Bitcoin is a software protocol designed to do many of the things that the current finance system cannot. It allows you to transact directly with another person, without going through a bank or any other central institution.
When you buy bitcoin, you are not buying anything physical. You are “buying” data, and a place on a decentralized public ledger. The value of bitcoin comes from the fact that no-one can edit or corrupt the ledger and no one can double-spend or send the same bitcoin transaction twice. You can trust that the blockchain is accurate and secure with an intermediary.
With Bitcoin you can do many things a bank can do. You can prevent money from theft or counterfeiting. You can print money, you can avoid fees, and you can ensure your customer has the money being conned – ‘cause your customer has to show you they have the money beforehand. All from an incredibly simple piece of software on your Smartphone. This concept, when executed globally, will change the world.
Bitcoin’s biggest selling point is the ability to opt out of the global financial system, and the costs that come with it.
Big B little b –
What Begins with B?
– Theodor Seuss Geisel
It can be confusing because the word bitcoin has a few meanings. When someone uses the word bitcoin, we often expect them to be talking about money. However, many people also use Bitcoin when they are talking about the cryptocurrency community, or the Bitcoin network, or anything associated with it.
bitcoin (lowercase b)
The word bitcoin has several different meanings. If it is lowercase b, it is a type of money you can use to purchase things. It is also a software file on your computer.
A lowercase bitcoin is similar in meaning to ‘dollar’.
Bitcoin (uppercase B)
Here is where the confusion comes in. The abstract idea “Bitcoin” has come to mean the whole cryptocurrency market. Not only can it mean cryptography, but also it can mean the place where you can change your bitcoin into money, and even another cryptocurrency. Even for active Bitcoin users it is hard to tell the difference between the abstract concept, (of a cryptographic financial network) and the currency.
Uppercase Bitcoin is similar to ‘financial system’.
The language used is the biggest problem to entry. Cryptocurrency isn’t using new concepts, just bringing old concepts out of the dark. When using new words like Blockchain and Private keys take a very long time to circulate through society, on the order of generations. That is the basic reason that Bitcoin is still confusing.
Basic Concepts Explained
The fourth technological revolution (the internet) is well underway, with global repercussions. We can now remotely work from almost anywhere. Software robots do a great deal of work, and we have easy access to most of the world’s information, should we wish. With connectivity to anyone at any time, you can connect with work colleagues on the other side of the globe, with time zones being the biggest irritant.
That is the foundation that Bitcoin works on, unlimited connectivity.
But there are downsides to the internet industrial revolution. 60% of the world’s email is junk. Your information is now entirely public, and large institutions track every move you make no matter if you want it private. There is simply too much information out there, and finding what you want can be extremely difficult.
Bitcoin, and the Blockchain are attempts to remedy these problems. They are a technological attempt to bring privacy back to the internet, and eliminate controls on the transmission of your data.
Bitcoin Basic Concepts:
Bitcoin as a Currency
You can invest in it, spend it, or just use it like money.
Bitcoin is a secure digital ledger – the blockchain can’t be censored or edited.
Also known as a public key, this is necessary to receive bitcoin.
Bitcoin Private Keys
All Bitcoin is stored on the blockchain. Private keys allow access to BTC (to send or spend it).
Buying with Bitcoin
Telling the accounting software you are moving your money. (see above)
Bitcoin Mining – Maintaining the bitcoin network is called Proof of work
A bitcoin is an encrypted file stored on the blockchain. Bitcoin is abbreviated as BTC. The encrypted file can also represent a fraction of a bitcoin, like pennies and quarters reflect a fraction of a dollar.
Access to your bitcoin is controlled with a private key which is essentially what your wallet is for. Make sure your passwords and recovery phrases are very secure.
Another part of the Bitcoin system is the accounting, which is used to prevent counterfeiting. This is called the Bitcoin ledger. This digital ledger is built on blockchain technology. It tracks changes over time to the ownership of the ‘bitcoin block’, in this case the Bitcoin data that you “own”. Some features of this ensure that the data cannot be easily hacked.
Bitcoin Address (Public Key)
A bitcoin address is similar to an email address or IP address. It tells the bitcoin program which computers to send the bitcoin file to, and. Each time you send and/or receive a piece of bitcoin software, you should use a different address, (or public key) to maximize your privacy.
The Bitcoin system uses Bitcoin addresses to send and receive bitcoin. The program uses that address to find the Bitcoin network location. For example it needs to know which internet service provider, which part of that provider you are on, and which computer in your house, and then which part of your computer to send it to. Your encrypted address can also be called a public key.
Internet protocol addresses identify the Internet Service Provider, the specific network you are contacting them through, and the specific machine you are using. Similar information is attached to your Bitcoin address, but it is encrypted so your actual location is not revealed to third parties.
Another feature of a bitcoin address is you don’t ever have to use the same one twice. You can generate a new public key every time you receive money. That would keep your information safe.
Bitcoin Wallet (Private Key)
This piece of software is the most secure part of the Bitcoin network. This digital wallet is a file that is stored locally on your computer, or even better printed off and deleted from your computer. Only the person or people with the password (called a Bitcoin Key or private key) can get into the wallet. You can use this private key to buy or sell bitcoin.
It’s called a wallet because the creator of Bitcoin, Satoshi Nakamoto, named this piece of software a wallet in his white paper. No one has successfully changed the name by this point.
What Happens When You Buy Bitcoin?
On the surface, as bitcoin is a digital currency, the same thing happens. You trade money for bitcoins, and then you can send the bitcoins, privately, to anyone else who has a bitcoin wallet. They, in turn, will send you goods or services.
When selling or buying any number of bitcoins a lot more is going on behind the scenes. The whole Bitcoin system has to function like a normal financial system, so it does quite a bit to protect your bitcoin. A bank account is necessary to keep your money safe, and a bitcoin wallet keeps your bitcoin safe.
Opening or Unlocking Your Bitcoin Wallet (BTC Account)
The first thing we do is use the password to open the wallet, so we can look at what’s being held in it. That password causes the bitcoin program to open the access to your money, if you want to move it.
The password (or private key) is an instruction to an encryption program. It will tell the encryption program to change the data on the network’s computers in a very specific way.
There are uncountable ways you can cause the data to be encrypted, and thus a nearly infinite number of possible passwords. Thus your password is nearly impossible to guess. If you enter the wrong password, the data won’t be accessible, by anyone under any circumstances.
That is a problem for users, too. Something like 20% or all bitcoins have been lost because users have forgotten their passwords, or in at least one circumstance, died without telling anyone.
What Can You Do With Your Bitcoin?
Once you open your wallet, you can do all the actions you can with money, except lend it. You may send bitcoin, see the price of bitcoin, transaction fees, or generate a bitcoin address for a buyer.
Unlike a bank account, this crypto wallet can be stored in many places, on your computer, on a usb key in a safe, a piece of paper in your sock drawer, or on a custodial crypto exchange like Coinbase, Binance, or Newton.
To send Bitcoin, you’ll need the buyer’s bitcoin address, (public key). It is similar to a bank account number. Usually that’s everything you’ll need, but you may need more information about the receiver to make sure it gets to the right place, depending on what wallet (or software) you are using. Its pretty straightforward if you copy and paste it or scan their QR code.
QR codes are also used in the bitcoin payment system. Using a QR code is difficult to mess up.
How Bitcoin Mining Works
Proof of work is the name for the system that keeps Bitcoin transactions secure. This Bitcoin work is essential to the value of a bitcoin. Bitcoin miners do the basic maintenance, using proof of work, that the Bitcoin network needs, along with ensuring the network is not hackable. If it didn’t take a large amount of computing power to create new bitcoins, it could be more easily counterfeited.
The computing power (energy) used in bitcoin mining consumes more energy than many environmentally conscious people find acceptable. However, proponents argue that Bitcoin mining uses far less than traditional banking and that most of the energy is provided by renewable energy sources or capturing energy that would otherwise have been lsot entirely.
Most cryptocurrency exchanges are also in the business of bitcoin mining.
Behind the Scenes Concepts
The software that tracks all bitcoin transactions
Better than central banks
Bitcoin is much harder to corrupt than institutions
Cryptocurrency software can be programmed to fill almost any niche where something is tracked.
Crypto is in its infancy, and it can be used for millions of purposes
Blockchain Technology 101
A block is a group of encrypted data. It contains multiple transactions and the specifics of each one bundled together. Bitcoin’s data is organized in 256 bit units, all of which need to be decrypted properly to access your money.
The Bitcoin blockchain is a decentralized public ledger of the history of every single BTC transaction. It records how each bit has been transferred, or changed in any way, and by which addresses. It has been validated and secured by miners and it cannot be changed or edited.
Buying Bitcoin is a fast, easy, inexpensive and safe way to transmit money without an intermediary.
As my father once said:
Banks are like thieves with their newly invented fees.
Banks are making billions of dollars every year.
Most centralized crypto exchanges charge fees of around 1-2% of the transaction. With a private or non-custodial wallet, the transaction fees can be closer to zero. Eliminating back fees is a welcome prospect to many people.
Becoming Your Own Bank
First of all, it crypto cannot be taken away from you once you own it and hold it in a private wallet. It also can’t easily be traced back to you, so your privacy and personal information is better protected. It is 100% open source, so everyone can see how it works on the inside, preventing tampering. The value of bitcoins is already much more than a dollar, and because it is deflationary, many “experts” think it will only go up in price.
One potential downside is the volatility. It can change up to 50% in value (up or down) in a month, and has done so in the past. Trying to time the market or predict the bottom or top in crypto is next to impossible. So far, bitcoin has only gone up over time and many people, especially in developing countries, have done well to invest in it.
What Can Cryptocurrencies Offer?
Replacing institutions you don’t trust, like a government, central authority, or bank is high on the list of benefits. You don’t have to have credit cards, debit cards, or trust in any fiat currency when there’s a viable option to make, gain, or use crypto instead.
Many people see cryptos as a long term store of value – especially as inflation rises with the ever expanding supply of fiat dollars.
There are now somewhere around 6,000 cryptocurrencies. More every day are being developed and launched to achieve specific goals and offer utility and value in different markets.
Bitcoin Cash (BCH) is an attempt to make the currency faster, i.e. it can process more than 7 transactions a second that Bitcoin can.
Ethereum (ETH) delivers programmable money – aka smart contracts
Monero (XMR) makes money private
Is Cryptocurrency Mainstream Yet?
Retailers like BMW, Apple, and others now accept cryptocurrencies. Paypal and Visa have gotten into the market.
Traditional exchange rates are terrible for overseas workers, and some are opting to be paid in crypto. It appreciates, and is much easier and cheaper to transport across borders. It is ideal for frequent travellers. You can use bitcoin to pay for groceries, hotels and beer now. You can buy pre-paid gift cards or amazon gift cards and buy almost anything online from there.
The barriers to the movement of traditional money have provided a space for a more flexible currency. The COVID 19 pandemic only hastened this by showing how versatile crypto uses are.
Even though Bitcoin seems to be very established by this point, it’s still just the beginning for crypotcurrencies and blockchain technology.