What is Bitcoin? Blockchain technology introduction

12/07/2020, 12:06 PM

What is Bitcoin? Blockchain technology introduction

If you want to find out what a Bitcoin is, you came to the right place. Below you will find clarifications regarding everything you need to know and dispel the most common Bitcoin myths.

New users often ask us questions like: "What is Bitcoin?" or "What is blockchain and how does it work"?

In this article we will try to answer these questions in a simplest way possible. If this is your first encounter with Bitcoin and blockchain, you should start with crypto dictionary.

After you pick up basic terminology, you will be able to understand the entire process easily.

History of Bitcoin

The infographic timeline showing the history of Bitcoin.
The infographic timeline showing the history of Bitcoin.

Before answering the ultimate question "What is bitcoin?", let's begin with the events that actually led to the creation of Bitcoin.

Bitcoin creator - Satoshi Nakamoto (alias) was the first person or a group of people that who managed to put together the available technology in order to create a world's first cryptocurrency.

Some of the Bitcoin cryptographic foundations that Satoshi applied were created by David Chaum and Stefan Brands.

Digital money was a concept mentioned even before Bitcoin. These concepts were created by Wei Dai and Nick Szabo. Their concepts of digital money remained just that - concepts, mostly due to the limited technology.

Things changed one afternoon in 2008, when Satoshi sent a Bitcoin whitepaper a cryptographic mailing list. The email contained the whitepaper and a short description of Satoshi's brilliant idea.

"I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party."

The first version of software that runs Bitcoin was released on January 8th 2009. Mining process started and interested parties could join the network and support its operations.

The first Bitcoin block, the so-called genesis block was created several days earlier by Satoshi, but until the software went public, new blocks weren’t created.

This claim and dates can be easily checked through Bitcoin block search engine, block 0 (genesis) and block 1. Bitcoin genesis block contains this message:

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.

A few days after the first Bitcoin block, a first transaction was made via Bitcoin network. The sender was Satoshi Nakamoto, and the recipient Hal Finney.

Bitcoin pizza

In May 2010 one BitcoinTalk user named Laszlo Hanyecz paid two pizzas 10,000 BTCs. At that time the value of this was approximately $40.

If you don't believe it, there is a whole discussion still available on the forum. Eventually two pizzas became two most expensive pizzas in the world. Today, 22nd of May is celebrated as Bitcoin Pizza Day.

The person who ordered the pizza became famous as the man who did the first real purchase with Bitcoin coins - he claims that he doesn’t regret he spent the coins to buy pizzas. It is unknown what happened with the receiver of the coins and how were they spent.

Satoshi Nakamoto

The photo portrait of the Japanese old man named Satoshi Nakamoto.

The person you see on the photo is not the founder of Bitcoin. This is a man's name is actually Satoshi Nakamoto, but he is not connected in any way to Bitcoin.

Many people believed that Craig Wright was a man behind Satoshi Nakamoto alias. There are various theories and speculations on the identity of this mysterious person, but only one thing is certain.

Nobody knows who Satoshi Nakamoto really is, not it is just one person or a group of people.

Satoshi is the founder of BitcoinTalk forum - the most popular and most important crypto-forum. You can see the initial publication and Satoshi’s BitcoinTalk profile which has been inactive for a whole decade here. His posts represent a unique insight into the very beginnings of Bitcoin.

Satoshi's wealth

Many blockchain analysts believe that Satoshi owns approximately 1 million Bitcoins. That is 5%o the total number of Bitcoins that can ever exist. For the reference, the maximum number of Bitcoin that can ever exist is 21 million.

The exact number of Bitcoins owned by Satoshi is unknown. You can check the list of the wallets with the highest Bitcoin balance here.

Satoshi’s coins are distributed to many different addresses which contain 50 BTCs. At the beginning things were significantly different than today. There were no mining pools and specialized miners.

Each interested individual could mine Bitcoin with ordinary processors (CPU mining). The reward for finding a block was generous 50 BTC.

Satoshi is the main miner for the most of early BTC blocks. Since Satoshi used several different wallets, all those coins from block rewards have been distributed to a lot of different addresses.

Therefore, there is no unique address which we could keep an eye on and await Satoshi’s return. Still, today there are advanced blockchain analyses which automatically monitor the movement of coins and would detect the movement of Satoshi’s coins quickly and notify the public. If Satoshi ever returns and starts using his coins, the information will spread really fast.

What is Bitcoin?

After a longer introduction and the Bitcoin history lesson, the time has come to break down the Bitcoin. There are many definitions that explain the essence of Bitcoin and its characteristics.

Bitcoin is a decentralized digital currency, which enables secure transfer of value without an intermediary.

Bitcoin is a decentralized database designed to answer the question who the owner of certain coins is and at which moment (eliminates the problem of double spending of the same coins). The base is censorship-resistant, and it does not request permission for use from a central institution.

Everyone can join the Bitcoin network at any time, day or night.

Bitcoin is a cryptocurrency based on blockchain technology.

Bitcoin is not issued by the central bank nor by the state. Therefore, Bitcoin is formally not money. Bitcoin is an alternative payment method.

Bitcoin is an alternative to banks and to a standard monetary system as we know it.

Bitcoin enables the transfer of unlimited value from one end of the world to the other within several tens of minutes.

In third world countries, where inflation eats up savings of inhabitants overnight, Bitcoin is the border between life and death.

Bitcoin connects people who have no access to banking infrastructure with the rest of the world.

Bitcoin enables you to be a sole owner of your own money, which cannot be confiscated by no-one or deny you access to it.

Bitcoin enables you to be your own independent bank.

No centralized institution controls nor manipulates Bitcoin.

Bitcoin cannot be shut down by anyone due to its decentralized nature.

Bitcoin is a volatile cryptocurrency which reaches daily movements of up to 40%.

Bitcoin is an instrument which opens the window of opportunities to speculators for making big profits, as well as big losses.

Bitcoin is digital money which has no physical manifestation. It is based on blockchain technology. Due to its decentralized nature there is no central institution which manipulates Bitcoin circulation and price. It is run by clearly defined laws which cannot be changed without global consensus.

What is Bitcoin - for dummies

The whole idea behind Bitcoin was to enable one person to send money directly to the other, no matter if they live in the same street or across globe.

Since the transaction is direct, it's called peer-to-peer. No banks or payment apps as intermediaries. One of the greatest features of Bitcoin is transparency. Once you send a Bitcoin to other person, the transaction will be verified and visible on a public digital record (known as ledger).

The reason for this is to reduce the risk of manipulating with data and double spending.

Where can you keep you Bitcoin?

Just as you keep your paper money in a wallet, you can keep Bitcoin in a secure storage service - digital wallet.

When you create a digital wallet you are responsible for it. You must create a strong password, and the backup of all data (email, phone number, etc.).

Blockchain technology

The image representation of the blockchain ecosystem.

Blockchain technology enables decentralized bookkeeping. Basically, blockchain is a public ledger or recordation of all transactions and Bitcoin exchanges on Bitcoin network. It is comprised of many different kinds of blocks which are interconnected and form a chain of blocks - blockchain.

To change any block of transactions it is necessary to change all blocks, which is practically impossible endeavour.

Currently it is estimated that one attack on Bitcoin network would cost approx. 200 million USD. That is why all transactions which are covered with a significant number of blocks are considered final and unchangeable.

Bitcoin myths

Bitcoin has no real value

How can a Bitcoin have any value when it doesn’t exist?”. Questions like this are very often among uninformed or first-time users. It's normal since we are traditionally used to the physical form of money, mostly in paper.

The paper on which bills are printed doesn’t have a significant value per se, it is still just painted paper. Value comes from the fact that most people are ready to accept these paper bills as an exchange for goods or services.

We won’t discuss monetary policy behind paper bills (fiat currencies). However, the very manifestation of money, whether is it physical or virtual is less important for its value.

What is important are the characteristics of money. Monetary policy, coverage, acceptance, and so forth. The value of Bitcoin derives from the possibility which it provides and a carefully planned, unchangeable monetary policy.

Bitcoin is based on Proof Of Work (POW) consensus. To create new coins in a strictly controlled atmosphere requires significant amount of work, power, and money.

On the other hand, fiat currencies are based on Proof Of Print (POP) consensus and their value (bills) are relentlessly printed in large amounts.

Bitcoin pollutes the environment

Bitcoin consumes great amounts of electrical energy. On a yearly level it consumes the power equivalent to the power consumption in Belgium.

An enormous energy input is the main source of security (resistance to alterations) of Bitcoin network and transactions which Bitcoin users enjoy.

There is a lot of criticism regarding the use of fossil fuels and carbon, which pollute our planet. But, in practice, things are quite different.

Bitcoin mining is most definitely one of the most competitive professions and a constant race in having more efficient miners and getting better deals with the manufacturers of electrical energy. Costs optimization is necessary for every serious Bitcoin miner who wants to do business successfully.

Therefore, most miners resort to the use of excess energy which comes from renewable sources due to significantly lower prices. It is assumed that over 75% of energy comes from eco-friendly sources which do not cause environmental pollution, i.e. have a significantly lower effect from traditional energy sources.

Hydroelectric power plants are one of the most frequently used energy sources which Bitcoin miners use.

Bitcoin Cash is actually Bitcoin

Bitcoin Cash (BCH) is a fork (copy/clone) of Bitcoin (BTC) which is making a tremendous effort to take the lead in manipulative marketing. Bitcoin.com website and wallets present BCH as BTC so many inexperienced users remain confused.

There is just one Bitcoin. Different clones are trying to take a cut and claim fame acquired by BTC instead of building their own brand.

BCH is by no means BTC. The same goes for many different BTC forks such as Bitcoin Gold (BTG) and Bitcoin Diamond (BCD). Bitcoin Satoshi Vision (BSV) shouldn’t even be mentioned. That coin and his founders have nothing to do with the real Bitcoin.

Bitcoin is too expensive

Users often tell us that Bitcoin is too expensive and that they cannot afford it. But that is not true, because it is not necessary to buy a whole Bitcoin. Bitcoin is dividable up to the eighth decimal place. The smallest Bitcoin unit is usually called Satoshi.

In the Bitcoin Store exchange office, you can buy a Bitcoin even for € 100.00.

Beginners often focus on the unit price of a certain coin, what is basically not important. The total value of all coins in circulation gives a far better picture, but even better liquidity of a certain coin, but we can cover this topic some other time.

Bitcoin is money for criminals

Sceptics often say that Bitcoin is actually money designed for criminal activities. The statement like this actually makes no sense. It would be like saying smartphones are designed to ease the communication for criminals.

But let’s get back to Bitcoin and explain why Bitcoin is actually less convenient for illegal activities in comparison to existing means of payment, especially cash.

All Bitcoin transactions are public, and everyone is allowed to have insight in them. Every Bitcoin can be traced from its creation to the last transaction. Coins used for illegal transactions can be marked and their each move can be traced. Once a Bitcoin transaction is confirmed, it is not possible to cancel it anymore and therefore a cheater cannot fraudulently take the money back and cause damage to you.

Bitcoin is used by different types of users, as any other technology. Bitcoin is definitely unsuitable for illegal uses, as demonstrated by competent institutions throughout the years. All larger, publicly known illegal operations which used Bitcoin as a payment method were stopped fast, and all people involved were caught.

Paying with Bitcoin

Users often ask us where can they pay with Bitcoin. The number of stores which accept Bitcoin is constantly growing. Today. you can pay with Bitcoin in different places.

If you need new glasses, you can buy them with Bitcoin in the Vision optical store. It is also possible to pay accommodation on Booking in different cryptocurrencies through Travala platform.

Bitcoin Store has in its offer POS solution which enables merchants to simply accept Bitcoin and Ethereum. We expect continuous growth of merchant network which accept Bitcoin and other cryptocurrencies. You can also help spreading the network of cryptocurrencies. Start accepting Bitcoin when you sell something or as an exchange for services you offer.

What are the advantages of Bitcoin?

Bitcoin has many advantages, especially when compared to existing monetary systems. We will separate Bitcoin advantages into 2 categories.

Bitcoin advantages compared to standard fiat currencies

  • Safe transfer of value without an intermediary
  • Relatively fast and safe transfer regardless of the distance between participants
  • Pre-defined, unchanging inflation
  • A certain dose of anonymity
  • There is no central institution which controls the price and circulation of coins
  • The price is formed exclusively based on offer and demand
  • Excellent preservation of value though a longer time
  • Transparent transactions
  • An open system. Everyone can join and participate in processing transactions.

Bitcoin advantages relating to gold and silver

  • Easier, faster, and safer transfer
  • Smaller, strictly controlled inflation
  • Limited supply

Bitcoin shortcomings

Bitcoin also has certain flaws. The good thing about its flaws is that they can be improved or eliminated with future upgrades.

  • Weak scalability
  • Lack of real privacy
  • Slow compared to other, relatively new cryptocurrency projects
  • Relatively expensive transactions depending on network load
  • Potentially centralized miner network