25.10.2021

What Is Bitcoin in Simple Terms: From Theory To Practice

That’s why this article is a real gem. We processed tons of information in order to present it to you in a short and simple manner. Stephen Hawking succeeded in a similar endeavor. He wrote a book about the origin and structure of the Universe without mathematical formulas titled A Brief History of Time.

We will try to reproduce his success. Not in physics, but in modern finance, or better yet, in the finance of the future.

Throughout the article, we are going to share links to the articles from the blog, Wikipedia, and lots of other resources. Feel free to dive deep in various aspects of cryptocurrencies that interest you. Some might argue that we oversimplified some things in the article.

Bitcoin: the First and the Most Popular Cryptocurrency

There are thousands of cryptocurrencies in the world. The first cryptocurrency ever created is Bitcoin or BTC. For the sake of simplicity, we are going to talk mainly about Bitcoin.

All other cryptocurrencies are Bitcoin clones. They were fully or partially copied and sprinkled with new ideas here and there. It’s no secret that Bitcoin is open-source. Anyone in the world can see how it’s built and how it operates.

If you don’t know anything about programming, don’t worry. It’s worth pointing out that we must accept the work of Bitcoin code creators in good faith. Should we worry about it? Not at all. You don’t know the purpose of every little screw in your car or how its computer works. It’s the same here.

Programmers all around the world would be happy to find even a tiny fault in the Bitcoin network operation. So rest assured, if there was a fault, they would have already found it. We simply put our trust in experts that built our car and tested it. Same with Bitcoin. Millions of programmers in the world read and examine the Bitcoin code every day.

What Is Cryptocurrency and Who Controls It? Are Physical Bitcoins Real?
Bitcoin: Digital Currency

Based on the name “cryptocurrency”, you clearly understand that it’s some sort of money. Crypto means that this money is encrypted. What exactly is encrypted and how is irrelevant at this point. Let’s assume that cryptocurrency is digital money.

What does digital mean? Traditional money can be printed (in the form of banknotes) or digital (on bank accounts). When you transfer money from your account to your friend’s account, pay for utilities via online banking, or pay with a credit card in a shop, you don’t actually see your money. It is stored virtually on computer servers. You can’t either see or touch it.

You can use an ATM to withdraw cash from your credit card and put it under the mattress. In this case, your digital, virtual money becomes real. You can touch it, look at it, or hang it on the wall. You can’t do that with Bitcoins. You can’t go to the bank, withdraw Bitcoins in cash, and put them under the mattress in the form of physical BTC coins. Of course, you can exchange Bitcoins for dollars and bring them home. At this point though, they are dollars, not Bitcoins.

How crucial is it? We think not at all. Even most of our grandparents have been receiving pensions on bank accounts. They don’t use cash much.

How Many Bitcoins and Dollars Exist?

According to the Federal Reserve System, $6.1 trillion worth of cash was printed. Plus, virtual, digital dollars are stored on bank accounts. How many? Nobody knows. The same goes for the euro, pound, and any other traditional currency. We don’t know and can’t control its quantity today, tomorrow, or in a year. We can neither control nor predict the issuing of dollars. The government of any country can print banknotes at any time.

Things are much more straightforward with Bitcoins. As of now, there are almost 19 million Bitcoins (BTC) in the world. About 900 new BTC are created every day, but the daily amount of new Bitcoins is decreasing with time. In total, there will be 21 million Bitcoins in the world. The precise amount is 20,999,999.9769 BTC. That’s it. No more, no less.

If the Federal Reserve decides to print 100 million dollars, they just print them. They are not going to ask you or us. It doesn’t work this way with Bitcoins. Their amount is limited to 21 million coins. You can’t “print” a few more BTC at a later time. It’s simply impossible.

Who Controls Currencies?

Traditional currencies are controlled by central banks of respective countries. The US Federal Reserve System controls the dollar, the European Central Bank controls the euro, the People’s Bank of China controls the yuan, and the Central Bank of Russia controls the ruble, etc.

Nobody controls Bitcoin. Bitcoin is an anarchic system. It doesn’t have a boss. The source code prescribes everything that should be happening in the system of this currency. In the next chapter, we are going to see how it works.

How Does Bitcoin Work? Transactions in Traditional Currencies and Bitcoins. What Is Bitcoin Mining Actually Doing?
Dollar Transactions

Transactions in traditional currencies like dollars are controlled by banks. How does it work? Say, you want to send $100 to your grandmother. You have a bank account with the Bank of America, and your grandmother’s is with Chase. You go to the Bank of America app or website on desktop or mobile, enter your grandmother’s account number, the amount you want to transfer, verify with the SMS code if required, and after that, your grandmother receives money to her account.

What’s behind this? You just requested your bank to send $100 to your grandmother. Your bank took $100 from your account and sent them to your grandmother’s bank. Then her bank added $100 to her account.

Can anyone but you and bank workers find out that you sent money to your grandmother? No, nobody knows and can’t find out. Bank account information is not public, that is, it’s not accessible to everyone.

You can’t even track the transaction. Did it go through? Will it go through in 20 minutes or in 24 hours? Your grandmother might say, “I didn’t receive the money.” Your bank would say, “Money is on its way. Please wait.” The system is not transparent.

Bitcoin Transactions

All Bitcoin wallets are interconnected. They communicate with each other all the time sharing information about all cryptocurrency transactions. Here’s an example.

You have 1 BTC, and you want to send 0.1 BTC to your grandmother. Like with traditional money, you have your grandmother’s account number (wallet address). Up until this point, everything is the same with the only difference being that the Bitcoin account number contains more letters and has more symbols overall. A typical US bank account number looks like this: 408178100999, the rest of the World uses IBAN accounts: FR7630006040011234567800289, whereas a typical Bitcoin wallet address looks like this: 32qoXh82StQpvgCwhQdKpxoLTrcAX5EqyG.

You go to the app with your Bitcoin wallet on your desktop or mobile, enter your grandmother’s address, the amount you want to transfer, and confirm. You wait for about 10 minutes, after which the cryptocurrency is transferred from your account to your grandmother’s.

What’s behind this? Your wallet transmitted the information about the transaction to all other wallets. However, simply transmitting the information is not enough. Somebody should execute (validate) this transaction. In the case of traditional money, banks do it. In the case of Bitcoin, a computer or a group of computers do it. The computer gets a reward for the transaction.

However, it’s not easy to become such a computer. It must solve a complicated math problem that changes every 10 minutes in a highly competitive environment. This process is called mining, and we are going to discuss it in the next chapter.

All the data in the Bitcoin system is open to any person. All information about transactions is public. However, this information is anonymous. For example, 0.0138 BTC was transferred from wallet bc1q3hq0rrkzvw48fgs3c9ceyxvjwe9zn5z0y7pkgc to wallet 14o9CArVto8yPfo5W4bMSM7spmEK9E1q3Z on September 21, 2021, at 12:46 am. Any person in the world can verify it. You won’t hear, “I didn’t receive money,” from your grandmother, or, “Today we are closed. Please expect the money tomorrow,” from the bank. You will see for yourself that your money is transferred to your grandmother and is now in her wallet. You can show it to other family members. Everyone can see your transaction details and your grandmother’s balance.

What Is Blockchain

Apart from “Bitcoin” and “Cryptocurrency”, you probably also heard about two other important concepts: “Blockchain” and “Mining”. They are interconnected and serve as a foundation for cryptocurrencies.

We already mentioned that information about all transactions in the Bitcoin system is available to all people. This information is stored on the blockchain. Blockchain literally means the chain of blocks. There is nothing complicated about this term. Blockchain is like a ledger where pages are numbered sequentially, each page contains the data of creation and a list of transactions performed at this moment of time. One page is called a block.

An example of a page in the ledger (block).
  • Page number: 456701
  • Time: November 3, 2017, 8:08 am
  • Address 1CKXsyrhF9zfzizZb1x9zwkHczjxNRc6by transferred 0.065 BTC to address 15pRb5SZDLWNVuQx3PqcueYarHy3u83LdA.
  • Address 1NuUvBpCSHCa2Ltsj4KEVF1wb1kK6xyZQz transferred 4 BTC to address 17G52MMSn9tadonQKbo2Ch6oB7PygUc6c7.

And so on.

For the sake of simplicity, let’s say that Jack sent 0.065 BTC to Mary, and Kate sent 4 BTC to Peter. By the way, this data is real. You can find it in the Bitcoin network by following the link.

Similar ledgers have existed since the times of Ancient Rome. However, one thing distinguishes blockchain. As soon as you close one page and open the new one, you can’t make any changes to previous pages. Ever. That’s why it’s called a chain. Such a ledger doesn’t let you paste a page somewhere in the middle. It’s impossible.

Let’s create a ledger, that is, a blockchain, together. We have a notebook with an endless number of pages and start filling out the first page. All wallets in the Bitcoin network communicate with each other. We receive new data.

  • Gary transferred 2 BTC to Stephen.
  • Mike transferred 3 BTC to Jane.
  • Nick transferred 4 BTC to Daniel.

And so on. Of course, we don’t see names like Gary or Stephen. We see anonymous addresses like 15pRb5SZDLWNVuQx3PqcueYarHy3u83LdA.

We record all the data on the first page of the notebook. We keep receiving more information about transactions. We keep recording.

  • Mary transferred 1 BTC to Sue.
  • Larry transferred 3 BTC to Mike.
  • Stacey transferred 5 BTC to John.

We keep recording. Until we turn the page, all these transactions are void. How to turn the page? Only cryptocurrency miners can do it. If we are not miners, there is no way for us to do it. We ask a miner for help, and he turns the page. He also puts time and his name on it. Miners get rewards for their work, which is also recorded on the page before turning and sealing it.

Then we fill the second page with new transactions. To turn it, we ask a miner again. There is no way around it. This process is endless.

Blockchain is open to all people at all times. You can open any page of the so-called ledger and see who made a transfer, to whom, when, and how much. You can also see the balance of any wallet in Bitcoin. You won’t see a name like Mary or Peter. You will only see addresses, but all the information is public. If you want to see it for yourself, you can go to blockchain.com.

Easy, right? Now that we know how blockchain works, let’s talk about mining. We are sure that now you too want to become an important person that everyone needs to close a new block on the blockchain (i.e., to turn the page in a ledger called Bitcoin). Plus, they say you get paid well for it.

What Is Mining

Bitcoin mining is the process of solving a math problem using computing equipment. The problem is the same for all the computers in the world. A miner that solved the problem turns the page in Bitcoin’s “ledger”, that is, he creates a new block on the blockchain. By doing so, he validates all the transactions recorded since the closure of the previous block. Once the problem is solved, another problem appears. The whole world starts working on it. It’s important to be the first to solve the problem, otherwise, you don’t get the reward.

Too hard? Let’s try again.

  1. All the computing equipment engaged in Bitcoin mining is solving the same problem.
  2. Users record all transactions on an open page of the “ledger” called Bitcoin blockchain: Gary transferred 2 BTC to John, Larry transferred 3 BTC to Rachel. However, these transactions are void. They are simply piling up for now.
  3. Then a miner solves the problem.
    • All recorded transactions are validated.
    • The miner gets a reward.
    • The miner puts his name (his wallet address) into the block solved just now.
  4. The whole world, including the lucky miner, starts looking for the solution to the new problem for the next page of the “ledger” (block).

How often do problems change? Bitcoin source code is written in such a way that it takes about 10 minutes to solve a problem. It is enabled through a simple algorithm. The more miners are working on the problem, the more difficult it is. And vice versa: less miners would be solving an easier problem.

Bitcoin and Other Cryptocurrencies Use Cases

Unlike traditional currencies, cryptocurrencies are anonymous but completely transparent. Ironic but true. It means that you can find any Bitcoin transaction at any point of Bitcoin’s existence. Senders and recipients are identified with wallet addresses instead of names, like the gibberish we already mentioned above: 1CKXsyrhF9zfzizZb1x9zwkHczjxNRc6by.

On the one hand, it guarantees full anonymity. On the other hand, if you match a real person with his Bitcoin address, you can see all his transactions: how much he transferred and to which addresses. The number of Bitcoin wallets a person can have is endless, but it’s not always possible to remain completely anonymous.

One important thing that distinguishes Bitcoin from the dollar or euro is that nobody regulates or safeguards Bitcoin in any way. Here is a simple example.

If you transfer $100 to a stranger instead of your grandmother, what would you do? You would contact your bank and file an application. It is almost certain that you will get your money back.

If you transfer 0.1 BTC to a stranger’s address instead of your grandmother’s, it is very likely that you will never get your money back. There is no mechanism that would let you get your money back. You can’t contact the recipient to ask him to give the money back. There is no Bitcoin police. You don’t have any leverage at all.

In this case, cryptocurrencies are like cash. If your cash gets stolen, you won’t be able to get it back. Storing cryptocurrencies is as unsafe as storing cash. The only difference is that banknotes are pieces of paper, and you can only stash a limited number of those. On the contrary, an unlimited number of Bitcoins can be stored on a flash drive, or even in a tiny file on your computer.

Keep in mind the important difference between transactions in cryptocurrencies and traditional currencies. When you transfer Bitcoins and the transaction gets sealed on the blockchain, your money has already left your account and reached the recipient. It can’t be changed. Any person in the world can verify it. When you transfer dollars from one account to another, they may be already gone from the sending account but only reach the recipient in a day or two, or they may get lost due to the negligence of the bank.

Where and How Can You Use Cryptocurrencies?

Cryptocurrencies are mainly used for the following purposes.

  1. Investing. You can buy cryptocurrencies to make a profit from their price increase.
  2. Paying. You can pay for goods and services with cryptocurrency. Sadly, few sellers in the world accept cryptocurrencies at the moment, but there are more and more of them each year. El Salvador adopted Bitcoin as legal tender. You can buy cars and property with Bitcoins. Even PayPal lets the US and UK citizens buy cryptoassets.
  3. Mining. You can earn cryptocurrency by using the computing powers of your equipment. Simply put, you have mining equipment, and you make a profit by making it operate.

You shouldn’t confuse mining with investing. A person can be engaged in both activities, but there is a difference. Mining brings immediate profits, whereas investment brings profits in the long run.

How to Store Bitcoins

Regardless of how you are planning to use Bitcoins, you need a wallet. Choosing the right wallet is important. You are responsible for the safety of your cryptocurrency. Remember that if your cryptocurrency gets stolen or lost, nobody will be able to restore it. Whichever wallet you choose, there is a risk of losing your Bitcoins. Depending on the wallet and type of storage, the risk may be higher or lower.

If you are not planning to store large sums of money or you are only starting out, we recommend one of the multicurrency cryptowallets. They are available on desktop and mobile. For example, Coinomi or Trust. Make sure to secure your passwords and recovery phrases as recommended by wallets’ creators.

Hardware wallets offer a higher level of security. They are special flash drives that you connect to your computer. In the case of such wallets, avoid buying used wallets or wallets from unverified sources. Hardware wallets must be new and bought directly from the manufacturing company.

If you plan to store large sums, you need more secure storage. For example, you may want to buy a separate computer and a few flash drives to store cryptocurrencies.

There are plenty of scammers and hackers. When you use cryptocurrencies, it’s up to you to protect yourself against them. Don’t expect anyone to help you.

How to Pay For, Buy, Sell, and Exchange Bitcoins and Other Cryptocurrencies

There are special cryptocurrency exchanges and platforms that let you buy, sell, and exchange Bitcoins for other cryptocurrencies. Most of them require registration and ID verification. You can still find some exchanges that operate anonymously.

In any case, exchanging one cryptocurrency for another is much easier than exchanging cryptocurrency for dollars. All you need to do is to go to one of the exchanges with multiple exchange options. The most popular exchanges in the world are Coinbase, Gemini, Kraken, and Binance.

Is Cryptocurrency Legal?

The regulations differ depending on the country. Some countries legalized cryptocurrency, others didn’t. In some countries, it’s still not regulated in any way.

Mining

Mining is not as hard as it may seem at first glance. You may have already heard of a “cryptocurrency mining rig”.

Mining Equipment

There are two types of mining equipment:

  1. A special mining device called ASIC (Application-Specific Integrated Circuit). It’s a small metal box with microchips inside and cooling fans on the sides.
  2. A computer graphics card. It’s the same graphics card used for computer gaming. To maximize performance, miners usually build special computers with an open case for better cooling and install not one but multiple graphics cards to one computer.

Bitcoin is mined exclusively on ASICs, while Ethereum is mined on GPUs.

Keep in mind that both ASICs and GPUs consume a lot of power and tend to heat a lot.

Is it Hard to Mine Crypto?

Mining difficulty is extremely high today, so it’s mostly possible through so-called mining pools. Mining pools are servers that connect miners. Miners work together and get a reward. Mining pools distribute the reward fairly and pay out the earned cryptocurrency to each miner.

If you have a desktop gaming computer with a graphics card, you can start mining even today. Go to 2CryptoCalc and check which cryptocurrency is the best for mining on your graphics card. Then follow the instructions of a mining pool. You will need to install a special mining software and a wallet for the cryptocurrency you are going to mine.

If you want to mine Bitcoin, a graphics card won’t do. You can only mine it on specialized ASIC devices. As of now, one of the most advanced devices is the Antminer S19 Pro by Bitmain. It consumes 3.5 kWh and makes as much noise as an airplane. You can’t keep such a device at home.

However, it’s quite easy to set up. You just need to open your ASIC settings to add the mining pool address and your Bitcoin wallet address, connect your device to the Internet, and plug it in.

Putting Theory into Practice

So you think you’ve had enough of theory, and you are ready to start. In this small chapter, we will show you the two most common ways people become part of the cryptocurrency world.

You Decided to Become a Cryptocurrency Investor
    1. You saved $1000 and want to spend it on Bitcoins.
    2. You should install a wallet. For example, Coinomi. You can do it right on your smartphone.
    3. Install the app for iOS/Android.

    1. Choose the cryptocurrencies. For example, Bitcoin.

    1. Make sure to back up your wallet.
    2. Go to the Receive tab. Here you will see your wallet address.

  1. Now buy Bitcoins for $1000 on any of the Crypto Exchanges and send to your wallet address displayed on the Receive tab.

Congrats! You are now a cryptocurrency investor. Now you just have to wait until 1 Bitcoin reaches $1 million.

You Decided to Become a Cryptocurrency Miner

You have a computer you use to play GTA, so why not make full use of it?

    1. The computer has an Nvidia 1080 graphics card. Go to 2CryptoCalc.com and choose your graphics card to see which cryptocurrency is the most profitable for mining.

    1. Turns out, it’s Ethereum.
    2. You should install a wallet. For example, Coinomi. You can do it right on your smartphone.
    3. Install the app for iOS/Android.
    1. Choose the cryptocurrencies. For example, Ethereum.
    1. Make sure to back up your wallet.
    2. Go to the Receive tab. Here you will see your wallet address.
    1. Go to the Ethereum mining pool.
    1. Download the archive for a quick start.
    2. Unpack it. The password is 2miners.
    1. Go to the Nvidia folder and open eth-pool.bat using Notepad.
    1. Replace the wallet address with yours.
    2. Launch eth-pool.bat.

Congrats! You are now a cryptocurrency miner.

We are sure you learned a lot about cryptocurrencies thanks to this article. Feel free to share it with friends.

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