investment vehicle. The bitcoin symbol is BTC and is usually portrayed against another fiat or cryptocurrency, for instance, BTC/USD.

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Why Bitcoin is the Future

Bitcoin answers to the payment needs of the Digital Age. Since the coming of the Internet, people, entities and systems worldwide have become highly interconnected and integrated.

The transfer of information, data and the execution of transactions between parties are now borderless and almost instantaneous; the World has become an always-on, global society where immediacy is the norm.

Bitcoin the future of money

Bitcoin Currency Vs Fiat Currency

However, to process electronic payments on the Internet, commerce still relies almost exclusively on the traditional (fiat) financial system; which was not designed for the requirements of the Digital Age. Because the classic system includes several intermediaries –such as financial institutions- to serve as trusted third parties, payments are costly and slow.

The reason why bitcoin is good for modern times is that it eliminates the need for middlemen during the online payment process. The bitcoin network hinges on digital technology instead of trust. It employs a secure code –cryptographic proof- to allow willing parties to transact directly with each other; payments are irreversible and made without intermediaries.

The supply of bitcoins is regulated by cryptographic software and the agreement of users of the open source code system; the bitcoin network cannot be manipulated by any government, bank, organization or individual. Because the bitcoin token flows directly between peers, payments are almost instantaneous and costs are negligible; this is why bitcoin is the future.

What Bitcoin Looks Like

Many different, random images & graphics are used online and in the media to represent the bitcoin symbol. However, visual presentation of the bitcoin token are used only for illustrative and branding purposes. In reality, no physical bitcoin exists, such as the tangible notes and coins of traditional money.

The Cryptocurrency is only available in pure digital format –a string of computer symbols- which represents how bitcoin is created; sample image below.

bitcoin coin 1                  bitcoin coin 2bitcoin coin 3

How Bitcoin Works

The bitcoin currency allows for online payments to be sent directly from one party to another on the bitcoin network without going through financial institutions. The Bitcoin network is also known as the bitcoin blockchain. It is a public accounting system which records and reflects all bitcoin token transactions.

Anyone in the World has access to the bitcoin blockchain; it is spread across a global network of independent computers which is not owned or controlled by middlemen. More on bitcoin and blockchain below; also how bitcoin transactions work.

As bitcoin is the first cryptocurrency, it is very easy to purchase. There are a variety of exchanges and payment methods available to investors, including paypal, credit card, bank transfer and various E-commerce products.

Bitcoins workings

How Bitcoin Started

When bitcoin started;

  • An unknown person or entity registered the online bitcoin address -Bitcoin.org- on 18 August 2008 (maybe bitcoin satoshi?);
  • The bitcoin whitepaper was posted to an online cryptography mailing list on 31 October 2008, and
  • On 8 January 2009 the first version of bitcoin was announced; shortly thereafter bitcoin mining began.

The bitcoin inventor goes under a pseudonym of Satoshi Nakamoto. Throughout the years there was wide speculation –and dubious claims- on the true identity of the person or group who first posted the bitcoin concept online. Today the identity of the bitcoin founder remains unverified; the Satoshi Nakamoto accounts are no longer active and the coins in its bitcoin wallet have never been spent.

The man behind Bitcoin?

How Bitcoin Works Under the Hood

The first step for new users is to find a good bitcoin wallet. Secondly, the wallet needs to be funded; this can be done by buying bitcoin, or by receiving bitcoin from another bitcoin wallet. And lastly, once the bitcoin wallet has been funded, then payments can be made by sending bitcoins from the wallet to the address of another bitcoin wallet.

Bitcoin payments are called transactions. A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. The balances on bitcoin wallets update automatically after each transaction.

MyEtherWallet

Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued.

MyEtherWallet is one of the most popular wallets on the market at the moment.

How Bitcoin Blockchain Works

The blockchain is a shared public ledger which forms the basis on which the entire bitcoin network relies. All transactions from bitcoin wallets are broadcast between users on the bitcoin blockchain network; soon afterwards, the network begins to confirm each waiting transaction through a process called mining.

To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. Bitcoin miners compete to complete the verification process first by trying to solve a computationally difficult puzzle which is also known as proof-of-work.

Whoever solves the puzzle gets to place the next block on the blockchain and claim the rewards; which includes transaction fees and newly released bitcoin. Once confirmed, transactions on the blockchain are considered to be immutable, therefore permanent. The bitcoin network is also fully transparent as the public can view all transactions at any time.

Bitcoin Fork Explained

A bitcoin fork is what happens when the blockchain diverges into two potential paths forward. Because bitcoin is based on open source software which anyone can contribute to, permanent changes to the rules of the blockchain can only occur on consensus of a majority with the community; if consensus is not possible, then the blockchain splits.

Bitcoin Fork

For example, the bitcoin symbol BTC represents the original bitcoin. But, because miners disagreed on the way forward in terms of increasing the bitcoin blockchain size from 1MB to 8MB –to increase scalability and improve processing speed- the bitcoin blockchain forked and a second bitcoin symbol, bitcoin cash BCH was added.

There has now been a second fork, forming bitcoin gold.

Bitcoin Explained – Coinlist.me
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