What is bitcoin? How is it created & used?

July 12, 2017
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What is bitcoin?

An introduction to bitcoin cryptocurrency, in (mostly) non-technical terms.

Andrew emailed me and asked a challenging question, “Can you explain bitcoin?

Bitcoin ImageIf you haven’t heard of bitcoin, you will, as it is a term that is becoming more widespread and widely accepted as a form of payment. This is a complex topic and we’ll cover key concepts in mostly common terms.

Bitcoin is a worldwide financial currency that is 100% digital – there is no coin, bill or gold associated with it. No bank or governments control bitcoin. A bitcoin (a digital token of sorts) is created by powerful computers, called bitcoin miners, which are located throughout the world. Anyone can own a bitcoin miner running bitcoin software but they are expensive and consume significant power.  There are thousands, if not millions, of bitcoin minors around the world. There are even miners in Asheville, NC.

How are bitcoins created?

Bitcoin Farm - Hundreds of Bitcoin Miners in a Warehouse

Bitcoin Farm – Hundreds of Bitcoin Miners in a Warehouse

Bitcoins are generated when a bitcoin miner, or group of miners working together (pool), solves a complex mathematical problem related to a group of bitcoin transactions called a block.

All miners around the world have a copy of every bitcoin transaction that has ever occurred, resulting in a universal ledger.  Transactions are grouped together into blocks and miners work together to check and re-check the accuracy of the universal ledger, which is what makes the bitcoin transaction system secure. When the block of transactions is validated it is considered as solved.

The blocks (groups) of transactions are heavily encrypted and each new block contains encrypted code from previous solved blocks creating a chain of transaction activity called a blockchain. The miners work together to solve the complex math problem that validates the occurrence of the transactions in the block, ensuring the integrity. The complexity of solving blocks increases over time. When a block is solved, thus confirming the legitimacy of the transactions, it results in the creation of new bitcoin.

Approximately every 10 minutes a block is solved (validated) and new bitcoin are created.

The person or persons who own the bitcoin miners that solve the block own the newly created bitcoin. If there are multiple owners involved they each receive a fraction of the bitcoin directly proportionate to the amount of work their miners did to solve the block.

The bitcoin owner can then save their bitcoin, use it to buy goods and services or sell the bitcoin.

What happens when someone buys goods with bitcoin?

Screen capture source: Bitcoinexchange.com

Screen capture source: Blockexplorer.com  / Shows an active list of blocks and the encrypted transactions within the block.

When a person buys a product or service with bitcoin, the transaction is recorded on every bitcoin minor around the world keeping the universal ledger. If a bitcoin miner fails or is taken offline it is not a problem because the bitcoin is not tied or associated to any specific computer. The tracking of the bitcoin is distributed across many computers that are not owned by a centralized entity such as a bank or government. This distributed “accounting” ledger is what allows for independent verification and ownership of bitcoin. There is no one person or bank in charge of tracking your bitcoin. If you own bitcoin, you can track your buying, selling and balance in your bitcoin wallet – which is an app on your phone or via a computer.

Photo credit: Blockchain / Bitcoin Wallet App named Blockchain showing transactions.

Who accepts bitcoin as payment?

Many organizations accept bitcoin for goods and services but it is not yet universal. You can buy items online with bitcoin on sites like Overstock.com or many individuals will accept bitcoin for payment when selling goods and services.

The original intention of bitcoin was for person-to-person transactions without the need of a middleman – such as a bank or credit service. Traditionally the transactions costs are low, however this is beginning to change and there are no international conversion rates.

Stores like Amazon and BestBuy do not currently accept bitcoin directly, but you can buy gift cards with bitcoin then purchase product on these sites.

Why use bitcoin?

People like to use bitcoin, rather than traditional currency, for a variety of reasons. It is accepted worldwide without any conversion rates. No bank or government controls it and your purchases cannot be tracked. The transactions fees are small.

Unfortunately, it can be used for purchasing illegal items, like drugs, as well. In these earlier stages many people like to accept payment in bitcoin because it is cool and the hope is that the value of bitcoin will continue to rise. Many people see bitcoin as an investment, similar to buying shares of stock or gold.

How do you get a bitcoin?

Bitcoin ATMIf you are not “manufacturing” bitcoins with a bitcoin Miner, you can sell goods or services and accept bitcoin payments using your bitcoin Wallet. If you don’t have product to sell, probably the easiest way to get bitcoin is to buy a bitcoin or a fraction of a bitcoin through a bitcoin ATM. You won’t receive physical coins but you will have a bitcoin wallet set up where your bitcoin is held until it is spent.   Bitcoin ATM’s are popping up across the country.

You can also download a mobile app like Coinbase and purchase bitcoin.

In the ATM or Coinbase app scenarios you are exchanging cash for a bitcoin (or a fraction of a bitcoin) that is then recorded in your bitcoin wallet.

What is the value of a bitcoin?

Bitcoin Value

Bitcoin Value on 7/12/2017 at 12:19AM

The value of bitcoin is rapidly changing. Around the time of this article a single bitcoin has the value of about $2200. So if you were to buy a bitcoin, it would cost you about $2200. One year ago, a single bitcoin was worth approximately $656. You can buy or sell using fractions of bitcoins similar to fractions of a dollar in pennies, dimes, etc.

You can check the current value of bitcoin by doing a Google search for “bitcoin value.”

Cryptocurrency

Bitcoin is considered as a cryptocurrency. There are multiple cryptocurrencies but bitcoin is probably the most well known. A cryptocurrency means it is a digital currency (asset) used to buy and sell goods where cryptography, a distributed computer validation system, is used to securely keep track of transactions. The distributed digital validation also controls the creation of additional units of the currency.

The max number of bitcoins that will ever be generated is 21 million, which is expected to happen sometime between the years 2110 and 2140[1].

The current market value of all  16.4 million existing bitcoin is roughly 39 billion.

When did bitcoin start?

According to Wikipedia, bitcoin was invented in October 2008 but was made available in January 2009 as open-source software that recorded the trading of bitcoin. The actual creator(s) of bitcoin are unknown but is referenced under the individual or group name Satoshi Nakamoto.  No one really knows for sure.

How do I track the value of bitcoin

You can use a wallet app such as Coinbase or do a search on Google, or other search engines, for “bitcoin price.”

More info on bitcoin

Article References

  1. https://en.wikipedia.org/wiki/Bitcoin (10 Jul 2017) Bitcoin

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