Bitcoin being the first digital and decentralized currency, is computerized (thus, virtual and without any physical form)It’s not also owned by any central bank, government, or any form of central financial entity. Bitcoin crypto value is basically calculated in USD rate anyways.
I deemed it right to write a comprehensive bitcoin explanation for dummies to help you understand fully how bitcoin originated to exist strongly, and firstly before all other alternating cryptocurrencies in the fintech market.
I could’ve made this whole content a
Before i get into answering the question ‘what is a bitcoin and how does it work?’, let me first explain the term, Cryptocurrency. It’s after this that you’ll get to fully understand how the whole digital cryptocurrency market work, as well as the bitcoin cryptocurrency.
Table of Contents
Understanding Cryptocurrency Education Guide for Dummies
The term, Blockchain is actually, a combination of two words – Block (list of digital records) and Chain (cryptography linked together). This simply means that blockchain is list of digital blocks that are chained together using cryptographic nodes.
In financial industry today, unlike the blockchain development, there are lots of middlemen (e.g. payment processors, banks, and credit cards companies etc).
Intermediaries like these, are institutions that help to establish trust between buyers and sellers, where-by ensuring accurate transactions. These are the major reason why cost of transactions tends to be costly or cheap depending on speed.
What is blockchain technology?
Blockchain simply eliminates the need for middlemen by providing a decentralized, trust-less ledger system with little, or no exposure to fraudulent activities.
This means that the blockchain transactions occurs without the financial institutions getting involved directly, or indirectly. It can be known to be called more like a peer-to-peer transactions, without any kind of third-party.
Although, blockchain is commonly used in connect with bitcoin and altcoin transactions, it is also used by some companies to disrupt huge data, supply of chain to gamblers and the internet.
How does blockchain work?
Blockchain app is more like a network, and it has its own paths of links for specific transactions. These are known as Nodes.
These are large network of computers that runs the blockchain. They validate and keep records of all transactions by solving complex mathematical algorithms.
Each of the nodes has a complete history of transactions, and that means, no one can change any data without letting the whole systems know (or they will definitely reject the change instantly).
Benefits of blockchain development
1. Fast Transactions: It is very fast because already it has cut out the middlemen that tends to delay most financial transactions, and validation are even inbuilt into the systems.
2. Cost effective: Blockchain is very cheap compared to what middlemen charge to move finance between financial institutions.
3. Privacy: It is secured to the extent that transaction details only remains within the nodes in the networked systems and cannot be seen by humans.
Fiat money vs Virtual currency vs Cryptocurrency
Fiat money is a currency that a government has declared to be legal tender, but not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand, rather than from the value of the material that the money is made of.
Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on the faith and credit of the economy.
Fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose faith in a nation’s paper currency, like the U.S. dollar bill, the money will no longer hold any value.
In the process of trying to define “virtual currencies,” we run into several problems.
In fact, it is easier to define what they are not, rather than what they are. The problem becomes all the more evident when considering that a “currency” essentially requires a statutory definition.
Virtual currencies, however, lack a normative definition. From the “synthesis” of this syllogism, we can easily deduce that virtual currencies are not actually “currencies” because of the legal vacuum surrounding them.
This makes them both extremely attractive and dangerous as they’re still in the “legal gray zone”. This absence of clear regulation, however, does not mean that they are not being closely monitored by regulatory agencies around the world.
Virtual currencies have traditionally been classified according to their relationship with “real money” and the “real economy”, taking into account if and how the money flow between virtual currencies and real currencies works, and how virtual currencies can be converted and used to purchase real goods and services.
According to these characteristics, the existing virtual currency schemes have been divided into…
- Closed virtual currency schemes (that have scarce, if any, interaction with the real economy; e.g. currencies used for online games);
- Virtual currency schemes with unidirectional flow (that implies an irreversible conversion at a specific exchange rate from the “real currency” to the “virtual currency” that can then be used both to buy virtual and real goods and services; e.g. “credits”, “vouchers”, “points” or other “bonus” systems);
- Virtual currency schemes with a bidirectional flow (virtual currencies can be bought and sold according to exchange rates with real currencies and can also be used to purchase both virtual and real goods and services; e.g. Bitcoins).
However, the virtual currencies that are most interesting to the watchful eye of the regulators are Bitcoin, Etherium, Litecoin, Dogecoin (A satirical meme created with the sole intention of trolling the “crypto investors”) and other top-ranking cryptocurrencies on the market.
Since we (me and you), have fully discussed and learned about blockchain in detail. Let’s go ahead, and learn everything concerning cryptocurrency. There is no way you will talk about blockchain without talking about cryptocurrencies.
In other words, this will be a fully detailed cryptocurrency for dummies guide. After reading this guide, you will have no need to ask about what it really mean, because i am going to let you know everything and what it really mean in detail.
Let’s get started!
What is cryptocurrency?
A cryptocurrency is a form of virtual currency that uses encryption techniques as means of securing the verification of transactions. Cryptocurrencies can be centralized and decentralized, depending on the method of issuance of currency.
It uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency.
How cryptocurrency works
Cryptocurrency does not need bank, third-party or any other financial institution to be transacted. User can simply transfer or trade cryptocurrencies between each online freely, and even without trusting each other with their financial information.
Cryptocurrencies do this by recording every transaction (like the one above between Peter and Paul) on a shared database called a blockchain.
Bitcoins are considered to be a “cryptocurrency” specifically because they rely on a mechanism of peer-to-peer cryptography for the validation of transfers.
Users can exchange Bitcoins through a mechanism of verification known as “mining” which is based on a public ledger (also known as Blockchain) that records information about the sender, receiver, time and amount of “currency” in the transaction.
When the owner of a Bitcoin transfers it to a recipient, a group of so-called “miners” consults the ledger to verify the owner’s claim of ownership, solves a complex cryptographic problem, and annotates the transfer to the recipient by logging the transaction on the ledger (where the recipient will now appear as the new owner).
As an incentive for mining, which involves the “sacrifice” of computer power and therefore huge amounts of electricity, the “miner” that solves the cryptographic problem is awarded newly generated bitcoins.
This is also known as the Proof of Work method of verification of transactions. Bitcoin is, at least in theory, a completely decentralized currency.
Things all cryptocurrencies have in common
What is cryptocurrency backed by? There are many kinds of cryptocurrency, but all of them has these things in common. Every cryptocurrency must be aimed at these things below:
Digital: Cryptocurrencies are digital money (or digital currencies), which means that, it only exists in computers. Cryptocurrencies don’t have physical coins or paper notes just like the popular fiat money.
Peer-to-peer: Cryptocurrencies are only passed from person to person online.
Global: A cryptocurrency is the same in every country. They can be used freely between countries and across borders.
Encrypted: This is where we get the crypto part of the cryptocurrency definition. Crypto is Latin for hidden. So, cryptocurrency translates as hidden money.
Decentralized: In cryptocurrency world, everyone is in charge of their own money, it isn’t kept in a bank. A bank is a center where lots of people keep money. Cryptocurrencies are not managed by a central server, that’s why we say they are decentralized.
Trust-less: The way cryptocurrencies are built means that you don’t have to trust anyone in the system in order for it to work.
Status of “money” and virtual currencies
The nature of “money” of decentralized cryptocurrency is to be questioned.
The legal nature of money is traditionally identified with three functions:
- Money as a means of exchange;
- Money as a unit of account;
- Money as a store of value.
Bitcoins (and other decentralized cryptocurrencies) are used for the exchange between a “unit of account” on one hand and (virtual or real) goods and services on the other. The first two functions normally attributed to money can be said to also be functions of decentralized cryptocurrencies.
An argument can be made that the last function, that of a “store of value” can be attributed to Bitcoin and other decentralized cryptocurrencies, and this last feature has raised major concerns because the function of “store of value” may be dangerously close to that of an “investment instrument” (that is thoroughly regulated in almost all legal systems).
The argument that Bitcoin can be considered to have the function of ‘store of value’, is usually deducted from the deflationary monetary policy of the currency, and the tendency for decreased market volatility in value over time.
This is mostly considered as the market capitalization gets bigger, and more users joins up every day, while investing the cryptocurrency projects.
What is Bitcoin?
It is a digital coin that has gold-like value. Bitcoin is easy-to-use, stored in cryptographic wallet addresses, and can be securely transferred from one point (i.e. wallets) to another.
Due to the fact that bitcoin is decentralized, the value is determined in a free market without manipulations from any financial central bodies that mostly hold fiat currencies.
Why bitcoin never had any centralized body?
In the world today, bodies like major banks alongside governments, must stand behind any currency (mostly fiat) to maintain its distribution and economical stability.
The fact is that, we’re currently living in the Debt Economy Era, where central banks including other financial body of most countries print new bills (fiat money) at will, and without tangibly having linkage to any base asset (e.g. Gold).
This is exactly one of those practices causing inflation in most countries’ economy up til date: unpredictable rises continues, and the prints gets worn-out over time.
Note: Before this era, fiat currencies was not controlled by any government or central bank which made people of then, to have totally control over how much they can control or hold just like bitcoin.
Who created bitcoin and when?
However, since 2009, the BTC Project has been gaining popularity and also accumulating users worldwide.
Enthusiasts also helped by contributing their time and efforts in developing and distributing this particular asset throughout the whole globe.
How was bitcoin created, and how can it be gotten?
The bitcoin creation has exactly the same analogy like gold mining, and this is to say that, bitcoin first came into existence through the same process known as mining (Popularly called Bitcoin Mining).
However, the term ‘Bitcoin Mining‘ necessarily, does not mean that you have to start digging the earth in search to find bitcoin just like the way gold is been mined and discovered.
In bitcoin’s case, the mining is actually done using some couple of special computer powers and gadgets to solve some mathematical calculations involved, which in return is rewarded by the created bitcoin.
The computational power is exactly what determines how fast bitcoin is been created as the mathematical solutions creates what is known as block in the network (blockchain). This is also the environment that makes transfer of bitcoin swift for existence.
How to get bitcoins
Bitcoin distribution is simply done with the process of buying the mined bitcoins online, or bitcoin ATMs (they can be located in some parts of the world).
Though there are so many other ways you can still get bitcoins without investing, or buying it with your fiat currency. I recommend you read how to earn bitcoins for free, and without investment.
How to store or hold bitcoins
Bitcoins are stored in secured and dedicated cryptographic materials, digital software or devices called wallets. Each wallet has a public address which is used publicly to send and receive bitcoins.
This address is made of alphanumeric 30 character string of codes. There’s no cost, or limit to creating and having new wallets.
There are different types of wallets that can be used to store bitcoin cryptocurrency, without loosing it to theft or hacks.
Recommended read: Step-by-step guide to BTC wallets and how to use them
How bitcoin is transferred between wallets
Bitcoin transactions are digitally signed and encrypted from the wallets that is sending it out with its private key (not distributive), and it gets broadcasted to the blockchain network on the internet, which then gets listed on the Block Explorer.
The transaction log keeps tracks of all bitcoin transactions made throughout its existence. This log is also divided into blocks, and each of the blocks contains commands that guides the transaction till it’s closed after completed transactions.
How much it costs to send bitcoin
Miner’s fee is the only transaction cost for transferring bitcoin from one point to another (with physical distance being neglected entirely).
The fee is always paid to a miner for each order added to the blockchain to close the block during mining.
Comparing to the means of money transfers, bitcoin is always cheaper in a way, not minding how much that is involve in each transaction.
However, the fee is not fixed and most digital wallets automatically, can calculate the fee required for each transaction.
It’s necessarily to note that the higher the fee, the faster the transfer will become (i.e. your bitcoin transfer will be on the priority list that is handled by the miner who prefers to take the higher fee transactions).
How to send less than 1 Bitcoin
It is absolutely possible to send any amount of bitcoin, as long as, it doesn’t affect the miner’s fee (which may be very higher than the amount to be transferred) for the transfer.
The cryptocurrency has 8 numbers after the decimal point (i.e. the smallest bitcoin is 0.00000001 BTC), and the most unit of measurement for bitcoin is known as Satoshi. There is a post i wrote on how to buy bitcoins with USD.
Advice: Never send lower amount of bitcoins to avoid paying bigger amount of bitcoin to the miners than the amount that is being transferred.
What affects bitcoin price?
As we’ve stated earlier, bitcoin is an open source project and that means the price increase or decrease in price is affected by supply and demand just like every other market commodity.
Political news, FUD and most other events can result to the graphical shift in demand, or supply of the bitcoin cryptocurrency.
Characteristic of bitcoin cryptocurrency
Bitcoin can only be recognized by some certain characteristics, and that is what maintained its existence till date. Below are the existing characteristics of every bitcoin in the market.
Bitcoin is created by Satoshi Nakamoto to eliminate middle-man in every transaction. This means that every bitcoin transaction is independent of government authorities.
Everybody is part of the vast network, so long as you are involve in mining, trading or buying and selling of bitcoins. The money keeps moving, even if the network should have any kind of issue.
Bitcoin wallets are not linked to any financial network, or bodies. Unlike financial institutions like banks that virtually knows everything about their clients: credit history, addresses, phone numbers, spending habits and so on, bitcoin transactions cannot be linked to any personally identity.
Most people just don’t like their financial transactions to be tracked, and monitored by anyone during business. This is what also raised the argument that, drug dealing, and all other illegal business will be thriving with this kind of currency.
Normally, bank transactions usually take up several days to get through, but bitcoin transactions are almost instant. It normally take up-to some minutes to get to the other person’s wallet in any part of the world.
Recently, lightening network has been introduced to the bitcoin blockchain, and it has help to even make the BTC transactions even more faster. Now, transactions mostly take seconds to get through.
Even though tracing a particular bitcoin wallet address to a person is still very impossible, amount of bitcoins involved in any transaction can still be tracked in the blockchain – if it’s really necessary to do backward recording of transactions.
There are wallets that can still make every transaction anonymous in the blockchain. This is to say that, when you make use of this type of wallet to transfer bitcoin, your transaction cannot be traced in the blockchain.
Recommended read: Best bitcoin hardware wallets to use
Once you send your bitcoin out to someone else’s wallet, there’s no way you can revert the transaction back. Unless the recipient agrees, or decides to send it back to you. This feature was implemented to makes sure that no one will scam another person by claiming that they didn’t receive any coins in their wallet during transactions.
How to buy bitcoins?
Buying bitcoins is very easy and simple. Currently, there are decentralized bitcoin exchange platforms that you can use to buy any amount of bitcoin, depending on the present price value as the market worth is always volatile.
To learn how to buy bitcoin safely, without getting into the hands of scammers, i’ll advice you read an article based on how to buy bitcoins with USD
Summary: Bitcoin guide for dummies
Most people thinks bitcoin is one of the normal ponzi scheme that appeared in a serious large scale. But i will tell you that this cryptocurrency is totally different from ponzi, or even pyramid schemes.
It is simply another form of keeping values, just like the way you would keep Gold if you have one in your possession already. Bitcoin can actually make you rich and wealthy, especially right now that the price value is still highly volatile.
As you should know too, bitcoin is still waxing strong into the financial economy of countries, because it is not affected by any governmental policy. It has no central body that controls it. You can acquire any amount, and HODL it till whenever you think you may need to convert it to money.