Bitcoin (BTC)

Bitcoin is the first truly decentralized digital currency created by the mysterious cryptographer Satoshi Nakamoto. Over the years, it has become the largest cryptocurrency and one of the core financial assets.

Easy Explanation For Beginners

Bitcoin is a digital currency similar to traditional ones like the Dollar, Euro, or Yen. You can send Bitcoin to anyone worldwide or use it to buy things just like regular money. It can be stored, spent, or even broken down into tiny units called Satoshis (like cents in a dollar) for smaller transactions.

Uniqueness: What sets Bitcoin apart is that, unlike traditional currencies managed by central banks, it has a fixed supply of 21 million coins. This limit is designed to prevent inflation, which can happen when central banks print more money. Because of its scarcity, Bitcoin is often seen as a “store of value,” similar to digital gold, with the potential to hold or even increase its value over time.

Benefits: Sending Bitcoin is easy, fast, and often much cheaper than traditional cross-border transfers, which can have high fees and long processing times. Bitcoin transactions usually go through in minutes, not days, and don’t require Know Your Customer (KYC) verification—so anyone can use it without sharing personal documents or going through identity checks at a bank. This makes Bitcoin a unique mix of privacy, low-cost transactions, and global accessibility that’s hard to find in traditional finance.

Decentralization: Bitcoin’s decentralized network of computers worldwide, known as the blockchain, ensures security and transparency, so people can trust and use Bitcoin without relying on a central authority like a bank. Even if most them are taken down by some disaster, only a handful of them can ensure that the system works fine.

History of Bitcoin

Whitepaper

Bitcoin was first conceptualized in October 2008 when a mysterious cryptographer named Satoshi Nakamoto released the Bitcoin Whitepaper ( Titled “Bitcoin: A Peer-to-Peer Electronic Cash System,”) which majorly noted the following points.

1. Decentralized, Peer-to-Peer Network
   • Bitcoin allows direct transactions between individuals without needing a trusted third party (like a bank).
2. Double-Spending Solution
   • It uses blockchain technology to solve the double-spending problem, ensuring the same Bitcoin can’t be used in more than one transaction.
3. Proof-of-Work Consensus Mechanism
   • Miners solve cryptographic puzzles to validate and record transactions on the blockchain, securing the network and preventing fraud.
4. Fixed Supply
   • Bitcoin has a hard cap of 21 million coins, limiting inflation and ensuring scarcity.
5. Transaction Transparency and Privacy
   • Transactions are pseudonymous (using addresses instead of personal identities) and are stored in a public ledger, providing transparency without revealing personal information.
6. Irreversible Transactions
   • Once confirmed, transactions are final and cannot be undone, reducing fraud risks seen in traditional payment systems.
7. No Trusted Third Party Needed
   • By eliminating intermediaries, Bitcoin reduces transaction fees, delays, and restrictions, making cross-border payments cheaper and faster.
8. Block and Blockchain Structure
   • Transactions are grouped in blocks, which are linked together to form a blockchain, providing a chronological and immutable record of all transactions.
9. Incentive Structure for Miners
   • Miners are rewarded with Bitcoin for validating transactions, creating a financial incentive to maintain network security and operation.
10. Security and Anti-Tampering Mechanisms
    • The network’s proof-of-work and cryptographic design prevent tampering with past transactions and keep the ledger secure.

Bitcoin Pizza Transaction

The first major publicly known transaction involving Bitcoin was done by programmer Laszlo Hanyecz on May 22, 2010. Laszlo bought 2 Papa John Pizzas with 10,000 Bitcoin, something that could have been worth millions today. However, to his defense Laszlo said that at that time, Bitcoin had no value and obviously he could never have though what it would value a decade late.

The day has since then been celebrated as Bitcoin Pizza Day.

Purpose

My experience an a crypto researcher since 2021 says the purpose of Bitcoin was to create a cryptocurrency free from governments or any kind of centralization. The motivation for this could have been the 2008 Global Financial Crisis, when rampant corruption, greed, and a careless attitude caused a financial crisis that resulted in the loss of livelihoods of millions of people across the globe.

To make matters worse, the government provided bailouts(with tax money) to the companies that lost billions of dollars without holding any corporate body responsible for the collapse.

Bitcoin aimed to create a decentralized, sustainable, and cryptographic solution to this problem of over-centralization.

How Does It Work?

Bitcoin operates on a decentralized network of computers, known as nodes, where specific participants called miners play a crucial role in verifying transactions and maintaining the security of the system.

This network ensures that only legitimate transactions are added to Bitcoin’s public ledger, the blockchain, without needing a central authority or intermediary like a bank.

Bitcoin Blockchain Structure

The Bitcoin blockchain is a publicly accessible ledger that anyone can view, and it records all transactions that occur on the network. It is composed of:

• Blocks: Each block is a collection of valid transactions.
• Transactions: Individual units of value exchange, such as sending Bitcoin from one user to another.
• Nodes (Miners): Special nodes that validate and add blocks to the blockchain by competing to solve cryptographic puzzles.

The Role of Miners

1. Verification and Block Creation:
   • Miners gather transactions from the Bitcoin network, verify their validity, and group them into a block.
   • To add a block to the blockchain, miners must solve a complex cryptographic puzzle based on the SHA-256 algorithm. This involves finding a specific number called the nonce.
2. Proof of Work and Security:
   • The Bitcoin network uses a consensus mechanism called Proof of Work (PoW). Miners must expend significant computational power to find the correct nonce.
   • The first miner to find the correct nonce gets to add their block of transactions to the blockchain, ensuring the integrity and security of the system.
3. Incentive for Miners:
   • As a reward for successfully adding a block to the blockchain, the miner receives a block reward.
   • Currently, after the 2024 halving, this reward is 3.125 Bitcoins per block.
   • Additionally, miners earn transaction fees from users who send Bitcoin as part of their transactions.

Step-by-Step Process of How Bitcoin Works

1. Transaction Broadcast:
   • Users generate and send their Bitcoin transactions to the network, where miners pick them up.
2. Transaction Verification:
   • Miners verify that the transaction inputs are valid, meaning the user has enough Bitcoin to spend and that the transaction isn’t a double-spend.
3. Nonce Calculation:
   • To add the transactions into a new block, miners need to solve the PoW puzzle by calculating a nonce value that, when hashed with the block’s contents using SHA-256, produces a hash that meets the network’s difficulty target.
4. Block Addition:
   • Once a miner solves the puzzle, the new block is added to the blockchain, and all other miners confirm that the solution is valid.
5. Rewards and New Bitcoin Creation:
   • The successful miner receives the block reward (currently 3.125 Bitcoins) and any transaction fees from the block.
6. Propagation and Consensus:
   • The new block is broadcast to all nodes on the network, and they update their copy of the blockchain to reflect the most recent, valid block.

Security and Trust

Bitcoin’s decentralized structure makes it secure and resilient. No single miner or group can control the network, and altering past transactions would require an infeasible amount of computational power. This distributed and cryptographically secure model allows Bitcoin to function without the need for trust in any central authority, making it a reliable and transparent system for digital money transfers globally.

Benefits of Using Bitcoin

In this section, we will focus on using Bitcoin rather than on using it as a capital investment.

Bitcoin is often termed an evolution of traditional fiat money due to its benefits for users.

Fast Transactions

Bitcoin processes 6 to 7 transactions per second, and each transaction takes 10 minutes to finalize after processing. This makes it very useful in cross-border payments.

Compare it with PayPal, which used to take around 2 days for cross-border transfers when I used it for payments.

Cheaper Transaction Costs

A Bitcoin transaction, on average, costs $5 even for international transfers, and this is irrespective of how large the transaction is. In the case of PayPal, it was around 4 to 5%, and users like myself who are not in the US also lost money on forex conversion.

No Centralized Authority

In Bitcoin, if you initiate a valid transaction, it will surely reach the destination unlike in other traditional payment methods where a central authority can stop, freeze and even confiscate your money.

Free From Politics

Unlike SWIFT, Stripe, PayPal, or any other international transfer channel, Bitcoin is not affected by war, politics, or even disasters.

Bitcoin payments worked fine between the US and Russia even when the US imposed sanctions on Russia and confiscated billions of dollars in user funds.

Disadvantages

There are also a few disadvantages to using Bitcoin. However, many of them are being solved with new technologies.

High Transaction Costs on the Bitcoin Network

• Bitcoin transactions have a fixed base cost, which, due to network congestion and limited throughput, averages around $5. This makes it impractical for small, everyday transactions such as buying a coffee.
• As a result, Bitcoin’s use as a frequent payment method is often limited to larger or less time-sensitive transfers.

Limited Transaction Capacity

• The Bitcoin network can process roughly 7 transactions per second (TPS), which is low compared to demand.
• With an estimated 5,000 people attempting to transact per second, the network quickly becomes congested. This congestion leads to increased fees, as users bid higher transaction fees to prioritize their transactions.

Lightning Network as a Solution for Small Transactions

• To address the limitations of Bitcoin’s base layer, an additional layer called the Lightning Network was developed.
• The Lightning Network allows for much faster and cheaper transactions, reducing costs to just a few cents per transaction.
• By moving smaller, frequent transactions off the main Bitcoin blockchain, the Lightning Network enables Bitcoin to be used for micropayments and reduces congestion on the main chain.

Bitcoin vs Gold

Bitcoin has often been compared to Gold as a reserve asset.

Over time, Bitcoin has developed several attributes that were earlier the characteristics of previous commodities like Gold. Bitcoin can be used to preserve capital, used as a currency, and as a consumable, making it a Triple-Point Asset just like Gold.

Buying and Selling

Buying and selling Bitcoins is very easy if you already have some crypto. Even if you do not, you can easily buy it from exchanges or use Peer-to-Peer trading.

Where can you buy and sell Bitcoin?

1. Centralized Exchanges like Binance, OKX, Bybit.
2. On PayPal.
3. Peer-to-Peer Networks
4. Face-to-Face trading on the sidelines of big crypto events like Token2049.

What do you need to buy Bitcoin?

1. Some cash.
2. A crypto exchange or PayPal account with KYC done.
3. A wallet to hold Bitcoins, I prefer Trust wallet (easy to use, secure, multiple platforms).

Transferring

To send Bitcoins to someone, follow these steps:

1. Get their Bitcoin address. There are several types of addresses in Bitcoin like Taproot, Native, Lightning, etc.
2. Select send crypto in your wallet.
3. Copy and paste it into your wallet.
4. Enter how much Bitcoin you wish to send. Be careful of zeros and dots while entering.
5. Click send and sign the transaction.

You have successfully sent Bitcoin.

To receive Bitcoins, you just need to send your wallet address to them.

Bitcoin Mining

We saw earlier how Bitcoin transactions take place. Let’s now examine this from the perspective of miners.

Bitcoin mining refers to the process of validating Bitcoin transactions in exchange for a reward that is given after each successful block. The process helps make the network secure by only allowing valid transactions.