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What is a Bitcoin?

Bitcoin (BTC) is the first decentralised, digital currency in the world. This means that, unlike in the case of traditional banking systems or payment providers such as Paypal, there is no central authority controlling currency transactions.

The digital currency Bitcoin was designed as a medium of exchange. Cryptography is used to create and manage the currency. The creator of Bitcoin, Satoshi Nakamoto, is known by name only. He wrote the original Bitcoin whitepaper in 2008. Based on the whitepaper, the Bitcoin network was created in January 2009.

Meaning of the term Bitcoin

Bit → the smallest unit of data in computing | Coin → traditionally a piece of hard material used as money | Bitcoin → digital coin

Did you know?

The digital currency Bitcoin was invented in response to the 2008 financial crisis and as an alternative means of payment to traditional currencies.

Bitcoin as currency

A complete Bitcoin consists of 100 million Satoshi (also known as ‘Sats’) and has exactly eight decimal places. The smallest possible unit of a Bitcoin is 0.00000001 BTC and has the value of a single Satoshi.

Smallest unit
0. 0000 0001 Satoshi | 1 Bit = 1 Satoshi
Milli-Bitcoin
0. 001 mBtc → 0.0010 0000 BTC | 100 000 Satoshis
1 Bitcoin
1 BTC → 100 000 000 Satoshis

The cryptocurrency was capped at 21 million units as a countermeasure against possible inflation. To date, the Bitcoin mining process has generated around 17 million bitcoins and put them into circulation.

The advantages of bitcoin

Manage your money yourself

If you invest your money in a bank, the bank promises that you will get the money back at a later date. However, you do not manage the money yourself, and you have to trust that the bank will not go bankrupt, lose money through speculation, or keep only part of the money available. Bitcoin does not require trust in banks or financial services providers because, as a user, you always have your money in your own hands.

Did you know?

In a traditional bank, it would be, in theory, no problem to exchange a number on the central booking server or simply halve the account balance. However, we trust that banks will not do that.

Transparency and security

There are no account balances with Bitcoin currency. In the Bitcoin wallet of choice, a current "account balance" of the Bitcoin address is visible, however, this number is not stored in the Bitcoin network (the so-called blockchain). Instead, since the beginnings of Bitcoin in 2009, all transactions between all Bitcoin addresses that have ever been made are on public display. If someone were to view all the transactions from the beginning to the present day, it is completely transparent which amount was moved to which address and when.

This way it is determined which address currently has which account balance. Therefore, an individual participant cannot cheat and omit or add transactions because all other participants in the Bitcoin network would recognise the fraudulent transaction.

What is a blockchain?

Transactions requested in the network are collected, verified and bundled. Creating a valid new block in the blockchain (chain of blocks) requires solving a mathematical puzzle, entailing a lot of computational power from the miners. This process is called mining. The miner who first solves the task receives the block reward. The distribution of the block reward is given out in Bitcoin and is an incentive for all those network participants who are providing their computing power for the mining process. A block reward is always the first transaction of a block (the so-called “coinbase transaction”).

Did you know?

The block reward started at 50BTC and is halved about every four years. Bitcoin currently has 12.5 BTC every 10 minutes.

Each node in the network checks the validity of a new block. All blocks must meet the requirements set by the majority of the peer-to-peer network. There are different types of nodes with different tasks - for example miners.

Did you know?

A node is a computer in the Bitcoin network. A node that fully checks all rules and administers a copy of the entire blockchain is called a full node. Invalid or fake blocks are thus discarded and not forwarded. According to forecasts, after 33 halvings, the last Bitcoin will be released by 2140. There will never be more than 21 million Bitcoin.

The blockchain can be compared to a huge, public, anonymous and cryptographically encrypted ledger. It simultaneously runs in its current version on thousands of computers in the network and is constantly updated to the most recent version. Consequently, it’s almost impossible to attack the network.

What happens if there are no more block rewards left? What would happen if all bitcoins had been paid out as block rewards? If there were no more rewards, one would think that as a miner, you would have no more incentive to mine. If this were to happen, all newly verified blocks would continue to include all transaction fees. So you can still earn from these transaction fees.

What is a miner?

Miners are participants in the Bitcoin network. There are set rules in the Bitcoin network for the expansion of the blockchain. Miners make sure that no one violates these rules by, for example, making duplicate transactions. Each transaction must conform to the protocol.

Bitcoin miners bundle block-requested transactions with special software and use complex mathematical calculations to verify that these transactions are in compliance with the protocol. The first miner who solves the computational puzzle and validates a block publishes it on the network.

The more miners there are in a blockchain network, the more stable and less susceptible to attacks the network.

Did you know?

After 2016 blocks (approximately every two weeks), difficulty is adjusted so that it takes about 10 minutes to solve a block. As the total processing power increases, the difficulty level increases, and as computing power decreases, mining difficulty becomes easier, and miners do not take too long to find a block.

If a higher amount is sent for a transaction, it is preferred by miners because they earn more. Such transactions are then processed faster.

New, not yet confirmed transactions are first accepted in the Bitcoin network by certain nodes, called full nodes. A full node executes a program that reviews and validates the transaction and forwards it to the miners. The miners review the transaction again and, using a specific process, summarise new and confirmed transactions in a block.

The other miners then check the validity of the transaction. If everything is in order, they attach the new block with the confirmed transactions to the blockchain forever. Management of the blockchain is decentralised via the miners. They control the network, keep it stable, and verify transactions on the network.

What is meant by "mining difficulty"?

Mining difficulty is a measure of the relative difficulty of finding a new block in a blockchain network. Difficulty adapts to the total computing power of a network, ensuring that a block is found in a given amount of time. The more miners there are in a blockchain network, the higher the overall processing power. In order to prevent more blocks from being found during a short time span as a result of increases in computing power, difficulty in a blockchain protocol needs to be adjusted on a regular basis.

FAQs

What is a wallet?

A "wallet" is a virtual "purse" in which you can store, receive and send Bitcoin and other cryptocurrencies through a program that can be downloaded from the internet for free. Depending on the type of wallet, it can be used on desktop, mobile phone or tablet. However, storing Bitcoin and other cryptocurrencies is the safest in a hardware wallet that is not connected to the internet.

Even if you say colloquially that you have your coins in a wallet, that is not entirely correct. Bitcoin is always on the blockchain, the wallet merely contains the private key, which points to the Bitcoin in the blockchain.

Bitcoin in comparison to fiat money

Many of the benefits of Bitcoin have already been described in the previous text. To emphasise these benefits again and to dispel any doubts, here is a comparison to fiat money.

“Fiat money" is legal money issued by a state authority without intrinsic (internal) value. It serves as a medium of exchange and is the opposite of commodity money (for example, silver, gold). Commodity money has an intrinsic value inherent in its material properties.

Suppose you want to borrow money from the bank. You decide on a loan with a term of ten years. The bank credits a sum of €10,000 to you and the following happens in the background: There is no actual transaction made from A to B, the bank does not get the €10,000 from a larger bank. It also does not generate new paper money. After only numbers are entered on a display, the balance changes and confirms the "receipt" of the loan to someone. Thus, the next ten years you pay back money that was never printed but only digitally generated.

In the case of Bitcoin, it isn’t possible for a third party to type something, to change or to create anything. Bitcoin is not a tangible good, but it is limited and it is impossible to change it. The properties of blockchain technology ensure a cryptocurrency is highly secure. The way you handle your assets is entirely up to you and there is no need for a third person or intermediary authority to have additional access to your private data. You have access to the Bitcoin payment system 24/7 and can send money anytime, anywhere in the world - interest-free and in minutes.

Advantages of Bitcoin over fiat money

  • The system behind blockchain technology can not be manipulated mathematically
  • The privacy of participants remains fully protected
  • No middlemen have any access to accounts
  • The Bitcoin limit always stays at 21 million
  • A blockchain can not be forged
  • Duplicate transactions are impossible
  • The global demand for Bitcoin is increasing
  • Bitcoin does not belong to anyone, but to everyone
  • Participants do not have to trust a bank
  • Bitcoin is easier to keep safe than other valuables
  • Theft and loss is virtually impossible if digital assets are handled correctly
  • Bitcoin is censorship-free - nobody can be excluded
  • Fast payment processing
  • Low transaction fees
  • Absolute counterfeit protection

What is the bitcoin network?

All participants in the Bitcoin network are organised in a peer to peer network and are on fully equal terms. Since there is no central monitoring authority, nobody can be excluded from the Bitcoin network. The Bitcoin network manages and mines bitcoins. At the same time, the network is a payment system in which transfers are made and documented.

The Bitcoin system and its function are incorporated in the source code and can be viewed by anyone. Modifications by a single participant in the network must be accepted by the majority of all participants by consensus. That is what Bitcoin security is based on because you would have to convince the majority of users in the world to make certain changes.

For this reason, nobody can simply change properties of the network. Development of the total money supply is predetermined in the source code and thus cannot be altered. This measure is a hedge against possible inflation (devaluation).

About Bitcoin

Bitcoin is the most popular cryptocurrency, both in terms of mainstream awareness as well as buy and sell volume. It is based on an open-source technology and operates with no central authority. This means that nobody owns or controls the network and everyone can take part. Bitcoin was conceived in 2008 by a person or group going by the name Satoshi Nakamoto, whose real identity is still unknown. Bitcoin’s supply is limited to a fixed number of 21,000,000 units.

  • Bitcoin gained value over time, starting from 0
  • First and most popular cryptocurrency
  • Decentralised and secure peer-to-peer payment network
  • Makes it possible to verify transactions, prevent double spending and secure trust without a centralised authority
  • Can be used anywhere and by anyone in the world
  • Transactions are pseudonymous
  • Highly divisible in Satoshis (1 Satoshi = 0.00000001 BTC)
  • Supply fixed to 21 million units

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