What is Bitcoin?

Bitcoin is digital money. Because of its numerous benefits, many people believe bitcoin will soon replace national (fiat) currencies. Today, some people use bitcoin as a currency while others use it as a security for investment purposes. You can buy it online from exchanges or directly from individuals

The most important benefit of bitcoin is that it is much cheaper, easier, faster and should become safer to transfer than fiat money. More about all the other benefits of bitcoin here, but for now, on to what bitcoin is and how it works. 

Bitcoin Uses Code Instead of Paper

Bitcoin is money, but instead of printing national heroes on pieces of paper, as we do with fiat money (national currencies), one can think of bitcoin as a piece of programming code that has monetary value (even though the mechanisms behind are far more complicated). The main benefit with code instead of paper is that it is faster, cheaper and, in the future, safer to transfer.

The problem with a system where a piece of code holds a certain monetary value is, of course, that anyone who knows how to program could just copy the code and by doing that make a lot of new money for themselves. So, in order for bitcoin to work, it’s crucial to have a robust safety system that surrounds the bitcoin code. And there is such a system in place…

Bitcoin Uses a Security System Called Blockchain

There is a robust safety system surrounding the bitcoin code. The security system is called blockchain and is built upon decentralization.

It works like this:  a log of every bitcoin transaction is added to a long list of bitcoin transactions (a so-called ledger) that is encrypted and stored in blocks.

The blocks are linked to each other and form the so-called blockchain. The blockchain is public to everyone and, therefore, a copy of it exists on thousands of computers all over the world. Because there are so many copies of the blockchain in so many locations, it is virtually impossible to hack or manipulate it.

Every Transaction is Verified Several Times

The transactions on the ledger (transaction list) are not considered valid until they have been verified. Computers automatically run the verifications via a mathematical process. For a transaction to be valid, it must be verified by several computers. 

Anyone is welcome to do the verifications. All you need to do is get special hardware or use a cloud service that uses your computer to run verifications. The people/companies who run verifications are called miners and are paid a small sum of bitcoin for their efforts. Hashflare Mining sells cloud mining services and you can read more about how it works on their website.

How a Bitcoin Transaction Works

Let’s make an example:  Björn gives Ebba 0.008 bitcoin, so he transfers 0.008 bitcoin from his wallet to Ebba’s (a wallet is like a bank account for bitcoin - it’s where the bitcoin is stored). When Björn presses the Send-button, the ledger on the blockchain gets a new line of information, namely that 0.008 bitcoin has been transferred from the wallet owned by Björn to the wallet owned by Ebba.

Because the ledger is on the blockchain, there are now thousands of encrypted copies of Björn’s transaction to Ebba - on computers all over the world.

Gloria in Wisconsin, USA, has mining hardware installed on her computer which verifies Björn’s bitcoin transaction. Seven other miners in other places in the world also verify Björn’s transaction.

Once the verifications are finished, the 0.008 bitcoin appear in Ebba's wallet and she can go buy the app-controlled Star Wars R2-D2 robot she has always wanted. You can read more about how bitcoin was created and how the miners are paid here.

2017-09-03

Disclaimer: The information in this article, as all content on BlockBull Review, is not and should not be seen as investment advice. The information is for educational and/or entertainment purposes only, so use it at your own risk. It is possible to lose money when engaging in any investment including cryptocurrencies and past performance does not indicate future performance. Any opinions expressed are those of BlockBull Review's writers who are not broker-dealers or advisors of any kind.


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