What is bitcoin (BTC) and how does it work?

Bitcoin, the first and most popular of cryptocurrencies, has become essential. The digital currency is making waves all over the world, from China to the United States to El Salvador, and is gaining more and more followers. Creation, operation, use, security: we consider your questions.

Since late 2020, one word has been on everyone’s lips: bitcoin. between its extraordinary price increase in 2021, its prohibition in some places, its legalization in othersor knowing it as official currency in El Salvador AND in the Central African Republicbitcoin has been regularly in the news for 3 years.

Although it is more than ever in the light, the field of cryptocurrencies and bitcoin still remains very complicated. Between the math concepts that can seem complex, the English jargon, and a lot of concepts to remember, it’s not easy to get a good idea of ​​what’s really going on. Operation, utility, impact: we answer all your questions.

Bitcoin, the most popular cryptocurrency // Source: Canva

Bitcoin, what is it?

First we need to start with the basics: what is bitcoin? It is a cryptocurrency, meaning a currency that is not created by a centralized entity. Specifically, no government or central bank oversees the creation of bitcoins, unlike what happens with classic fiat currencies. The Euro is controlled by the European Central Bank, the dollar is issued by the US Federal Reserve, etc.

It is important to note at the outset of this article that it is very easy to confuse the definitions of bitcoin and cryptocurrency. These are really two separate concepts: bitcoin is a cryptocurrency, but not all cryptocurrencies are bitcoin.

To give a basic definition, bitcoin is an autonomous digital currency, which is created at regular intervals by an algorithm and is based on a system known as blockchain, or chain of blocks in French. There are no banknotes or bitcoin coins: everything is done online.

The previous terms are complicated at first glance, but we will explain them all during this article — and to better understand the workings and the idea behind the creation of bitcoin, it is better to go back to what motivated the genesis of his.

Who created bitcoin?

The creator of bitcoin is Satoshi Nakamoto. A great mystery rests on this personwhose true identity has never been confirmed and who hasn’t given a sign of life since the bitcoin blockchain hit the internet in January 2009.

However, this is not a question of returning to the various theories related to his identity, but to return to his ambitions. Satoshi Nakamoto wanted to create a currency that would only answer to any government authority or any banking institution. He wanted to achieve the implementation of a completely independent currency.

But how to achieve this goal without a third person to adjust the value of the currency? How do we ensure that it is not misused? A safety net had to be put in place. The solution found by Satoshi Nakamoto is the implementation of a blockchain.

What is a blockchain?

You might be wondering what the definition of blockchain has to do with a letter that is supposed to define bitcoin: you’re absolutely right. However, it is necessary to understand how a blockchain works before moving on to the explanatory part of bitcoin: the blockchain is indeed a central element in its development – and in the development of all cryptocurrencies. It is, in a sense, the machine in which digital currencies exist and from which they are inseparable. To take one example, the blockchain is to bitcoin as a console is to video games.

Bitcoin is based on a blockchain // Source: Canva
Bitcoin is based on a blockchain // Source: Canva

More specifically, a blockchain is a database that contains a history of all transactions that have occurred in it. Therefore, the bitcoin blockchain keeps, since 2009, a trace of all the exchanges that took place there. The chain is ownerless: it is shared simultaneously with all of its users, who are all owners, which also means that it doesn’t have just one storage location. Users who host the blockchain on their computer (the so-called of joints bitcoin) are what allow blockchain decentralization.

The chain is transparent, meaning it can be consulted by everyone, it is secure, immutable and decentralized, meaning it is somehow self-managed thanks to the users of this chain. This is made possible by its architecture: transaction information is stored in blocks of data, which are added to the chain as you go (hence its name).

For a new block to be added, it must first be validated by users using a specific protocol, called the consensus protocol, which uses cryptography technology to ensure his inviolability. This is a very important step, which is called mining. Once a new block is added to the chain, it is visible to everyone joints bitcoin – which ensures its integrity.

How is bitcoin produced or mined?

Mining, let’s talk about it. The term refers to the act of creating a new block, and therefore, new units of cryptocurrency – in our case, bitcoin.

This is the validation process for transactions made on a blockchain, in our case, that of bitcoin. We don’t validate each transaction individually, but block by block, as we just saw. To validate a new block, Internet users are put in competition with each other: the first to succeed in answering a cryptographic equation (therefore, extremely complex) will win the right to approve the new block of transactions. This process is called the “consensus protocol”.and ensures that all joints of bitcoin have the same version.

Bitcoin mining requires a lot of computing power // Source: Canva
Bitcoin mining requires a lot of computing power // Source: Canva

Once the new block is added, the miner who validated it is rewarded for their work: they receive new bitcoin units. This is what ensures that no one can create bitcoin properly, which would distort its usefulness as a currency.

Thanks to the blockchain’s operating protocol, we have a database that makes it possible to keep accounts, secure transactions, and reward the people who maintain it with money. It is an autonomous and decentralized system, and that is what has made bitcoin so successful over the years.

How does bitcoin work?

To summarize: bitcoin runs on a blockchain, like all other cryptocurrencies, and is produced through an operation called mining. These are the basics you need to know about bitcoin. Once a bitcoin is produced, it works the same way as other currencies: it can be used to pay for a good or a service.

How is the value of bitcoin determined?

Like everything, the value of bitcoin is determined by 2 main factors: its rarity and utility (even if we can add a certain amount of speculation as of 2020).

As we have seen, not everyone produces their own bitcoins, as we cannot print new banknotes ourselves to get rich. This provides some stability for bitcoin. Furthermore, from the beginning, Satoshi Nakamoto planned that only 21 million bitcoins would ever be created. This adds a rarity to bitcoin that makes it a precious commodity, like gold or oil: the rarer something is, the more expensive it is.

Since the beginning of 2022, the price of bitcoin has fallen significantly // Source: Canva
Since the beginning of 2022, the price of bitcoin has fallen significantly // Source: Canva

In addition we must add its usefulness: initially, bitcoin was not used much as a currency. Few merchants accepted to be paid in cryptocurrency and there was not a large market for it online. Over time and as bitcoin’s popularity grew, more and more people began to accept the cryptocurrency as a form of payment, mechanically increasing its utility and value.

Finally, in recent years, bitcoin has increasingly become part of a stock market logic: an entire trading market has been created around the cryptocurrency, which helps to change prices. The more demand there is for bitcoins, the more they are worth – this is the phenomenon we have seen at work when the value record was broken in October 2021. The opposite is also true: when the price falls, everyone wants to sell before the product completely loses its value, causing the value to fall – which is known as bear market.

How to pay with bitcoin?

Since it is a completely digital currency, it is not possible to pay exactly as you are used to: there are no coins, not even a credit card (yet) for paying in bitcoins. Therefore, paying in bitcoin requires internet access.

However there are some similarities: first, you will need a crypto wallet (often called wallet in the middle). Finally, you will need the address you want to transfer your bitcoins to.

For further

Genesis has filed for bankruptcy // Source: Nino Barbey for Numerama

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