Bitcoin is the gatekeeper to something truly beautiful. It’s going to take a little to get you up to speed, but you’ll get the basics from this Bitcoin 101 article.
I’m eager to fill your brain with the cutting-edge stuff as soon as possible, but lets take it one step at a time.
What is Bitcoin?
Fortunately, it’s pretty simple. But here at the main things that Bitcoin is:
Bitcoin is a currency
Much like any other currency, it’s a unit of account — money. Just it isn’t distributed by the government — like dollars, pounds, or euros are. Bitcoin is the currency of the Bitcoin network.
Bitcoin is code-based
You can’t withdraw a physical representation of Bitcoin from an cash machine. Bitcoin is purely digital. It’s code, software, free to use, contribute to, and download.
It is possible to have an ‘offline wallet’ but it’s still ‘on’ the Bitcoin network. You’re actually just holding the ‘keys’ to the wallet in an offline format.
Bitcoin is a payment network
The Bitcoin network operates via the internet. Anyone can join the network, and anyone can use it.
Bitcoin is cryptographic
Bitcoin uses encryption algorithms to keep itself secure. This is all built into the blockchain, which we’ll learn about later.
Who controls Bitcoin?
There’s no one person ‘controlling’ Bitcoin. Bitcoin is owned by the people who use it. Everything is voted on by the Bitcoin community, and anyone can partake.
Anyone can contribute to the Bitcoin GitHub repository. Where the code is stored and updated. You can submit code changes, but they still go through an approval process, there are procedures in place to ensure nothing bad gets out.
There are a lot of misinformation about Bitcoin. So lets go over the most common safety concerned questions about bitcoin.
Is Bitcoin a scam?
No, Bitcoin is not a scam. However, there are many scams and scammers looking to steal your Bitcoin. Bitcoin is especially valuable for criminals, as it can be transferred without blocking, and wallet owners are anonymous.
Is Bitcoin safe?
Yes, Bitcoin is safe. However, just as real-world money is ‘safe’, you should take still take steps to keep your Bitcoin safe. An awareness of the pros, cons, strengths and benefits of each storage medium is really important.
Bitcoin is blockchain-based, and any tampering with the blockchain will invalidate the entire blockchain. As you’ll discover in Blockchain 101. But there’s a neat bit of technology that makes Bitcoin so special. It keeps Bitcoin’s blockchain safe through the use of a clever ‘consensus algorithm’; we’ll talk more about this later.
Can Bitcoin be hacked?
A lot of people wonder whether or not Bitcoin is secure. “Can’t it be hacked”? And its a good question to ask. I won’t lie to you, but:
Sure, Bitcoin could be hacked. However, it would be incredibly difficult, if not near impossible, to hack Bitcoin. Put it this way: Bitcoin has a market capitalisation of over $1,000,000,000,000, and the code is public. This is surely the most valuable hackable prize known to man, yet, it still runs. Hack-free.
For now, you can rest assured that Bitcoin will not be hacked, and that Bitcoin is secure.
What problems does Bitcoin solve?
Bitcoin saves an incredible number of problems. I’d even go as far as saying it’s “the perfect antidote” to many problems faced around the modern financial system. And, if you partake in the usage of ‘money’ and ‘banks’, you are a part of the modern financial system.
That’s not to say that Bitcoin is perfect, because there are numerous downsides, especially when compared to some of the newer blockchains. We’ll touch on these later. For now …
Let’s look at some of the problems that Bitcoin solves:
- Counterfeiting (people making and using fake money),
- Fiat hyperinflation (your money becoming worthless),
- Coercion (people controlling it against your will),
- Trust (Bitcoin is ‘trustless’, you can see whether a transaction has taken place, with absolute provability).
What’s special about Bitcoin?
Well, I briefly touched on a few things previously — that Bitcoin is the ‘perfect’ antidote to counterfeiting, hyperinflation, and coercion. Well … That might have been somewhat of an overstatement.
But only because there are now many better alternatives in terms of tech.
However, Bitcoin is the one with the notoriety. The one that everyone has heard about. The one that Elon Musk set as his profile picture and accepts as payment for Teslas.
Let’s see where Bitcoin came from.
Where did Bitcoin come from?
It’s not like an alien came down and wrote some code? Right?
Honestly, we’re not even sure. The guy that made it disappeared shortly after making it; I say ‘guy’, it could be a ‘she’, or a ‘gender fluid person’, or, in fact, some other life form. Who knows.
Chances are, Satoshi Nakamoto (the pseudonym for the person that made Bitcoin) was probably a dude — judging by the inequalities in tech and cryptography — so we’ll assume it’s a single male human that made it.
More to the point though, the guy disappeared. Leaving some random cryptographic currency for us to use. And now the worlds going crazy over investing in it? Seems a little bit odd doesn’t it? That we’d flock to something that sounds so profoundly risky.
Well, there’s magic in the technology behind it.
Satoshi and the ‘double spend’ problem
Satoshi hadn’t just made a cryptocurrency; there were plenty of cryptocurrencies that came before it that never took off. No — Bitcoin had managed to use Blockchain (a technology that already existed) to solve the ‘double spend problem’.
Which is, actually, a big problem.
Why the double spend problem is bad
Picture this for a second: You own a ‘magic’ digital-currency company-thing.
Call it “TrueMillerCoin”. And TrueMillerCoin is equal to $1. Great.
You start accepting orders for TrueMillerCoin, selling it to all the happy investors. And, some crafty hacker, figures there is a ‘bug’ in the software.
TrueMillerCoin is a decentralized currency, so everyone has their own ‘ledger’ containing all the times they’ve sent and received their coins.
So, the hacker uses a program that they’ve coded in their bedroom. To add more TrueMillerCoin to their wallet!
Not once, not twice, but over 9000 times. The hacker now has 9000 TrueMillerCoins !?
Better yet — the hacker decides to sell it all! And sends the coins to different customers at a lower price. 1000 coins at a time. And the whole thing is a complete mess because no one knows who’s ‘ledger’ is correct any more as many transactions have taken place since.
The market crashes, you get sued, your wife leaves you, you go to jail, your life is ruined.
Satoshi solved this problem, by making it incredibly difficult to tamper with the data. He a distributed blockchain that used a ‘consensus algorithm’ to maintain multiple sources of truth. So that even if some crafty fellow changed the blockchain it would be invalidated by all the non-hacked blockchains it would be compared against.
Every single person ‘mining’ Bitcoin stores a copy of the Bitcoin blockchain. There are tens of thousands of people mining, therefore, there are many thousands of copies of the blockchain!
How do we know a copy is correct?
This all boils down to the cryptographic hashing. Bear with me, it’s not that complex.
Basically put: a digital signature (made of numbers and letters) is pulled from each ‘block’. This signature is pushed through a mathematical function. The function is easy to execute one way, but it’s very hard to reverse.
For example, it’s easy to calculate
99951124995129 * 1135139581938519 if you have a calculator.
But, it’s very difficult to reverse this calculation to find out the first two numbers.
Well, every single block (that Bitcoin miners store bitcoin transactions in), is hashed, then chained to the next block, which is hashed, then chained to the next block.
And eventually …
We have a cascading effect of ‘compounded hashing’.
And, if you change any part of the blockchain, you will know exactly which block is the bad egg, because every single block thereafter will change!
I know it’s a lot. But honestly, the working conceptualized blockchain is a seriously valuable tool, as you’ll learn in Blockchain 101 next!