While millions of people double with this currency, not everyone understands what it is and what makes its underlying systems tick. This is not surprising, as Bitcoin and cryptocurrencies, in general, are not exactly simple concepts. And when you throw in terms like ‘blockchain’ and ‘hash function,’ talking about them becomes technobabble you’d probably rather not engage with.

What Is Bitcoin?

Even if you’ve been living under a rock or just willfully avoiding any crypto-related news, there will come the point at which you will have to say, “Ok, I give up; what is this Bitcoin?”

However, Bitcoin is not that hard to wrap your head around once you boil it down to its core concepts. That’s exactly what we’ll do here: We’ll explain how Bitcoin came into being and look into how the blockchain infrastructure it relies on operates.

What Are Cryptocurrencies?

As you probably know, Bitcoin belongs to the cryptocurrency family. While cryptocurrencies often differ in some aspects, they can all be encompassed by the following definition: A digital-only currency that relies on cryptography to prevent tampering and double-spend.

This means that cryptography is used to protect the information flow within a given currency’s network, allowing only the sender and the recipient to decrypt the data. Cryptography is integral to the functioning of cryptocurrencies, as they only exist in electronic form and would otherwise be easily susceptible to tampering. Nearly all cryptocurrencies also rely on blockchain technology to conduct and verify transactions and add new currency units to the market.

Therefore, without cryptography, there would be no way to verify that transfers occurred in a system where no actual money changes hands, prevent anyone from adding fake transaction data to steal crypto, and control the creation of new coins.

Blockchain

The blockchain is a distributed ledger, where thousands of computers (nodes) that participate in the network voluntarily keep their copy of the ledger. Whenever a new transaction occurs on the blockchain, all those nodes verify the transaction by looking at their copy. Then, a sort of virtual voting happens, and if the majority of nodes give the green light, the transaction is completed.

Records in this distributed ledger are called blocks. Since all these blocks form an interconnected chain, the whole system is referred to as the blockchain.

Satoshi’s Vision

Bitcoin came into existence back in 2009. Bitcoin’s founder is the mysterious Satoshi Nakamoto, who laid out his ideas in a whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System and launched the bitcoin.org domain.

Satoshi Nakamoto is a pseudonym, and it remains unclear whether it represents one person or multiple people, whoever the person(s) behind the name laid out the main reasons for creating a cryptocurrency in the whitepaper above.

Satoshi’s central idea was that the current FIAT financial system we use is extremely anti-consumer-oriented. Huge transaction fees, slow speed of transactions, centralized governance, and useless middlemen are all working against the consumers. His solution was Bitcoin, a cryptocurrency that relies on a decentralized, peer-to-peer system called the blockchain.

While all the elements Bitcoin needs to function, like cryptography, digital currencies, and even the blockchain, were discussed before, they were never combined in such a way. Satoshi mined Bitcoin’s genesis block and kicked off the world’s first cryptocurrency.

Bitcoin Mining

Mining refers to the process of generating new Bitcoin. To do so, miners on the network use their computers to solve complex mathematical problems unsolvable by humans. The first miner to solve the puzzle gets rewarded with Bitcoin. The mining process is also used to add new transactions to blocks and generate new Bitcoin in the market.

Mining difficulty adjusts automatically based on how many miners are on the network. The fewer of them there are, the easier it gets to solve mathematical problems. However, as Bitcoin surges in popularity, mining difficulty has been increasing in the last few years. Back in the day, you could mine Bitcoin with your personal computer, but now, you don’t stand a chance without specialized mining rigs – and lots of them.

How to Use Bitcoin?

Since Bitcoin has no physical form, you never “have” Bitcoin in your possession in the usual sense. Instead, you only have records of the transactions you verified, proof that you own a certain amount of Bitcoin.

All Bitcoin transactions occur between crypto wallets. These wallets come in online (software) and offline (hardware) forms and track how much Bitcoin you currently have. Bitcoin wallets can be easily obtained online, either through dedicated wallet services or on cryptocurrency exchanges.

Cryptocurrency exchanges are places for trading various cryptos, including Bitcoin. The majority of all transactions take place on these exchanges, which charge different transaction fees. If you’re looking to get your hands on your first Bitcoin, head over to the crypto exchange, and you’ll be able to buy some with regular currencies, either through debit/credit cards or via various e-wallets (e.g., PayPal).

How to start trading Bitcoin:

  • Register on a crypto exchange site
  • Get a personal crypto wallet or use the one provided by the exchange
  • Buy Bitcoin through an available payment method
  • Use it to buy things online or trade them for other cryptocurrencies

We should add that many people do not use Bitcoin as a payment method at all. Instead, they treat it as an investment, buying or mining Bitcoin only to sell it later at a higher price. Due to BTC’s huge value, this can be an extremely lucrative investment opportunity.

While many people got rich this way, countless more lost huge amounts of money during Bitcoin’s infamous crashes, as the cryptocurrency is still highly volatile.