Another Instalment in the ‘What Is A Bitcoin’ Series of Blog Posts for the Bitcoin Beginner
If you haven’t checked out my free beginner’s guide to bitcoins email course and you’re wondering what is a bitcoin or how do bitcoins work, this post is for you. It is one of a number I am writing for the bitcoin and cryptocurrency beginner.
As a heads-up, if you’re reading this because you want to understand how to get bitcoins there’s also my previous post titled, How to Get Bitcoins – A Guide For The Beginner.
By the way, if you’ve read this post and still want more information, you can check out the first post I wrote in the What Is A Bitcoin series here.
What Is A Bitcoin?
Bitcoins are the original cryptocurrency. Like the others that have followed it such as ethereum, bitcoin is an electronic, digital currency. Unlike traditional methods of sending money such as a bank transfer, bitcoins are peer-to-peer. I’ll explain what that actually means below.
Part of the software protocol of bitcoins limits the number that can be created. According to this protocol, once the total number of bitcoins in circulation has reached 21 billion, the mining of new bitcoins will stop. I cover mining below. It is anticipated this will be in 2040, as of 2017 50% of the potential mine has been mined.
Bitcoins can’t be seen in the same light as money. However, like money they have a value. In US Dollars that value is currently $4200. That’s not a fixed amount it fluctuates each day. Bitcoin prices are extremely volatility. Regularly changes of 10% in its value are seen. Assuming current prices of USD 4500 that’s a change of USD 450, which for an investor is a huge daily change.
How Do Bitcoins Work?
So as I mentioned above, bitcoins are peer-to-peer. By using bitcoins to pay someone for a good or service, you’re bypassing the intermediary which is your bank.
For example, if you want to send money to a friend on the other side of the city, country or even world, traditionally you would have to use a bank (or perhaps Paypal). You instruct your bank to send X amount of your currency to your friend’s bank. Your friend’s bank then allocates the money to your friends account.
To understand how bitcoins work you need tear up the old way of doing things. Bitcoins have revolutionized how value can be transfered (I’m deliberately not using the word money).
So if you’re using bitcoins to buy something such as a good or service. You open your virtual wallet (I write about virtual wallets here) and send it directly to the person you’re buying the good from. No bank, no Paypal, no intermediary.
The change of ownership (from you to the person you’re buying from) is recorded on the blockchain, I cover blockchains below. That record is now permanent, it can never be n.
Most of the bitcoin is then transferred to the exchange. A portion of the mined bitcoin is kept by the computer which mined the bitcoin. This is basically the the commission for mining and covers the significant costs of running these computers.
Bitcoins Cannot Be Counterfeited
Once a bitcoin has been mined, at least 6 other of these supercomputers which are part of the network will validate the calculations. Once validated the mining and validation proess is recorded.
The recording of the ‘birth’ of a bitcoin is kept on its ‘blockchain’. This is a just a fancy name for what an accountant might call a ledger. It’s a live, on-going record in digital format of the life of the bitcoin. A blockchain file size is quite small, similar to the size of a long text message on your mobile.
So the mining and validation and every single transaction onwards of that bitcoin is added to the blockchain. Every new transaction gets added to the ongoing history.
This make is impossible to copy or even steal bitcoins. Because each history is unique with a unique blockchain, they can’t be copied. In the same way as your fingerprint is unique, there’s only one bitcoin with that history in existence.
Does That Mean Only The Rich Can Get Bitcoins?
Not at all. Because owning and running these supercomputers is so expensive you might think it’s impossible to get bitcoins. There are two methods to get bitcoins.
The first is to mine and the second is is to buy them. I won’t go into how to buy bitcoins because I’ve covered that in my other post. What you’re doing is exchanging bitcoins for your hard earned cash.
You’re using an exchange to make the purchase. You will send your US dollars or Euros to the exchange and in return they will send you the bitcoin. That transfer to your ownership is recorded on the on-going ledger of the blockchain.