101: What is Bitcoin?

What is bitcoin?

Bitcoin is a digital currency launched in January 2009 by an individual or group of individuals named Satoshi Nakamoto (pseudonym). The creator(s) of bitcoin remains a mystery and assumptions say that it is to support the anonymity that bitcoin offers. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and, unlike government-issued currencies, it is operated by a decentralized authority.

Bitcoin is a cryptocurrency and not a physical possession; all the transactions made are recorded on a distributed ledger. Each transaction is recorded by a hash value of the public key and hence all the transactions can be seen in a public domain. Bitcoin keeps all our details hidden from the distributed ledger, keeping our identity anonymous but the transactions are pseudonymous as they can be tracked down by using the hash of the previous block and the public key.

History of Bitcoin

How does it work?

Bitcoin is a peer-to-peer electronic cash system as per the white paper format by Satoshi Nakamoto. Bitcoin works on the top of a blockchain that stores all the transaction details in a distributed ledger. A ledger can be referred to as a big spreadsheet for better understanding. Each node in the blockchain possesses a copy of this ledger and each transaction is recorded on each copy to maintain consistency in the dataset. This makes bitcoin secure from any manipulation and double-spending attacks.

“The consensus in bitcoin is achieved by Proof of Work.”

Breaking down the statement — Consensus is how new blocks are added to any blockchain. The consensus algorithm ensures that each block added to the blockchain is the one and the only version of the truth that is agreed upon by all the nodes in the Blockchain. Proof of work is a consensus algorithm that can be seen as a race between nodes to solve a complex mathematical equation. Whosoever wins the race gets the right to add the next block in the blockchain and gets an incentive in form of bitcoin. The incentive can be seen as compensation for the electricity that was used to run the node.

Bitcoin is a model that is built on some very clever incentive engineering. The incentive may not always yield profit for the miner. This is due to the dynamic exchange prices of bitcoin and the electricity cost for a geographical area.

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Shortcomings of Bitcoin

Bitcoin was made to be a secure electronic cash system that runs on top of the blockchain. Though the makers overcame the issues of security and double-spending, there are still many drawbacks in Bitcoin blockchain.

Loads of electricity being used up for nothing

All nodes run simultaneously to solve the complex equation in order to mine the coin. One in a hundred nodes wins the race and since most nodes get nothing this is seen as the wastage of electricity. As miners are shifting to renewable energy resources this may issue may resolve in the coming years.

Too few transactions per second

Bitcoin supports only seven transactions per second which is a very small number in comparison to PayPal or VISA. This may restrict people from adopting bitcoin in a full-fledged manner as the transaction would take a lot more time to complete when the traffic would be high. Altcoin Ethereum supports 30 transactions per second which are expected to rise to 100000 transactions per second with Ethereum 2.0.

Regulations requried

The transactions in Bitcoin are recorded in a distributed ledger in form of a hash value. The hash value is said to maintain anonymity in the transaction but that’s not the case. The transactions in bitcoin are pseudonymous which means the transactions can be tracked down to where they came from but we might never know who actually made those transactions. This possess a threat of money laundry and terror funding. Many countries have regulated these transactions and maintain separate records for any high-valued transaction on the blockchain.

Soon after the success of Bitcoin, many crypto-based projects emerged claiming to be a good enough alternative to Bitcoin. These projects work on similar principles as Bitcoin. Altcoins aim to overcome the shortcomings of Bitcoin and can be termed as “better versions of Bitcoin”. Some of the major altcoins are Ethereum, Binance Coin, Tether, Cardano, Polkadot, XRP, Uniswap, THETA, and Litecoin.

How to buy bitcoin?

Bitcoin or BTC can be bought in exchange for fiat currency on any cryptocurrency exchange. The process is simple and doesn’t take much time. This video by Andrei Jikh would be a lot helpful.

The exchange value of Bitcoin is pretty volatile and one may want to acknowledge the risks that are associated with BTC purchase/trading/mining/investing.

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