Blog - What is a bitcoin?

What is a bitcoin?

Written by Mark Hansburge

Posted on 24th Oct 2019

To understand bitcoin and why it is worth anything, it is important to learn the history behind bitcoin and why it was created in the first place. We also need to learn the terms involved with bitcoin. I will first go over some of the backgrounds to understand why it exists and for what purpose it was created.

 

Background:
On the 3rd of January in 2009 the bitcoin network was created when Nakamoto mined the first block or genesis block. This is known as the genesis block. Embedded in this block was the text “The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks”. This is beveled to be both a timestamp and a comment on the instability of the banks and fractional-reserve banking. This is what Bitcoin was created as a new method of payment that didn’t involve the banks. Bitcoin between the times of 2011-2012 uses where mainly for black markets such as Silk Road. This is also where bitcoin started its very early momentum building. Rising in price from 30 cents to 11 dollars. In the following year's bitcoins price rose to a near 20,000 price on the 17th of December in 2017. It then fell back down to around 10,000 and has been fluctuation ever scene.

 

Why Does Bitcoin Wish to Get rid of the Banks?
The driving ideas behind Bitcoin believe the federal reserve and other centralized banking systems to be a sort of scam. This is because the centralized banking systems, like the federal reserve, print money for free which is then loaned the government. The federal reserve, for instance, prints money for free then loans it to the United States in the form of buying the United State’s bonds. Because this money is loaned it requires interest to be paid. Sense the centralize banks are the only ones who have the power to create money the government that the money has been loaned to will always have a debt that can never be paid off. These centralized banks also have a lot of control over the users of the money, by making the money more or less scare they can influence and control the economy of a country.

 

The Terms of Bitcoin:
Units of Bitcoin:
The unit of the amount for bitcoin is a bitcoin. Its ticker symbol is BTC. The smallest amount of bitcoin is called a satoshi or sat for short this is equal to 0.00000001 of a bitcoin, it was named this in homage of bitcoins creator. Another unit common unit is a millibitcoin (mBTC) which is equal to 0.001 bitcoins, or 100,000 satoshis.

Blockchain:
A blockchain is a public ledger. This ledger records all bitcoin transactions. These transactions are grouped into blocks. Each of these blocks also contains a hash of the previous block back to the first-ever block called the genesis block. A network of nodes, or computers, running the software of bitcoin maintains this blockchain. In general, how it works is that Transactions from person A to Person B are broadcast on this network. The nodes then validate these transactions and add them to their copy of the ledger, then broadcast these ledger additions to other nodes. This occurs about every 10 minutes. This creates a block. This allows for everything to happen without requiring central oversight. This means that bitcoin is not connected to the government directly but instead it is connected with every single person who runs a node or miner. This also allows bitcoin software to determine when a particular bitcoin was spent. Which is required to prevent double-spending.

A Wallet:
A bitcoin wallet is a piece of software that holds the keys to one's bitcoin. There are two types of keys, private and public. Public keys are used to receive bitcoin in one's wallet. Private keys are what is used to send or spend bitcoin. The private key is never revealed because whoever owns the private keys owns the bitcoin.

What is Mining?:
Mining is the record-keeping service done through the use of computer processing power. These miners group newly broadcast transactions into a new block which is then broadcast to the network and verified by recipient nodes. The method that is used by Bitcoin is called proof-of-work(PoW). It is based on a system made by Adam Back which was implemented in Hashcash a previous cryptocurrency. Proof-of-work requires miners to find a number called a nonce. What happens is that when a block's content is hashed along with the nonce and the result is numerically smaller than the network’s difficulty target the block is confirmed.

What is artificial scarcity?
Bitcoin is based on artificial scarcity meaning that there is a limited supply of bitcoin. Bitcoin could never exceed 21 million bitcoins. New bitcoins are created roughly every ten minutes and the rate at which drops by half about every four years. Meaning that eventually there will be no new bitcoin.

A Fork?:
A fork is when someone takes the original bitcoin code and modifies it and creates something new with the new changes. One good example is something called Bitcoin Cash. Bitcoin Cash changed the code by adding a larger block size limit.


Why was bitcoin created:
Bitcoin was created to allow people to hold their own money without using or needing a bank. One might argue that one could simply hold cash what is the need for bitcoin? The main reason that this isn’t the best solution is because of something called inflation. Every year there is inflation this is created by the federal reserve printing more money. So one year your 20$ is worth 20$ then the next year it might be worth 19.98$. So the same 20$ has less buying power. This was another problem that bitcoin tried to solve. They wanted to solve this by putting into place artificial scarcity. This means that due to supply and demand your bitcoin becomes worth more over time because there is less of a supply. So when holding bitcoin your buying power increases whereas when holding cash it decreases. Bitcoins' main point was to decentralize the money and to separate money from the State. This was so that the government would have less power and centralized control.