What is Bitcoin?


What is Bitcoin?

  • Bitcoin is an Internet payment system, currency, and commodity.  It is also an Internet protocol and a software program.
  • Bitcoin is decentralized and there is no authority in charge.
  • Bitcoin works collectively via the network that is formed by many computers running the software and sharing the Blockchain ledger using peer-to-peer (p2p) technology.
  • Decentralization depends on the process of Bitcoin “mining,” an incentive-based system to record transactions securely.
  • Bitcoins can be sent directly from person-to-person and is similar to sending an e-mail.
  • A Bitcoin is not a Physical Object or Digital File.
  • Bitcoin is a shared ledger system where transactions adjust the balances within the ledger.
  • A Bitcoin wallet displays balances by scanning the shared Blockchain ledger.
  • A Bitcoin “wallet” is more like a key chain than a wallet because it hold the keys needed to adjust the Blockchain ledger.
  • The shared ledger is called the “Blockchain” because sections or “blocks” with new transactions are added and they are “chained” together using mathematics for verification.

Bitcoin is a currency

  • Bitcoin is a currency because it can be used to buy things.
  • Since Bitcoin is still experimental large numbers of users and merchants have not yet adopted Bitcoin but adoption is increasing.
  • Exchange rates have been historically volatile which is often cited as a problem with Bitcoin being a useful currency.
    • Services allow consumers and merchants to immediately covert to another currency to reduce the risk associated with the volatility.
  • Volatility may be reduced once Bitcoin use and exchanges are readily available to large numbers of users.

Bitcoin is a payment system

  • Bitcoin is a payment system and Bitcoin can be sent directly to a Bitcoin address in a similar way as sending an email to the end user.
  • A Bitcoin address is a long string of letters and numbers and is usually displayed as a link or QR Code:  1JoEoube3F822qAunTF1U7mv9VQmEtcupD
  • The Blockchain ledger must be completely open and shared since there is no central authority keeping the records.
  • When a transaction is broadcast everone can see it broadcast on the network and then later can see it added to the Blockchain ledger.
  • All transactions are visible to everyone but they are linked to Bitcoin addresses.
    • Bitcoin transactions are “pseudonymous” or “false name,” rather than anonymous.
  • Bitcoin transactions are  irreversible once they are stored in the Blockchain and more sections of the Blockchain are added.

Bitcoin is a commodity

  • A commodity is generally considered a natural resource or a physical item that you can put in your pocket.
  • Bitcoin and other types of digital assets are increasingly being considered a commodity for some purposes such as regulation.
  • The total number of Bitcoins is capped at 21 million which is fixed within the software.
  • The 21 Million Bitcoin limit cannot be changed without having the vast majority of users and miners agree to change the software but such an action would change the value of current holdings.
  • Alternate systems are easily developed that create different types of digital coins but these are incompatible with the Bitcoin system.

Bitcoin is an Internet protocol

  • Bitcoin is an Internet protocol similar to other protocols such as email.
  • Bitcoin is “Open Source” which means anyone can review the code and suggest changes.
  • The identity of the original contributor(s) is not known but that is not important since it is open source and the project has many contributors, reviewers, and testers.
  • Decisions about what changes get implemented in updates are done in a somewhat centralized manner by the developers.
    • Anyone can create their own version of the software (a software “fork”) and offer it to users.
  • Bitcoin achieves a consensus by users and miners agreeing to use a certain version of the software.
  • Fixing a “bug” or making a change means breaking the consensus and a new consensus must be achieved by convincing users and miners to run the new software.
  • Many hundreds of Alternate Coins or Altcoins have been developed based on the Bitcoin software but most depend on the development of Bitcoin software for updates.

Bitcoin is a software program

  • Bitcoin may be run locally on your computer to completely control your Bitcoin holdings.
  • Bitcoin is an open source software program known as “Bitcoin Core” or “Bitcoin-Qt” and can be viewed at https://github.com/bitcoin/bitcoin and downloaded at https://bitcoin.org/en/download
  • Bitcoin Core comes with a wallet program included but the features are limited and it is not recommended for new users.
  • Users may run the complete software and become a full Bitcoin “Full Node.”
  • Bitcoin “Full Nodes” share the Bitcoin Blockchain ledger via p2p and validate and propagate transactions and new sections of the Blockchain (“Blocks”) that are broadcast by “miners.”
  • The Bitcoin network operates without a central authority and consists of:
    • “Full Nodes” that “validate” and propagate transactions and share the Blockchain ledger, and
    • “Miners” that record and “confirm” transactions.
  • Running a “Full Node” takes some resources but can easily run on desktop computers.
  • Users who want to manage their own Bitcoin but do not want to download the entire Blockchain use “light” clients that connect to private servers that have the Blockchain data needed to run Bitcoin locally.
  • Many new users use web-based services to avoid running the software and being responsible for security and backups but users must trust these services.

A Bitcoin can be broken down to 8 decimal places.

  • Since a Bitcoin (“BTC”) is a notation on a ledger there is no special significance to whole numbers as compared to fractions of a Bitcoin.
  • Bitcoin can be broken down to 8 decimal places
    • milliBitcoin (mBTC) is 1/1,000 or 0.001 Bitcoin.
    • MicroBitcoin (µBTC) is 1/1,000,000 or 0.000001 Bitcoin (Some services now call these “BITS”)
    • Satoshi is the smallest unit 0.00000001 Bitcoin named after the Bitcoin inventor.

Bitcoin is decentralized by the process of Bitcoin “mining”

  • Bitcoin is decentralized and there is no entity such as a government, company, or bank in charge.
  • There is no Bitcoin authority and various groups and foundations have no official status.
  • Bitcoin operates collectively via the network using peer-to-peer (p2p) technology and depends on Bitcoin “mining” to record the transactions.
  • Bitcoin mining is like a contest where computational work is required to solve a math problem.
  • Bad actors would need to solve the math problems faster than everyone else combined to be able to disrupt the system.
  • Bitcoin miners keep the transaction fees and receive “block rewards” which is how Bitcoin is distributed.
  • Bitcoin mining has become sophisticated, complicated, and is generally done in large data centers or by hobbyists with significant knowledge.

Bitcoin cannot be backed by something of value because it is decentralized

  • A decentralized currency cannot be “backed” by something of value since some entity would control the assets.
  • Bitcoin is “backed” by the faith of its users and merchants who accept Bitcoin.
  • A “government fiat” currency such as the US Dollar is backed by the faith of its users and laws enforced by the US government.
  • A “Fiat” currency generally refers to a government fiat currency which is issued by a government and Bitcoin is not a government fiat currency.
  • Some use a broader definition of “fiat” that states a currency is based on the faith of its users and say Bitcoin is the ultimate fiat currency since there is no central authority or laws contributing to its value.

Bitcoin transactions are public and associated with Bitcoin addresses

  • The Bitcoin Blockchain ledger is shared via peer-to-peer technology and viewed by everyone.
  • All Bitcoin transactions are viewable in the shared Blockchain ledger and all Bitcoins can be traced back to the time they was originally “mined.”
  • Bitcoin addresses are long strings of letters and numbers such as 1JoEoube3F822qAunTF1U7mv9VQmEtcupD
  • Bitcoin addresses are generated randomly by the user’s wallet and they can be used on the Blockchain ledger as long as they meet Bitcoin specifications.
  • Since all activities are viewable but associated with an address rather than an identity Bitcoin is “pseudonymous” or “false name.”
  • Users may have as many addresses as they need and a new address may be used for each and every transaction.
  • Users may choose to publicize an address or reuse it for accountability or publicity.
  • A Bitcoin “wallet” is generally a collection of Bitcoin addresses and not a single address.
  • Wallets are not visible to other users, just individual addresses that have transactions appear in the Blockchain ledger.

References and links

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