What is Bitcoin: 6 Important Concepts Behind it

What is Bitcoin?

Bitcoin is an encrypted token that you can place in your digital (electronic) wallet instead of your physical wallet or purse or your shirt’s pocket. Easy to understand, isn’t it? Bitcoin, in technological terms, can be described as a cryptocurrency that lets you do peer-to-peer transactions over the internet. And that too without involving any bank, government authority, or any other financial institution that could have any sort of control over your money.

Introduction

When you want to know what is Bitcoin, you need to know why it exists in the very first place. For this, let me quote what Satoshi Nakamoto, the founder of BTC wrote in his white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. He said, “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

That is the reason for the creation of this cryptocurrency. But the question is again what does it mean? Let us explore all about what we are trying to say and after reading this article, you will have a fair idea of what BTC is and how it works.

Why Bitcoin?

You must have heard about the word “digital money”. It is a sort of encrypted coin that exists in electronic form. Let us understand this by an example: You have money in your bank and you want to send it via internet banking to a friend of yours. For this to initiate, you will have to add your friend as a beneficiary in your account, wait for a couple of minutes, and fill in his/her details including account number, SWIFT code, and other details. Then you will send the money via your bank to your friend.

Bank verifies the transaction and processes it so that your friend receives money. Now the bank has a permanent record of your transaction. Also, depending upon the mode of transfer you chose for sending money, your friend may receive the money within a few minutes/hours or even weeks. Bitcoin eliminates all this. This is the beauty of it.

With BTC, you can transfer money in a decentralized manner to any other person in the world (even if you do not know him or her by name) without involving any bank or centralized authority to have scrutiny over it. The transaction is quick and anonymous. You need not tell your identification details to someone and need not know his details.

The only thing that you need to know is the address of the digital wallet that the recipient has. Similarly, if someone needs to send you a BTC, s/he only needs to know your wallet address. I think nothing could be simpler, easier, or quicker than that.

Now a question arises: can we track the transactions that we do with other peers? The answer is: absolutely yes! This is done via a distributed ledger system called “Blockchain”. Read more about blockchain here. Blockchain keeps records of every single transaction that is going on globally between two parties. But no single party can ever control or manipulate these transactions.

That’s why it is quintessential to decentralized technology (no single person or a group of people or a centralized authority like a bank or government can control it). This way, the user of this digital currency has the maximum control over it. To know more about it, click here.

Basic Concepts Behind Bitcoin

Trading Bitcoin: Let us now try to find out everything behind it. In the world of cryptocurrency, it has a symbol or say acronym: BTC. It, like all other cryptocurrencies, trades on various exchanges where one can buy, sell, or swap it.

Remember, trading (buying, selling, swapping for other coins) over exchanges is in addition to what we discussed earlier: peer-to-peer. So, transactions of BTC can be done via exchanges and also in person (you just need to know the public address of the recipient’s wallet).

One thing is important to note: Crypto exchanges let you cash out your token. This would make sense when you have BTC in your wallet and you want to sell it and receive an equal amount in your fiat currency (USD, Euro, AUD, INR, etc).

Bitcoin Wallets: Now a word about wallets: a Bitcoin wallet supports the Bitcoin blockchain. Most of the wallets that you see around are based on the Ethereum network and do not support BTC fully.

For this reason, wallets like Electrum, Guarda, and Mycelium are used. Even a hard-storage wallet (that does not remain connected to the internet all the time like Ledger Nano and Trezor) helps users store their BTCs. If you try to store BTC on Ethereum-based wallets like Metamask, only the ‘wrapped’ version of the BTC (wBTC) would be stored in them; both versions of BTC would be equivalent in value though.

Bitcoin Blockchain: As you read before, a BTC blockchain is like a public ledger that keeps a record of every transaction that is taking place around the globe all the time. But who runs this blockchain? It is people like you and me who are willing to use their computers as servers (also called nodes and people who do so are called miners) around the world.

Every transaction is copied on all the servers (there are over 10,000 full nodes in the world) and all the nodes have to reach a consensus (should agree) before a transaction can be added to a block (the transactions are recorded in blocks and there are, at the time of writing this article, 769,225 blocks so far that have been mined in the network). The nodes reach a consensus based on cryptography principles.

After every 10 minutes, a couple of transactions are collected and placed in a block after which they become an irreversible part of the blockchain. Once a transaction is added to the blockchain, it remains there forever. This is like proof of the work that has been done by the miners. You will read more about mining later in this article.

Cryptography: We have used the term “cryptographically” in this article. What does it mean? It means that the transactions and the associated information are secured using special algorithms; blockchains often use the SHA-256 algorithm. Also, the transactions are based on private-public key pair. When you create a wallet, you have a hidden private key (often a 12-word or 24-word seed phrase or 256-character long binary code) and a public key that other people need to know who want to send you any crypto.

The private key, as the name suggests, is only known to you and must not be shared with anyone. If someone wants to send you a BTC to your wallet’s public address, this transaction needs to be encrypted first using the public key and then signed using the associated private key, and then sent to you. A private key proves that the sender is the owner of the transaction that he has sent.

Bitcoin Mining: Now that you have got some idea about what bitcoin is, it is time to know how it works. The concept behind its creation is called “mining”. This is a process by which new tokens are added to the BTC blockchain after being verified by people working behind all this: miners. Miners bring new coins into existence.

The process is like this: the transactions are initiated by different users. A few of these transactions need to be collected together and placed in a block. For accomplishing this, miners all over the world, using their specialized equipment called mining rigs, participate in solving a complex mathematical puzzle that lets them validate these transactions and add them to the block, The first miner that solves this puzzle is able to publish the block to the blockchain and is rewarded with BTC for doing this complex task.

This way, mining benefits everyone: for users, transactions are added to the blockchain after proper validation; new tokens are mined, and the miners get their rewards. A block is mined approximately every 10 minutes and a miner responsible for mining that block is rewarded with coins. This process is called Proof of Work.

This whole process not only secures the entire blockchain but also makes it practically impossible for any kind of transaction manipulation. So, you see that even without involving any central authority, a huge blockchain is kept validated and secure all the time with the help of miners running their nodes. How nice is that!!

A question arises: is bitcoin mining profitable? It was in the initial years but now, the market is mostly captured by big giants and it is better to joining a mining pool to get profits. The expensive machines and inability to keep them cool makes it a bit harder for an average person to mine it at home with little resources.

A Video on Mining

Number of Bitcoins: You may be wondering what is the total number of these tokens that would be mined. Satoshi Nakamoto kept this cryptocurrency deflationary, which means there would be only a limited number of these that will be ever mined: this number is 21 million. This will ensure the scarcity and thus will keep it in demand and keep its price up. The total number is fixed at 21 million but all of them are not yet in circulation.

At present, about 19.07 million are in circulation; this leaves only 1.92 million left to be mined in the years to come. And this circulation procedure is made a slow one purposely; this is done by what is called bitcoin halving.

Halving ensures that the number of tokens brought about in circulation is halved after every 4 years. This minimizes the reward to miners too. In the beginning, the reward for mining was kept at 50 BTC per block and by May 2020, this got reduced to 6.25 BTC/block. By the next halving in 2024, it will further reduce to 3.125.

Features

Censorship Resistance: To understand this feature, you will again need to remember how banks and govt work. A bank can freeze a user’s asset anytime citing any number of reasons. Govt continually tracks your assets and you cannot get rid of this. But when it comes to the blockchain of a cryptocurrency like BTC, you have the upper hand. No central authority has the power to control, ban or manipulate for their own good. The transactions are anonymous (in fact, pseudo-anonymous because wallet addresses are public) and users have control over their transactions via the underlying public-private key infrastructure.
Decentralized: As stated repeatedly in this article, it is essentially a decentralized asset with no control of a bank or any central authority. The participants of the blockchain are end users, developers, and miners and even none of these participants have any control over the entire network.
Permissionless: This means that users need not take permission or seek authorization to use the BTC blockchain. Anyone can use it. There is full transparency in its use as well as development and no single person/institute can gain control over the rules of how this network runs. You don’t take permission; you just participate in an open-source project.

Regulations Behind BTC

Here comes the tricky part. The regulation. As you know, the trading of crypto requires support from a country’s financial institutions like banks to provide easy conversion to and from that country’s fiat currency. This has been the bone of contention for heads of several countries who do not intend to promote cryptocurrency; so, they try to regulate it in their ways. Some of these countries have even banned it altogether while the others like El Salvador have declared it a legal tender.

To avoid the use of this crypto in black markets, most countries have levied a certain amount of tax on crypto transactions and this varies from country to country. In some cases, like in India, though the government is in favor of adopting the blockchain for several use cases, it does not intend to support it for trading purposes. There are countries like China, Indonesia, Nepal, Qatar, and Bangladesh where it is completely banned.

In the United States, any exchange or entity that trades it, is required to register with the U.S. Treasury. There, it is considered a financial asset just like in Canada where exchanges need to register with FINTRAC (Financial Transactions and Reports Analysis Center of Canada). The European Union recognizes it as a crypto asset.

Conclusion

The popularity of Bitcoin is growing by leaps and bound with each passing year. It is used widely for online transactions in the crypto world.

By far, you must have got a fair idea about this cryptocurrency. So, spread your knowledge to others!!

Disclaimer

This article is for informational purposes only and is NOT a financial advice. We do not promote, in any form, any Bitcoin or any other cryptocurrencies or tokens mentioned herein. The content of this article is based on the information available up to the knowledge. You should be aware that investing in Bitcoin or altcoins or wallet or any other form of cryptocurrency is subject to market risk and you MUST do your own due diligence (DYOR) before you put any money in any of these coins or tokens or wallets or exchanges.

What is Bitcoin: 6 Important Concepts Behind it

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