I’m going to give you a simple explanation, what is Bitcoin, and why it’s so revolutionary.
Centralised and Decentralized
Long ago we use to trade physical items, then we decided that it is too difficult to trade something so we invented paper to trade with, “Money”. Basically, we all said “let’s just forget about gold and trade paper instead”. Even though there is no actual commodity backing paper money, people trusted the government and that’s how fiat money was created.
So, the value of today’s money actually comes from a legal status given to it by a central authority, the government.
Fiat money has two main drawbacks:
It is centralized – you have a central authority that controls and issues it.
It is not limited by quantity – the government or central bank can print as much money as they want. The problem with printing money is that the more money you print the less your money is worth.
Satoshi Nakamoto published a document in 2008, also called a whitepaper, suggesting how to creating a system for a decentralised currency called Bitcoin.
So, what is decentralized?
Today, thanks to the Internet, information is decentralized and you can communicate and consume knowledge from around the world with the click of a button. Bitcoin is the Internet of money – it’s offering a decentralized solution to money.
Bitcoin is the first decentralized digital currency. All Bitcoin transactions are documented on a virtual ledger called the blockchain, which is accessible for everyone to see.
At any point in time, I can sneak a peek into the ledger and see all of the transactions and balances that are taking place. The only thing you can’t figure out is who owns these balances and who is behind each transaction.
Bitcoin manages the double spending problem by using a confirmation tool and maintaining a universal ledger (called “blockchain”), similar to the traditional cash monetary system.
Every computer that participates in the system is also keeping a copy of the ledger. So, if you want to take down the system or hack the ledger, you’ll have to take down thousands of computers which are keeping a copy of it and constantly updating it.
Bitcoin is digital, this means there’s nothing physical that you can touch in Bitcoin. There are no actual coins, there are only rows of transactions and balances. When you “own” Bitcoin it means you own the right to access a specific Bitcoin address record in the ledger and send funds from it to a different address.
No government or bank can decide to freeze your account or confiscate your holdings. Bitcoin is cheaper to use than traditional wire transfers or money orders.
Bitcoin opens up transacting for people around the world who don’t have access to the current banking system. Today with a mobile phone and a click of a button they can start trading using Bitcoin, no permission needed.
The Value of Bitcoin…
Bitcoin has value simply because people are willing to trade money for it. Meaning somebody finds it valuable and decides to buy it from someone else.
The more people want to buy Bitcoin then the value of Bitcoin rises. If less people want to buy Bitcoin the value will drop.
What is Bitcoin Mining?
Bitcoin mining is the process of updating the ledger of Bitcoin transactions known as the blockchain. Mining is done by running extremely powerful computers called ASICs that race against other miners in an attempt to guess a specific number.
The first miner to guess the number gets to update the ledger of transactions and also receives a reward of newly minted Bitcoins (currently the reward is 6.25 Bitcoins).
Today, in order to be profitable with Bitcoin mining you need to invest heavily in equipment, cooling, and storage. It’s not possible to mine Bitcoin profitably with a PC or a GPU at home.
Once your mining computer comes up with the right guess, your computer determines which pending transactions will be inserted in the next block of transactions on the blockchain. Compiling this block represents your moment of glory, as you’ve now become a temporary banker of Bitcoin who gets to update the Bitcoin transaction ledger.
All the transactions in the block you’ve just entered are now confirmed by the Bitcoin network and are virtually irreversible.
A new block will be added every ten minutes (i.e., the number will be guessed every ten minutes on average).
Every 2016 blocks the system looks back on the past 2016 blocks and calculates the average block time. If it’s under 10 minutes it will increase the difficulty, if it’s over 10 minutes it will lower it.
Is Bitcoin Mining Profitable
The short answer is not really. You can do your analysis on these costs but inputs are close to outputs.
What will happen when all Bitcoins are mined?
Some people are concerned about what will happen when all of 21 million Bitcoins are mined. This is set to happen somewhere around 2140 and the answer to this question lies in Bitcoin mining fees. Bitcoins should become more valuable over time as the number of Bitcoins entering the system decreases.
As Bitcoin’s price rises, the value of transaction fees will increase. First because Bitcoin becomes more valuable and second, because people are willing to pay more in fees in order to get their transaction confirmed faster. Fees are what Bitcoin owners pay to bitcoin miners whenever they transfer funds to another bitcoin address. These fees will keep Bitcoin miners mining.
What happens when you transfer bitcoin?
When I hit the “send” button in my Bitcoin wallet…
1. The transaction is checked by every computer (nodes) holding a copy of the Bitcoin blockchain for validity. the wallet produces a unique digital signature for this message.
2. After a transaction is deemed valid it goes into the Memory Pool and here it sits and waits for a miner to pack it into a block of transactions. It’s basically looking to see that I actually have the funds I want to spend, much like a banker would check your account balance before clearing your check. In order to actually see what’s going on with our transaction while it’s making its path along the Bitcoin network, we can use a block explorer.
3. Once a miner picks up the transaction and includes it in a successfully mined block the transaction is considered to be confirmed. The Bitcoin transaction fee is paid to the miner who entered the transaction into a successfully mined block.
So, fees are a way of signalling to the miner how urgent your transaction is. If you want to get confirmed faster, you’ll attach a larger fee. If you’re not so time sensitive you can do with a smaller fee. When the Bitcoin network is extremely busy users will bid up their fees in order to prioritize their transactions.
When you send Bitcoins to someone you are basically selecting different inputs sent to you in the past and forwarding them to the recipient as outputs. The more inputs your transaction consists of, the bigger its size.
Use a wallet that supports SegWit (short for Segregated Witness) this creates a smaller file of the Bitcoin. Many wallets already support this feature and it can cut costs substantially.
Bitcoin wallets attempt to recommend a reasonable fee, based on the current and recent levels of activity on the bitcoin network. Most wallets allow you to adjust your fees or at least set a general fee preference (low, medium or high).
Bitcoin and the future?
There is definitely a future for bitcoin, decentralized and blockchain technology. How it will end up being received and approved as a final application we are not sure of. Basic understanding of the system is very important for when the official transition takes place you are familiar with the proses.
If you are not sure where to invest, I would start with investing in a top 10 bundle of crypto’s. It is similar to investing in an equity ETF for example. Thereafter you can focus on individual crypto’s.
These days you can also earn interest on your crypto profits you want to keep in a crypto wallet.
This is an extraordinary development in the financial world and only time will tell where this will take us, but it is exciting!!