What is Bitcoin and How Bitcoin Works?
Let’s talk about Bitcoin today. I know the topic is a little hard to swallow, and there are tons of articles out there, but I will explain it like John Oliver.
What is Bitcoin?
Bitcoin is digital money, and you can buy things using it, yes even those dirty magazines.
But How does Bitcoin start?
Bitcoin project started in 2008, by an alien named Satoshi Nakamoto. Yes, I believe in aliens, so what? It was invented by an anonymous person/group called Satoshi Nakamoto.
Can I touch Bitcoin?
No, you can’t touch Bitcoin. It exists only on computers, all over the world. But why you want to touch it? Do you want to feel it? I know what you do when you open Incognito.
But if you can’t touch Bitcoin, how can you call it money?
Good question, joey. I thought you already went incognito 😉. But let me ask, What is money? Is it something you can buy a Netflix subscription with? Yes, that’s correct.
Money performs three fundamental tasks for us.
- Store of Value — When you work your ass off, you produce value, and you can store it in the form of money.
- Medium of Exchange — You can buy things in exchange for money.
- Unit of Account — Everything on Amazon is priced against USD, what if Amazon started pricing in tomatoes, rice, beans, etc.… For example, buy an iPhone with 1000 KG of rice, that would be something.
Anything, which can perform the above three tasks for us is Money. In a world where everything is becoming digital, Why money needs to exist in the physical form?
Fun Fact: 97% of Fiat money exists only in electronic form.
But Dollar seems to work fine. Why I need Bitcoin?
Ok, smartypants, are you trying to be smart now? Are you? Let me tell you a story.
In 2011, the USA government ordered all financial service providers to stop providing their service to Wikileaks. Because Wikileaks released something which the government didn’t like, and they got angry 😠.
So no one can donate to Wikileaks because banks, card companies, Paypal, etc.. pulled their services from Wikileaks.
At that time, Wikileaks decided to use Bitcoin because it’s an open network where anyone can participate, and no government can stop it.
To stop Bitcoin, you need to stop the Internet all over the world which they can’t and now Bitcoin has its own internet too.
Therefore in its true essence, Bitcoin is an alternative to the current financial system which we never had. So whenever you think Dollars of the world are f**king up, give a try to Bitcoin.
“Bitcoin is a hedge against the greed of the current financial system.”
Ok, But from where do these Bitcoin come from? Who creates it?
Good question, Joey. So Bitcoin is a protocol. You know what is a protocol, right? A protocol is a set of rules, which everyone has to follow.
Bitcoin protocol has a concept of Mining. Have you heard of Bitcoin mining? When miners perform mining, the protocol creates new Bitcoins.
Read: What is Bitcoin mining?
I know, let me explain. You have to be patient here because there is a lot of things to unpack here.
Bitcoin’s real breakthrough was solving the double-spending problem without using a third-party. So what is the double-spending problem?
Let’s say you have only 10 dollars in your bank account. Now you went to the grocery to buy some tomatoes. There you met Alice (your old crush), who needs 10 dollars. She asks you for it, and How can you deny?
But you just saw Ocean’s Eleven and think you can fool anyone. So you stand at the grocery counter, and you transferred $10 to Alice and at the same time to grocery owner. You tried to give that $10 to both Alice and the grocery owner.
But your bank is smarter than you, it got Alice transaction first and processed it, and transaction for grocery failed because you don’t have sufficient balance after that.
Here the bank is serving as a third-party or middle man who always maintains your balance so you can’t double-spend the money. The bank is processing transactions based on a first-come-first-serve basis.
Solving the double-spending problem without any third-party was a big challenge. Because you don’t want a third party, and you want to make a consensus over the network that which transaction is first. And once the consensus made and the network decided what comes first, it’s should safe or tough to change without taking over the network.
For this, Nakamoto introduced the concept, called mining. Here, miners do the computing work to win a lottery. Whoever wins this lottery decides which transaction comes first. In reality, things worked differently, but the underlying concept is the same.
A miner creates a block of transactions (Hence Blockchain) and put processing power to find that lottery using which they can add their block on the blockchain. This is what people call Proof-of-work.
By the way, It’s tough to find that lottery, but it’s easy to prove that you have the correct lottery.
So whenever new Block is correctly added to Blockchain, protocol rewards the miner with new Bitcoins, this is how new Bitcoins comes into existence.
Bitcoin has controlled supply, There will be only 21 Million ever, and their issuance schedule is coded in the Bitcoin’s protocol.
So, How do I get Bitcoin? Do I need to mine them?
Bitcoin mining needs a lot of resources, so it’s out of the question for ordinary peoples. You have to be rich and bald for that. Ok, not bald, but you sure need a shitload of money for it.
But you can always buy Bitcoins from the market. There are different ways to buy it, for example, using Crypto exchanges, P2P exchange, crypto wallets, ATMs. Just google “buy Bitcoins” and ready with your credit or debit card.
Can I get Bitcoin using Cash?
Yes, there are Bitcoin ATMs, using which you can buy it with Cash.
Ok, once I get it, How you store them?
There are multiple Bitcoin wallets to secure your Bitcoin.
What else I need to know about Bitcoin?
Frankly, there are a lot of things to learn about Bitcoin. But don’t get confused with information overloading. Take 1 step a time, lets me summarize it:
- Bitcoin is digital money
- It is an open network where anyone can participate
- No one can stop it, even nation-states
- It solves the double-spending problem without any third-party
- There will only be 21 Million Bitcoins ever
- Miners mine Bitcoins that’s how new Bitcoin comes into existence
Here are some common Bitcoin questions. Check them out too.
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