What is bitcoin?

Bitcoin is a currency without borders. We have the AUD for Australia, the EU for Europe , CNY for China, the USD for America, and now we have bitcoin for earth.

So, what is it? Well, writing a definition of Bitcoin often raises more questions than it answers. Even the alleged creator (or creators?) behind the very concept of Bitcoin, Satoshi Nakamoto himself, is quoted saying: “Sorry to be a wet blanket. But, writing a description of Bitcoin for general audiences is bloody hard. There’s nothing to relate it to.” And, yeah, he’s right. Bitcoin was the first of its kind.

Bitcoin is a unique, evolutionary form of digital currency created and stored electronically. One of the most important aspects to understand about Bitcoin is that it is a decentralised currency, meaning no one central authority can control it. It’s a pseudo-anonymous, peer-to-peer currency with security maintained by using strong cryptography.

Also read: Bitcoin gambling

What does it mean for Bitcoin to be decentralised?

If Bitcoin was centralised and a government or someone wanted to shut it down, all they would need to do is walk in to the place where it operates from and pull the plug on it. Being decentralised makes this impossible. They would have to pull out thousands, even millions of plugs, and first they would have to find them. Decentralising is why programs like BitTorrent have survived unfazed for so long while Napster, the centralised equivalent, simply had its plug pulled.

Taking the responsibility of governing a currency away from specific countries, like bitcoin has, means that there are less external factors that can influence its viability. A decentralised currency is not at the mercy of central banks or government actions, like the U.S dollar takes a hit every time they engage in a war.

Obviously there are things that affect cryptocurrencies such as when the FBI shut down the early version of the Silk Road, causing a drop in the price of Bitcoin or the infamous Mt Gox Bitcoin Exchange hack.

Value of Bitcoin

The value of Bitcoin is based on the supply and demand inside its decentralised network, as more individuals and companies trade in Bitcoin, its value will rise and as it matures it has the potential to be more stable than centralised currencies.

Decentralising a currency in the way Bitcoin has also puts a limit on quantity and speed of production. Like any currency you don’t want too much too fast, because then the value of your currency drops, or too slow so that the economy grinds to a halt. Bitcoin’s design is for a self-stabilising economy, whether this is the case will be shown in time.

Peer-to-Peer Network

Usually when you transfer money online you go through a middle man, whether it be the bank when paying rent or Paypal when making an online purchase. A peer-to-peer (P2P) network allows you to bypass this middle man and send or receive money directly to and from your fellow ‘peer’.

The only prerequisites for joining a peer-to-peer network are a computer, an internet connection and the P2P software, which in this case would be your bitcoin wallet. Every bitcoin wallet comes with a unique address. You use this address combined with your peer’s wallet address to directly send and receive bitcoins.

Bitcoin wallets

Bitcoin wallets are similar to real world wallets. You store your cash in them, you can take out a note or coin and send it directly to whoever you like, whenever you like.

Without wallets, Bitcoin would be impossible. They provide a place to store as well as send and receive bitcoins. Wallets hold the private keys that you need to access a bitcoin address and spend your earnings.

There are multiple types of wallets including online, software, cloud, mobile and hardware. There are even physical world wallets for storing your bitcoin non-digitally; these are known as paper wallets.

There are benefits to each type of wallet and the choice is yours but always keep in mind the importance of keeping your funds secure because at the end of the day it is is your responsibility to adopt the correct practices in order to protect your money.

Is bitcoin anonymous?

Technically Bitcoin is pseudo-anonymous. When you’re transacting in bitcoin, you are using a numerical pseudonym. In bitcoin, your pseudonym is the address where you receive your bitcoins. This address, also known as your public key, is unique to every individual bitcoin wallet.

If you use one wallet only for all transactions then for each transaction your visible address will be the same and every transaction involving that address is stored permanently in bitcoin’s public ledger, known as the Blockchain. If your address is ever linked to your identity, every transaction can then be linked to you.

But for those of us who, for completely legit reasons, would like to remain anonymous it can be done. Though it does require some effort. The first move, as Satoshi Nakamoto recommends in the original whitepaper, would be to use a new address for each transaction hence removing the chance of those transactions being linked to a common owner.

Another problem to avoid is purchasing bitcoins online through a bank transfer. Seeing as your bank account is directly tied to your identity, pairing any kind of bank account with your bitcoin exchanges destroys your chances of anonymity. There are a few ways around this.

Cash deposits to bitcoin wallets

There are sites online that connect people seeking to purchase BTC with others looking to sell and vice versa. I would personally recommend LocalBitcoins.com, the site is reputable, easy to register with, and simple to use.

Say for example you want to buy $200 worth of Bitcoin. First you would enter $200 as the amount then select cash as the payment method. A list of people looking to sell will appear.

Simply select a trusted vendor from that list. The vendors are generally graded in an eBay-style feedback system. Your selected vendor will provide you with banking information and a unique reference number, you then simply make the correct cash deposit into their account at your local bank branch.

Once the transaction’s confirmed you’ll usually receive your BTC in a matter of minutes to your LocalBitcoin account. Totally anonymously.

Bitcoin Tumbling

If you already own bitcoins and for whatever reason want to make them anonymous, the way to do that is to use a Bitcoin Tumbler.

The basic idea behind Bitcoin Tumbling is simple. If you, I and a bunch of our mates each put 100 coins in a jar then shake it up, we can then take out 100 coins with no way of knowing which coins belonged to who initially.

Bitcoin tumblers co-ordinate groups of users, anonymously pool their bitcoins, mix them up, and redistribute them back to the group, making the trail almost impossible to follow.

How are Bitcoins created?

Bitcoins are created as part of a process known as ‘bitcoin mining’. I will go into more detail about mining next, but for now imagine it as a collective of anonymous individuals all over the world, independently verifying all bitcoin transactions conducted within a certain time period.

This verification is done using bitcoin’s publicly viewable ledger and secured through a proof-of-work (POW) system relying on complex mathematics and cryptography.

Whoever verifies these transactions quickest and with the strongest proof-of-work is essentially rewarded with a predetermined amount of freshly minted bitcoins.

Not only is this good for the miners’ pocket, but this incentive to verify transactions with the strongest possible POW ensures security in the bitcoin network.

What is bitcoin mining?

The term Bitcoin Mining is a bit of a curve ball. I’d say it’s called bitcoin mining because those people doing the ‘digging’ are the ones who get the new bitcoins. The role of a bitcoin miner is something more like competitive bookkeeping.

Every bitcoin transaction in the history of bitcoin is and will be recorded as a page, known as a Block, on a huge online public ledger, known as the Blockchain. Every single one of these transactions needs to be validated, and every validation is done by bitcoin miners. You can download this blockchain on your own personal computer, but as a warning it will take hours and hours for you to download the entire blockchain.

As you know bitcoin is completely digital and decentralised with no third parties involved. In fact, the very idea of a central overseer is completely counter to the bitcoin ethos. So, if you tell me you have 100 bitcoins, without an overseeing third party how do I know you’re telling the truth? The solution is the Blockchain. Being a public ledger, all of your bitcoins can be traced back to their beginning and you can’t get away with lying about how many you have.

Bitcoin miners all over the globe work independently of each other ‘competing’ to be the first to secure that page in the ledger. However in recent times the introduction of ‘Mining Pools’ has rendered the individual bitcoin miner useless, because they simply don’t have the computing power to compete with groups of miners.

One block on the Blockchain consists of 10 minutes worth of bitcoin transactions.This means in real life time, every transaction that occurs in the bitcoin network in a 10-minute period, becomes part of that block in the chain.

Securing one of these blocks requires the miner to complete what’s called a cryptographic proof-of-work. Doing this proof-of-work requires huge amounts of computing power so if you happen to be the miner or a member of the mining pool who successfully secures that block, you will be rewarded with newly created bitcoins.

What is the Blockchain?

The Blockchain is the publicly viewable ledger of every bitcoin transaction in history. As the Blockchain is equivalent to a ledger, a block is the equivalent to a page in that ledger.

One block in the Blockchain consists of 10 minutes worth of Bitcoin transactions. So, every transaction that occurs in the bitcoin network in a 10-minute period, becomes part of that block in the chain. Blocks are added in chronological order to this ledger. It is constantly growing as completed blocks are added to it with every new set of recordings.

If you were inclined to download the Blockchain (which is available to anyone) you would be able to view complete information on every single bitcoin transaction right from the very first block to the most recently completed block.