Table of Contents What is Bitcoin? Bitcoin Transactions What is Bitcoin Mining? Bitcoin as a Store of Value How Bitcoin Works Is Bitcoin Safe?

 

What is Bitcoin? How Bitcoin works for beginners.

Bitcoin, also known as BTC, is an innovative digital currency that was created in 2008 by an individual or group known as Satoshi Nakamoto. Nakamoto’s white paper introduced Bitcoin as a system for electronic cash operating on a peer-to-peer network [1]. This network is independent of any governmental or financial institution control. Instead, Bitcoin utilizes a public ledger called a blockchain to record transactions.

 

 

1 Bitcoin is made up of 100,000,000 Satoshis.

The BTC blockchain is maintained by a global network of computers and when a Bitcoin transaction occurs, it is validated by nodes and miners (computers) that utilize complex algorithms to ensure its authenticity and add it to the blockchain (public ledger). Once incorporated the transaction becomes visible to all users of the network, providing transparency and security [2]. Transactions can be freely seen online on websites such as Blockchain.com Explorer.

A key feature of Bitcoin is its decentralization. Unlike traditional currencies regulated by central banks some aspects of Bitcoin remain unaffected by governmental control and manipulation. The inability of governments to print BTC makes it resistant to inflation, capital controls, and other interventions that impact fiat currencies like the Dollar, Yen or Euro [3].

Additionally, Bitcoin enables nearly instant global value transfers without intermediaries such as banks or payment processors. This leads to faster and more cost effective transactions and is particularly beneficial for cross border payments which can be slow and subject to high fees through traditional methods [4].

While often referred to as a digital currency it is important to note that Bitcoin lacks physical backing like gold or silver. Critics argue this lack of intrinsic value renders it questionable; however, Bitcoin supporters counter this argument by pointing out that traditional fiat currencies also have no physical assets backing them and have an unlimited supply. In contrast Bitcoin has a finite supply of 21 million units. Supporters further assert that currency value is determined by factors such as supply and demand, inflation rates, economic stability and the health of global economies – much like how the value of Bitcoin fluctuates.

 

Bitcoin Transactions

Bitcoin transactions are carried out using public and private keys consisting of strings of numbers and letters. A public key, also known as a “Bitcoin address” functions as an identifier for the recipients’ address. Private keys on the other hand serve the purpose of signing and authorizing transactions. Public keys can be compared to an email address or a bank account number in terms of their usage – they are shared when you want someone to send you Bitcoin. In contrast private keys can be likened to a password, which should be kept confidential at all times. Disclosing your private key is equivalent to granting someone complete access to your Bitcoin and permitting them to utilize it as they wish.

The verification of these transactions is conducted by nodes (computers that validate and relay transactions) in the Bitcoin network. These nodes employ complex algorithms to validate and add the transaction details into the blockchain [6] which acts as a public ledger. The blockchain enables anyone who has knowledge of your public key or Bitcoin address to monitor all your transactions. You can do this yourself by utilizing free online tools such as the Blockchain.com Explorer. Tracking these transactions becomes effortless.

Bitcoin transactions offer a high degree of security due to their utilization of cryptography, which renders them nearly impossible to counterfeit. Furthermore, the decentralized nature of the Bitcoin network acts as a deterrent for hackers and other malicious entities attempting manipulation [7].

While Bitcoin transactions are not entirely anonymous; the name of the sender and receiver are not recorded on the blockchain – it is quite feasible to trace the flow of Bitcoin through its network. Some people have concerns that this pseudo-anonymity may lead to Bitcoin being used for illegal activities such as money laundering and illicit purchases [8]. Nevertheless, many proponents argue that traditional fiat currencies like the US dollar are often employed for money laundering purposes and illegal activities on a much larger scale compared to Bitcoins’ involvement. The numerous financial institutions subjected to penalties attributed to money laundering reinforce this argument in its entirety. According to Chainalysis the illicit share of all cryptocurrencies combined cryptocurrency transactions including Bitcoin was 0.15% in 2021 [8].

 

 

 

What is Bitcoin Mining?

Bitcoin mining is the process of adding new transactions to the Bitcoin blockchain. This involves using powerful computers to solve complex mathematical problems. Miners (computers that solve the mathematical problems to add new blocks to the blockchain and mint new BTC) compete with each other to solve these problems and the first miner to successfully solve it is rewarded with new Bitcoins or parts thereof known as Satoshis [1]. The process is known as proof-of-work.

Bitcoin mining is a crucial part of the Bitcoin network because it ensures that the blockchain remains secure and intact. However, mining also consumes a significant amount of energy due to the intense computing power required. As Bitcoin becomes more popular concerns about its environmental impact have arisen [9]. Nevertheless, supporters of Bitcoin ponder whether this is a fair argument given the usage of energy by traditional banks and financial institutions worldwide. This includes not only the power needed for their office buildings but also for daily employee commutes. Additionally, many cryptocurrency investors are actively working towards mitigating the environmental impact associated with cryptocurrencies.

 

 

Bitcoin as a Store of Value

Bitcoin, similar to gold, has gained acceptance as a secure store of value. This popularity can be attributed to the fact that there will only ever be 21 million Bitcoins in existence, making it a scarce asset. This scarcity has positioned BTC as a potential hedge against inflation and a safe haven for investors [10].

How does Bitcoin make money? The value of Bitcoin fluctuates in a similar way to stocks and shares. And International transfers are most likely much cheaper and faster than trying to send an International remittance through a bank. However, it is important to note that Bitcoin’s value can fluctuate greatly, which may introduce risk for some individuals considering investing in it. Additionally, critics highlight the lack of regulation imposed by any government or financial institution on Bitcoin as a risk factor. Despite this concern, several Cryptocurrency Exchanges including Coinbase and Binance have obtained financial licenses and adhere to government financial regulations like KYC (Know Your Customer) and AML (Anti-Money Laundering). Moreover, proponents of decentralized cryptocurrencies argue that investment safety and government regulation are not necessarily correlated. They support this perspective by citing instances when regulated financial institutions like Enron, Madoff Investment Securities LLC, and Bear Stearns failed to ensure investor protection.

 

How Bitcoin Works

Bitcoin represents one type of cryptocurrency known as digital currency. It operates on a decentralized network known as a blockchain [1].

To truly comprehend how Bitcoin functions on a fundamental level, it is necessary to acquire an understanding of what lies behind blockchains.

At its core essence, functionally speaking, a blockchain is a decentralized database that stores highly critical information such as transaction data and the like. The data is stored on an interconnected network of computers in such a way that it cannot be modified, tampered with or falsified. This specific security feature lays the foundation for blockchain’s elevated status as a transparent secure ledger [6].

Bitcoin transactions are recorded on the blockchain after undergoing strenuous verification protocols enacted upon by miners. Miners rely on complex mathematical problems being decoded via their exceptional computing power [6].

Once a transaction has been verified by a miner it is added to the blockchain and becomes part of the permanent ledger. In other words; it is permanently recorded on the blockchain and becomes part of the transparent public ledger available to all. Bitcoin transactions are pseudonymous; the identity of the sender and receiver is hidden behind a public address consisting of 26-35 characters. This helps to protect the privacy of users unless the identity of the user and the address can be matched [6].

A noticeable distinction when comparing Bitcoin against all other traditional forms of currency is its strictly limited supply: 21 million Bitcoins. There will only ever be 21 million BTC. A limit that is hard-coded into the software. This helps to prevent inflation and ensures that Bitcoin will remain a scarce asset [1]. Bitcoin offers a decentralized and secure way to transfer value without the need for third party intermediaries like banks or payment processing companies. While Bitcoin has a long road ahead, it has the potential to revolutionize money and finance.

 

 

Is Bitcoin Safe?

Bitcoin has been a controversial topic in recent years in part due to concerns about its safety, security and volatility – many wonder about the future of Bitcoin. There is a kindle of hope that it may bring forth a transfer of power and wealth that is fairer than what exists today. Some experts consider Bitcoin to be safe, while others claim that it poses significant risks to users. So, is Bitcoin safe?

One key aspect of Bitcoin is its utilization of a decentralized blockchain network for transaction processing. This decentralization is often cited as a reason behind Bitcoins perceived security. It is generally believed that the decentralized nature of the Bitcoin blockchain makes it challenging for attackers to manipulate the system or compromise user data. Cryptographic techniques employed to secure transactions further enhance network security. However, there are still risks associated with Bitcoin. Among concerns is the potential for hacking and theft. Users who fail to take adequate security measures like utilizing secure wallets for storage are especially vulnerable to theft. Other concerns include the same issues you would have with holding physical gold. In addition there is always the possibility of losing your private key and therefore your BTC. Or if you decided to leave your Bitcoin on a cryptocurrency exchange or with a bank there is always the possibility of insolvency.

Some believe that there is a lack of regulation governing Bitcoin transactions and that without centralized oversight protecting users from fraudulent or criminal activities becomes challenging. Some give the impression that there is a regulatory vacuum that poses significant threats to both the security and stability of the Bitcoin network. However, cryptocurrency advocates would counter argue, by pointing out that government regulation does not necessarily guarantee investment safety. They refer to historical cases where regulated financial institutions like Enron, Bear Stearns, Silicon Valley Bank, Silvergate Bank and Bernard L. Madoff Investment Securities LLC run by Bernie Madoff (a former NASDAQ chairman) turned out to be fraud schemes that cost investors billions of dollars.

So is BTC safe? Although Bitcoin provides security benefits as a result of its decentralized nature and utilization of cryptographic techniques it is important to acknowledge the accompanying risks. In order to mitigate these risks, individuals who use Bitcoin must adopt appropriate security measures to safeguard their Bitcoins or Satoshis from theft. This can be achieved by securely storing them in a reliable wallet, such as a hard wallet.

 

References:

[1] Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. [Online]. Available: https://bitcoin.org/bitcoin.pdf

[2] Swan, M. (2015). Blockchain: Blueprint for a New Economy. Sebastopol, CA: O’Reilly Media.

[3] Yermack, D. (2013). Is Bitcoin a Real Currency? An Economic Appraisal. National Bureau of Economic Research. [Online]. Available: https://www.nber.org/system/files/working_papers/w19747/w19747.pdf

[4] Tapscott, D., & Tapscott, A. (2016). Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World. New York, NY: Penguin Random House.

[5] Antonopoulos, A. M. (2014). Mastering Bitcoin: Unlocking Digital Cryptocurrencies. Sebastopol, CA: O’Reilly Media.

[6] Narayanan, A., Bonneau, J., Felten, E., Miller, A., & Goldfeder, S. (2016). Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction. Princeton, NJ: Princeton University Press.

[7] Casey, M. J. (2018). The Truth Machine: The Blockchain and the Future of Everything. New York, NY: St. Martin’s Press.

[8] Chainalysis Team, “Crypto Crime Trends for 2022: Illicit Transaction Activity Reaches All-Time High in Value, All-Time Low in Share of All Cryptocurrency Activity – Chainalysis,” Chainalysis Blog, 2022. [Online]. Available: https://blog.chainalysis.com/reports/2022-crypto-crime-report-introduction/

[9] Krause, M. J., & Tolaymat, T. (2018). The Energy and Environmental Implications of Blockchain Technology. Nature Sustainability, 1(9), 469-476. [Online]. Available: https://www.nature.com/articles/s41893-018-0152-7

[10] Grinberg, R. (2012). Bitcoin: An Innovative Alternative Digital Currency. Hastings Science & Technology Law Journal, 4(1), 160-181. [Online]. Available: https://repository.uclawsf.edu/hastings_science_technology_law_journal/vol4/iss1/3/