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What is Bitcoin and how cryptocurrencies work?

There is no doubt that you have already heard the term Bitcoin. But do you know how this most famous cryptocurrency actually works? In this article, we will find answers to the most rudimental questions that arise when we utter such words as Bitcoin or cryptocurrency.

Cryptocurrencies are not physical currencies such as the euro but exist only in the digital realm. That is why we also call them digital currencies. Does it seem complicated to you? No worries! We will make sure to go through the basic concepts one step after the other.

  • Title: Bitcoin
  • Designation: BTC
  • Origin: r. 2008
  • Founder: Satoshi Nakamoto (pseudonym)
  • Total BTC: 21,000,000
  • The last bitcoin will be mined in about 2145
  • Units: 1 BTC = 1000 mBTC = 1,000,000 bits (uBTC) = 1,000,000,000 satoshi

What actually is Bitcoin?

The Bitcoin cryptocurrency was created in 2008 by a mysterious person or group of persons known by the pseudonym Satoshi Nakamoto . His / their identity is still unknown and will probably remain so forever.

The initial idea that led to the formation of the cryptocurrency of Bitcoin was published by Nakamoto in a scientific article called Bitcoin: Peer-to-peer Electronic Cash System .

Bitcoin is actually a currency that belongs to everyone and serves as an intermediary for exchange. Digital currencies use cryptography to secure financial transactions. It is a form of control over the production of additional units (new bitcoin coins) and verification of the transfer of funds – hence the term – cryptocurrency . Because it does not belong to anyone yet at the same time it belongs to everyone, everyone can participate in its use and development.

There are several benefits to using Bitcoin. One of them is that there is no central body for cryptocurrencies, such as a bank in the classical financial world. Unlike bank transfers, transactions take only a few minutes. If you need to transfer money to the other side of the world, it can get really complicated. Especially if these funds are in another currency. It takes several days and the bank usually charges pricey fees.

The main features of Bitcoin

Bitcoin is a non-centralized virtual currency

  • because it functions in the system without a central bank or a single administrator. The value of this virtual currency is not controlled by any central authority, but by the users themselves. In a way, it is a currency that really belongs to the people.

Bitcoin is a cryptocurrency

  • because it is a virtual currency and has no physical form (coins or banknotes). It serves as a medium of exchange and uses cryptography to secure financial transactions, control the production of additional units (new bitcoin coins) and verify the transfer of funds.

Bitcoin is an open-source system

  • , which means that no one owns it and anyone can participate in its use and development.

21,000,000 coins

  • – this is the final number of bitcoin coins

There are several benefits when it comes to using Bitcoin. One of them is the absence of a central body , such as a bank. Suppose we have to transfer € 1000 from Slovakia to your relatives in Spain. The money passes through a bank in Slovakia and fees are being charged for processing the transfer of funds. Your relatives’ Spanish bank may also charge fees, and, on top of that, the whole process may take several days, especially if you are sending money to a country with its own national currency.

There are no centralized authorities when paying by Bitcoin, and in most cases, transactions take only a few minutes, even if you send money to the other side of the world. In addition, Bitcoin is a currency that is not limited by state borders. Slowness and geographical constraints are not the only disadvantages of traditional banking institutions. Banks can freeze or block their clients’ accounts at any time, sometimes even without sufficient justification. That is why some people think that banks have too much power in their hands.

You may have also noticed that Bitcoin emerged shortly after the financial crisis in 2008. Some even believe that it was the crisis that helped to give rise to the idea of a decentralized currency and that it was one of the reasons why Bitcoin arose as a possible future for the monetary system.

Decentralized networks

If you go to a web browser and enter “www.google.com”, your computer will start a conversation with Google computers. This way, they will start interacting with each other, and your browser will display images, buttons, etc. If Google’s servers are down for any reason, you will not see these images and buttons. The reason is that the data is stored in a centralized network – in one place.

To understand how Bitcoin works, it is essential to understand what a decentralized network is. In a decentralized network, data is everywhere. If Google would have used a decentralized network, you should still have been able to see the data, because it is everywhere, not just in one place. This means that Google would never go offline ever again.

Thanks to its properties, Bitcoin offers:

  • collective verification of transactions by nodes and miners in the public ledger
  • a system based on voluntariness and openness
  • transparent monetary policy that is unchanging and well-known
  • payment system available 24/7/365
  • a world community that knows no state borders
  • a system that does not discriminate or require its user to disclose their personal data
  • stability and robustness of the most secure blockchain protocol in the world
  • freedom, control, and responsibility in the hands of the user (be your own bank)
  • resistance to censorship and adverse regulations
  • speed and low charges
  • possibility of the indelible time stamp in network data
  • capacities to preserve value and maintain liquidity
  • a deflationary alternative to inflationary currencies

Conclusion

In this article, we have briefly explained the basic concepts. However, the whole issue of Bitcoin and Blockchain is much more extensive. What exactly is Blockchain and how does it work? Where can I buy bitcoin? Why is Bitcoin so valuable? Is Bitcoin just a bubble? There are a lot of questions, and all of them will be covered in our articles

Jakub is a crypto trader and founder of Trader 2.0 project, which helps hundreds of traders from central Europe to understand cryptocurrency trading and its challenges. Jakub not o...

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