What is Bitcoin?
Bitcoin is a type of cryptocurrency. Cryptocurrencies are digital currency - they don’t have any bills, and aren’t attached to any other assets, like gold.
How to cryptocurrencies work?
Unlike other currencies, cryptocurrencies are decentralized - instead of having a bank or central institution keep track of transactions, every node in the system keeps track of transactions.
Let’s look at an example:
Say Bob buys a pair of shoes from Nike for $100. With regular currency, Bob gives Nike his credit card number. With this info, the bank updates its ledger, subtracting $100 from Bob’s account and adding $100 to Nike’s account.
In this case, with credit cards, the bank keeps track of every transaction. So, in theory, the bank could alter what they record, since there is no one else to make sure their record is accurate.
If you didn’t trust the bank to do this - track transactions - who would you trust? Well, cryptocurrency uses everyone in its system to track transactions.
With Bitcoin, instead of having the bank keep the ledger, everyone in the system keeps the ledger. Each computer in the system is called a node, and each node keeps its own ledger.
If Bob goes to buy the same pair of shoes with Bitcoin, this transaction is shared with every node in the system, and each node records the transaction on their ledger.
Transactions are stored in blocks, which are stored in a blockchain (as the name suggests, a blockchain is a chain of blocks). Approximately every 10 minutes, a new block is added to the blockchain - connected to the previous blocks.
In a process called mining, all the nodes compete to solve a complex mathematical problem. Whichever node completes this problem first has their block of recent transactions added to the blockchain. This node (run by a person) also receives newly minted in Bitcoin. When the block is added to the chain, it is sent to every other node, so they can verify it. If it doesn’t match the ledgers of the other nodes, it gets rejected. In other words, any block that has its record altered will get rejected by the other blocks in the network.
Is cryptocurrency secure?
Cryptocurrencies maintain security through decentralization and hash codes. As mentioned above, each node in the system keeps a ledger. If the ledger of one node doesn’t match that of the others, it gets rejected. For example, based on the example above, all the nodes should subtract $100 from Bob’s account. If one node subtracted, for example, $80 from Bob’s account, it would get rejected, since it doesn’t match the other nodes. In order to get inaccurate info onto the blockchain, you have to get consensus on the inaccurate block, which means that you have to control over ½ of the nodes.
Each block on the blockchain has a hash code along with the data it stores. The hash code is a series of letters and numbers to identify the block, like a fingerprint. Each block also has the hash code of the previous block. If a block is changed, then its hash code is also changed. But since each block has the hash of the previous block, changing the hash of one block throws off the whole system, because the block after it will have the wrong hash code for the previous block’s hash code. This means that, in order to change a block, you have to edit every block after it.
Cryptocurrencies use something called proof-of-work to increase the amount of time it takes to edit each block; with Bitcoin, it takes about 10 minutes to edit a block. If someone wants to tamper with a block, they need to edit the hash code of every following block, which proof-of-work would make very time-consuming.
To recap, this means that, in order to tamper with Bitcoin, one person or institution would need to:
Be in control of at least ½ of the nodes, so their (inaccurate) ledger can get consensus from the other nodes and be added to the blockchain.
Change the hash code of every block after the one they tamper with, which takes about 10 minutes, per block, because of proof of work.
Are there other cryptocurrencies?
Yes, there are. The idea of Bitcoin was first outlined in 1991, and the first Bitcoin, called Bitcoin, was made in 2009, by someone under the alias name of Satoshi Nakamoto.
Some other cryptocurrencies include:
Bitcoin SV
Lifecoin
Ethereum
Monero
What can Bitcoin be used to buy?
Since they aren’t issued by a government, Bitcoins can be exchanged between countries without having to switch currencies. For example, if I go to England, I have to exchange American dollars for English pounds to buy things there. However, the Bitcoin here is the same as the Bitcoin anywhere else in the world; no exchange of currencies is needed.
Right now, Bitcoin has limited commercial value. You can’t walk into a store and pay it Bitcoin, or put a Bitcoin account into Amazon. Bitcoin is currently more of a store of value - similar to a stock.
Here’s the value of Bitcoin over the last five years:
