A quick overview of how Bitcoin, and cryptocurrency in general, works.
The gist
Bitcoin is a digital currency that works with a decentralised cash system similar to a peer-to-peer network for file sharing. This means that unlike traditional currencies, no entity such as central banks governs it. And while it is far from the only cryptocurrency available, bitcoin is the first and most famous.
How it works
In its truest essence, bitcoin is just software. An open-source software that can be reviewed by anyone. Once you download that software, it connects to other computers and creates a peer-to-peer mesh network with everyone connected to each other. The network maintains a shared, unified database of all the transactions that happen within the payment network; from the very first transaction to the latest one, wherever in the world it is.
For example, someone pays you using bitcoin. That transaction gets sent out to all the computers in the network. Once the transaction is confirmed, it is combined with other transactions to a create a new block of data, and then added to the existing blockchain. Hence, the term Blockchain Technology.
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Blockchains are secure by design; the software is designed and created to be secure from the beginning until the projected end of its life. A double-edged sword, really. On one hand, the technology is best for sensitive transactions such as money and other assests. On the other hand, confirmed transactions are absolutely irreversible. No one can help you. Sent money to the wrong person? It’s theirs now.
If you strip it down to the barest of the bare, bitcoin (and cryptocurrency, in general) is basically a secure list of transactions that is designed to be tamper-proof.
Obtaining bitcoins
One thing to understand about bitcoin is that it is hard-coded to be limited at 21 million. There will only be 21 million bitcoins ever.
Every 10-12 minutes, about 12.5 bitcoins get distributed through a process called mining. Currently, there are about 16 million existing bitcoins. Doing a bit of math, the last bitcoin will be mined by the year 2140.
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In the larger scheme of things, 21 million seems to be too scarce (even if it’s over a hundred years from now before bitcoin is fully minted) but note that one bitcoin can be broken down into units. Currently, the smallest unit or fraction of a bitcoin that can be sent is Satoshi, named after the mysterious inventor of Bitcoin, which is a hundredth of a millionth of a bitcoin (0.00000001).
The buying and selling, as well as payment, of bitcoin is usually done in units.
So, how do you go about obtaining bitcoins?
There are three ways:
The first is to earn it in the free market. Simply set up a bitcoin wallet, which comes with a public key. The public key is what you will need to give the person sending you bitcoin. Freelancers and contractors, for example, can opt to get paid with bitcoin.
The second is much more easier: purchase bitcoin. There are various bitcoin exchanges operating globally.
The third is by mining it using a computer. This article will better explain bitcoin mining.
The price of a bitcoin
In recent years, months even, the value of bitcoin has been volatile. It loses all it’s value one day and suddenly recovers 500 per cent the next. So, what causes said value movement?
The bitcoin market is a free market. The pricing is influenced by supply and demand, as well as news regarding bitcoin and its technology. And since bitcoin is treated as a form of security, news about other securities also affect it. An example given by SCI Founder John Bailon is the Brexit. When Brexit happened, the Euro went down, but bitcoin soared.
Evidently, bitcoin is beginning to be perceived as an asset more secure than currency. Not dissimilar to gold, except that it’s digital, fairly new, and has yet to reach gold’s level of stability.
Revolutionary technology
But the beauty of bitcoin is not just the actual currency but in the technology behind it. Bitcoin has created a payment and value network and exchange that does not need a third party to police the transactions – everything is secured by strong cryptography.
All transactions are secured not by people or organisations but by strong math. For a bit of visualisation on how secure it is, let’s say that it is more probable that you get hit by an asteroid while walking at a park than for a bitcoin address to be compromised.
It is this technology, more than the currency, that fintech startups and large enterprises are taking advantage of. From cashless payments to remittances, there is no shortage of financial solutions based on this technology.
But it’s not only finance and monetary matters that can make use of the blockchain technology. Experts and advocates of blockchain technology sees a bright future for what could potentially be a life-changing technology.
Imagine secure smart contracts, non-tamperable voting systems, and management of public records. For private enterprises, it would mean a smarter and more secure way of managing and implementing policies and agreements. For governments, it would mean a more transparent governance with less potential of human intervention.
In short, we have yet to fully explore what the technology behind bitcoin can do, but a digital currency that offers security, flexibility, and transparency is a good start.
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Heaps of thanks to Satoshi Citadel Industries Co-Founder and CEO John Bailon for breaking down how bitcoin works into layman’s terms.
Featured image credit: audioundwerbung / 123RF Stock Photo
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