What is Bitcoin

Do you want to know what Bitcoin is?

Well, you see, it's digital money. But not simple, like our regular bills or coins. There's no central bank here to keep everything under control. Instead, the management of this monetary world is in the hands of thousands of computers scattered around the globe. Anyone who's willing can join this ecosystem by simply downloading certain open-source software.

Bitcoin first appeared in 2008 (and was launched in 2009). It allows users to send and receive digital money (also known as BTC). But the most interesting thing about it is that it cannot be censored, it cannot be spent twice, and transactions can be made anytime, anywhere.

Why do people use Bitcoin?

Well, firstly, it's inclusive, meaning that anyone with internet access can send and receive these coins. It's like cash: nobody can interfere with your affairs, so you can freely exchange money worldwide.

And Bitcoin is valuable because it's decentralized, censorship-resistant, secure, and borderless. That's why it's often used for international transfers and payments if you don't want to disclose your personal information (like when using a debit or credit card).

Many prefer not to spend their bitcoins but to hold onto them (this is called hodling). Bitcoin even earned the nickname "digital gold" because of the limited number of available coins. Some see it as an excellent way to preserve money, similar to gold or silver.

And here's how it works: when Anna sends a transaction to Vladimir, it's not at all like sending a dollar bill. It's more like making a note on a piece of paper (and this note is available to everyone). Each participant in the network has a copy of such a "note," stored on their devices, and they constantly exchange information to stay informed of all changes.

And this "note" is the blockchain. It's a kind of database, and when data is recorded in it, it's almost impossible to change or delete. Each new block refers to the previous block, ensuring the security and reliability of the system.

Let's dive into whether Bitcoin is legal or not.

In most countries around the world, yes, it's perfectly legal. But there are exceptions, so it's worth understanding the legislation in your country before getting involved.

In countries where laws have been established, governmental bodies apply various regulatory approaches to Bitcoin, including taxation and usage rules. However, this area is not fully developed yet and is likely to change in the coming years.

Now, who created Bitcoin?

That's a mystery! The person behind this cryptocurrency goes by the pseudonym Satoshi Nakamoto, but nobody knows anything about them. Satoshi could be one person or a group of developers from anywhere in the world. His name is Japanese, but his English proficiency suggests he might be from an English-speaking country. Satoshi initially published the Bitcoin whitepaper and software but then disappeared in 2010.

Is Satoshi the inventor of blockchain technology? When Bitcoin emerged, it had already combined several existing technologies. The concept of a blockchain didn't originate with Bitcoin. You can trace its history back to the early '90s when Stuart Haber and W. Scott Stornetta proposed a system of timestamps for digital documents. These guys used cryptography to secure data and prevent information tampering. Satoshi's whitepaper doesn't include the term "blockchain."

What was there before Bitcoin?

Well, it wasn't the first of its kind, but it became the most successful attempt to implement digital money. Previous projects like DigiCash, B-money, and Bit Gold were the first steps in this direction, but unfortunately, they didn't reach completion.

How are new coins created in the Bitcoin system? Bitcoin has a limited supply, and all new coins are created through a process called mining. It's a specialized mechanism that allows adding data to the blockchain, the underlying technology of Bitcoin.

How many bitcoins have been mined so far? According to the Bitcoin protocol, the maximum number of bitcoins is capped at 21 million. Currently, just under 90% of this amount has been mined. However, mining the remaining bitcoins will take over a hundred years. This is due to a periodic event called halving, which gradually reduces the mining reward.

How does Bitcoin mining work? Mining allows network participants to add new blocks to the blockchain. They use the computational power of their computers to solve complex cryptographic puzzles. Once a miner finds the correct solution, a block containing transactions is added to the blockchain, and the miner receives a reward in the form of new bitcoins and transaction fees.

How long does it take to mine one block?

The Bitcoin protocol adjusts the mining difficulty so that a new block is created roughly every ten minutes. However, the actual time can vary, and this setting serves as a guideline for all network participants.

Here are some options for what you can purchase using Bitcoin:

1. Travel: TravelbyBit offers the ability to book flights and hotels using Bitcoin, allowing you to save on credit card fees.

2. Shopping for goods: The Spendabit service helps find products that can be purchased using Bitcoin, allowing you to choose from a list of sellers accepting cryptocurrency.

3. Crypto-friendly places: Coinmap provides information on places accepting cryptocurrency payments, as well as cryptocurrency ATMs.

4. Gift cards and services: The Bitrefill service allows you to purchase gift cards for various services and even top up mobile phones using Bitcoin and other cryptocurrencies.

Regarding the question of losing bitcoins, it's important to remember that cryptocurrencies are stored in digital wallets, and access to them is provided by private keys. If the private key is lost, access to the funds becomes impossible. Therefore, it's important to keep your private keys in a safe place.

Once a Bitcoin transaction is completed, it cannot be reversed. Once the transaction is added to the blockchain and confirmed, it becomes irreversible.

As for earning Bitcoin, this can be done in various ways, such as long-term investments, trading on exchanges, lending, or mining. Each of these methods has its own risks and potential profits. It's important to conduct your own research and understand which approach best suits your goals and risk preferences.

There are several options for storing bitcoins, each with its own advantages and disadvantages:

1. Exchange storage: This is a custodial solution where you trust the exchange to store your coins. It's convenient for trading and accessing lending services, but your coins are controlled by a third party.

2. Bitcoin wallet storage:

   • Hot wallets: Software on your device that requires constant internet connection. They're convenient for everyday operations but may be vulnerable to hacker attacks. An example could be Trust Wallet.

   • Cold wallets: These are cryptocurrency wallets that are not connected to the internet and therefore more protected from hacker attacks. They can be hardware devices, paper wallets, or even wallets on a separate computer that is never connected to the network. While they're more secure, they're less convenient for daily use.

The choice between a hot and cold wallet depends on your preferences and needs. If you need access to your coins for frequent transactions, a hot wallet may be more convenient, but if you prioritize maximum security, then a cold wallet would be the better choice. It's also important to regularly back up your wallet and protect your private keys.

Here's a detailed explanation of some concepts related to Bitcoin:

Bitcoin Halving: This event occurs approximately every four years and involves reducing the mining reward for adding a new block to the blockchain by half. It happens every 210,000 blocks, which equates to roughly four years with an average block time of 10 minutes. Initially, when Bitcoin was created, miners received a reward of 50 BTC for each block. After the first halving in 2012, the reward decreased to 25 BTC, then to 12.5 BTC after the second halving in 2016, and to 6.25 BTC after the third halving in 2020.

The halving process is a crucial characteristic of Bitcoin and one of its key features that Satoshi Nakamoto embedded into the system. It helps ensure a limited supply of Bitcoin, distinguishing it from traditional fiat currencies that have no limits on issuance.

Halving affects miners as they receive fewer bitcoins for their work. This can impact their profitability and ability to continue mining, especially if the price of Bitcoin does not offset the reduction in block rewards. However, halving can also influence the price of Bitcoin by narrowing the supply of new coins in the market. Historically, halvings have often been accompanied by an increase in the price of Bitcoin, although not always immediately at the time of the event, but in the long term.

Additionally, halving incentivizes miners to create more efficient and environmentally friendly mining methods, as reducing the block reward necessitates maximizing profitability.

Bitcoin Anonymity: While Bitcoin transactions are not directly tied to personal identities, all transactions on the Bitcoin network are open and visible in the blockchain. This means that while your identity may remain anonymous, your activity on the Bitcoin network can be tracked and analyzed.

However, there are methods to enhance privacy when using Bitcoin. Technologies such as CoinJoin and the use of anonymous wallets can help obfuscate your network activity. Additionally, developers are working on improving Bitcoin's privacy by introducing new technologies and protocols.

Bitcoin as a Scam or Bubble: Bitcoin is a digital currency with unique characteristics and potential for innovation in the financial sector. However, like any other asset, there is a risk of fraud and speculation. It's important to be cautious and informed when investing, by studying the market and making informed decisions.

Speculative cycles and fluctuations in the price of Bitcoin may raise concerns about its stability and resilience. However, many Bitcoin supporters view it as a promising asset with unique characteristics and long-term growth potential.

Encryption in Bitcoin Blockchain: The Bitcoin blockchain does not use encryption to store transactions. Instead, cryptographic hash functions and digital signatures are used to ensure the security and authenticity of transactions.

Hash functions are used to create a unique identifier (hash) for each block in the blockchain, which depends on the block's content. Any change to the data in a block will result in a change to its hash, which will be immediately noticeable to all network participants.

Digital signatures are used to confirm the authorship and authenticity of a transaction. Each participant in the Bitcoin network has their own pair of keys: a public key used to create a wallet address and a private key used to create a digital signature for the transaction. Only the owner of the private key can create a valid digital signature, and any network participant can verify this signature using the public key.

Thus, the Bitcoin blockchain ensures the integrity and security of transactions without using encryption. However, many cryptocurrency wallets and services use encryption for additional protection of user data, such as private keys and passwords.

What is Scalability?

Scalability is a measure of a system's ability to grow and evolve in response to increasing demand. In the context of cryptocurrencies, scalability refers to the ability of a blockchain network to process a large number of transactions with minimal delays and low fees.

Bitcoin, as a decentralized cryptocurrency, faces scalability issues due to limitations of its network. Currently, Bitcoin can process approximately five transactions per second, which is insufficient to support efficient daily payments for millions of users.

To address the scalability issue, several approaches have been proposed, one of which is the Lightning Network. The Lightning Network is a second-layer protocol for processing transactions off-chain, allowing for instant and virtually fee-free payments between participants. In this network, transactions are processed within special channels between participants, and only the final results are recorded on the blockchain.

What is the Lightning Network?

The Lightning Network promises to increase throughput and reduce transaction fees on the Bitcoin network, making it more attractive for everyday payments. However, further development and expansion of this technology are needed for it to become widely adopted and reliable.

What is a Fork?

In the context of cryptocurrencies, a fork refers to a change in the protocol or software that results in two or more separate versions of the blockchain and cryptocurrency. It can be done for network improvements or due to community disagreement over the project's development direction.

Soft Fork: This is a protocol change that makes new rules compatible with old ones. Old nodes can continue to operate without upgrading but may not be able to validate all new transactions. A soft fork does not lead to the blockchain splitting into two separate chains.

Hard Fork: This is a protocol change that makes new rules incompatible with old ones, resulting in a split of the blockchain into two separate chains. Participants must choose which version of the blockchain they support.

Forks can be caused by various reasons, including protocol changes, community disagreements, or a desire to improve network performance. Each fork has its unique characteristics and consequences, and the choice between them depends on the goals and needs of network participants.

What is a Bitcoin Node?

A Bitcoin node is a program or device that is part of the Bitcoin network and performs specific functions to maintain network operation. Nodes can be of various types and perform different tasks:

Full Nodes: Full nodes are one of the most important components of the Bitcoin network. They download and store a complete copy of the blockchain, which is a record of all transactions ever conducted on the network. Full nodes also validate new transactions and blocks, ensuring they comply with Bitcoin protocol rules. These nodes play a key role in ensuring network security and reliability.

SPV Nodes: Simplified Payment Verification (SPV) nodes do not download the full blockchain but only a part of it - block headers. This reduces resource requirements and bandwidth, making SPV nodes more suitable for use on mobile devices or devices with limited resources.

Mining Nodes: Mining nodes are full nodes that also participate in the process of mining new blocks. They solve complex mathematical problems to create new blocks and add them to the blockchain. Mining nodes have specialized hardware and software for performing this task.

Running a full Bitcoin node requires certain resources, including disk space for storing the entire blockchain, high-speed internet connection, and computational power for processing transactions and blocks. Despite this, running a full node allows users to achieve maximum security and independence when interacting with the Bitcoin network.

How to Mine Bitcoin?

Bitcoin mining is the process of adding new blocks to the Bitcoin blockchain, and in return, miners (also called miners or hashers) receive rewards in the form of new bitcoins. Here are the basic steps for mining Bitcoin:

Selecting Equipment: Initially, Bitcoin mining could be done on regular laptops or computers. However, with the increasing complexity of mining and competition, specialized devices such as Application-Specific Integrated Circuits (ASICs) have been developed to efficiently mine bitcoins.

Installing Software: After selecting the equipment, it is necessary to install mining software for Bitcoin. Setting up mining software may vary depending on the type of equipment used.

Choosing a Mining Pool: Mining pools are groups of miners who combine their resources to increase the chances of successfully creating a new block. Mining in a pool allows miners to receive a portion of the block reward proportional to their contribution.

Starting Mining: After installing the equipment and selecting a mining pool, miners can start the mining process, which involves performing complex calculations to find the correct hash for a new block.

Receiving Rewards: If a miner manages to find the correct hash and create a new block, they receive rewards in the form of new bitcoins, as well as transaction fees for transactions in that block.

Bitcoin mining has become more complex and competitive over time, requiring significant investments in equipment and electricity. Currently, successful Bitcoin mining often requires specialized ASIC devices and access to cheap electricity.

Additionally, besides individual mining in pools, there is also the option of cloud mining, where users rent computing power from a cloud mining provider who manages and maintains mining equipment.