To better understand Bitcoin, it is essential to comprehend the problem it solves. When it comes to transferring value over the internet, we typically depend on a third party such as a bank. Overtime, this reliance has often created scepticism and trust issues due to fraud. Additionally, a significant portion of the world's population lack access to a reliable bank or company making it impossible for users to transfer money online. In contrast, Bitcoin is the first peer-to-peer electronic cash system which addresses the double-spending problem and provides a means to exchange value directly between individuals without the need for a third party.
HOW IT WORKS: Every computer running the Bitcoin software functions as a Bitcoin node and stores a ledger on its hard drive. This ledger contains a complete record of all transactions ever conducted within the Bitcoin network. When connected to the network the ledger is updated approximately every 10 minutes. This process creates a new block, hence the term 'blockchain.' This new block is added to the chain of previous blocks forming a chronological and immutable record of transactions.
If a node attempts to spend Bitcoin that it does not own, the transaction will be rejected by the network. This rejection occurs because the ledger on that specific node will not match the ledgers of other nodes on the network. The consensus mechanism ensures that all nodes reach agreement on the validity of transactions and maintain a consistent ledger throughout the network.
Mining serves as the 'proof-of-work' consensus mechanism in the Bitcoin software. Proof-of-work requires miners to solve a challenging mathematical problem to update the Bitcoin ledger. This process enhances the security of the network. The difficulty of the mathematical equation adjusts dynamically based on the computational power available in the network. These adjustments ensure that the ledger is updated approximately every 10 minutes.
When a miner successfully updates the ledger, they are rewarded not only with newly minted Bitcoin but also receive the payments associated from the transaction.
Bitcoin software issues new Bitcoin approximately every 10 minutes through a process called mining. The amount of Bitcoin rewarded for each successful block mined is halved every 210,000 blocks and generally occurs every four years. The process known as the 'halving' continues until the last Bitcoin is mined approximately 120 years . Ultimately only a total of 21 million Bitcoins will ever be minted.
This limited supply creates 'digital scarcity' and contributes to one of the key properties that make Bitcoin similar to hard money and a scarce commodity akin to gold. The finite supply and the decentralised nature of Bitcoin's issuance contribute to its value proposition as a store of value.
Satoshis are the smallest unit of Bitcoin. One Bitcoin is divisible into 100 million satoshis. In other words, 1 Bitcoin is equal to 100,000,000 satoshis.
A Bitcoin wallet is a software application or a physical device used to store, send, and receive Bitcoin. It securely stores the private key required to access and manage your Bitcoin holdings. There are several types of Bitcoin wallets:
There are several types of Bitcoin wallets
Desktop wallets: Installed on your computer, they offer a higher level of security compared to mobile or online wallets.
Mobile wallets: These are apps installed on your smartphone providing convenient access to your Bitcoin.
Online wallets or web wallets: These wallets run on websites or web-based platforms. They are more convenient but less secure than desktop or hardware wallets.
These are physical devices specifically designed to store Bitcoin private keys securely offline. They offer a high level of security and are considered one of the safest options.
These are physical printouts or handwritten copies of your Bitcoin private and public keys. Paper wallets are stored offline, providing a high level of security against hacking. However, they require safeguards to protect against physical damage or loss.
Brain wallets allow you to remember a passphrase or seed phrase which is a series of computer-generated words that generates your Bitcoin private keys.
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