How to Understand Bitcoin

Bitcoin is a decentralized peer to peer electronic cash, without a central authority deciding on its course nor a middleman who’s needed to approve transactions. Bitcoin can be transacted freely among users (free as in freedom). Its amount is limited to only 21 million Bitcoin. With currently 8 billion people in the world, that’s not a lot, let alone the 11 billion with whom we will be by the year 2100.

After the 2008/9 financial crisis, the public confidence in government regulators was at a historic low. The public felt betrayed by the regulators who were created to protect them. In the aftermath of the financial crisis, a person going by the name of Satoshi Nakamoto created Bitcoin, a decentralized digital currency with no single regulator.

In the beginning not many people took Bitcoin seriously. It actually took 2 years for Bitcoin to reach a value of 1 USD. Not many people were understanding Bitcoin. That problem still exist, although thankfully that’s changing rapidly. Let’s look more closely at how Bitcoin works and how you can make it work for you.

Bitcoin: Digital Scarcity

Bitcoin really excels at being a saving technology. It captures and saves energy and transforms it into money. It’s also a hedge against inflation and thanks to its inherent scarcity, the value is expected to go up over time and Bitcoin can become the best money humanity has ever had.

The most important aspect of Bitcoin is that it creates digital scarcity. There will only be 21 million coins maximum. Each bitcoin can be divided into 100 million satoshis, which would be in total around 350.000 satoshis per person in the world. Towards the end of the year 2021 the total amount of Satoshis was almost 240,000 per person.

satoshis per person end of 2021

Bitcoin: How it Works

Bitcoin wouldn’t exist if it wasn’t for its blockchain. The blockchain contains all the data of the Bitcoin network. In order to have access to the bitcoins inside the blockchain, you need to have a private key. Only with this key you can get access to those bitcoin that belong to that same key. If you would share the private key, that other person also has the same access as you have.

With a private key, you can transact those bitcoins to another address inside the blockchain. All bitcoin can be send unlimited over the network, but in order to make transactions you must have access to its private key.

It is estimated that at least 4 million bitcoin is actually lost (“burned”). They are still on the blockchain, but no-one has the keys anymore and therefore access.

Sending to another address in fact means that you create a signature with your key, which is submitted to a bitcoin node. Bitcoin nodes validate the transactions and bitcoin miners do the calculations that guarantee the safety of the network. On average every 10 minutes a new block is mined and your transaction has been stored inside that particular block of the blockchain.

A block stores all transactions done in the time needed to mine this block. The mathematical calculation needed to mine this block, safeguards the correctness of this block and thus the transactions stored in this block. And so, basically, this is how Bitcoin creates a publicly accessible and verifiable database of transactions. This is in fact what constitutes the blockchain.

Bitcoin mining power use

The massive amount of calculations are using a lot of energy. Some people are upset about this. But if you look closer into this:

  • Bitcoin mining is a highly competitive industry, forcing miners to move to the cheapest forms of energy, in most cases this is environmentally friendly.
  • Bitcoin mining itself is also highly mobile, moving to places close to energy sources where energy is otherwise wasted (think of gas-flaring in Texas). Bitcoin mining can also be used by local communities to create wealth by using the surplus of energy (for example at night) to store bitcoin.
  • If we as the whole of humanity want to move up on the Kardashev scale we better start using and controlling a lot more energy soon.

Bitcoin Rewards and Hodlers

New bitcoin gets released every 10 minutes as a reward for those bitcoin miners that solve the mathematical puzzles the first. This amount is programmatically capped, and it’s getting less and less over the years. This ensures that the supply of new Bitcoin is increasingly slowing down.

This process of an increasingly lower supply is further enhanced as more people become Hodlers; they are convinced that they want to store their Bitcoin, and not offer them on the market. For this purpose they use Bitcoin hardware wallets.

Miners often use the majority of their Bitcoin reward to keep their operation running. Every 3 years there is an automated process happening called “The Halving”. This means that the rewards that miners receive is 50% less bitcoin. This reward halving ensures that the pace of bitcoins that are released in the network keeps on slowing down, and hence the scarcity of Bitcoin goes up.

As a consequence of the halving you can witness a new major market bull-run on Bitcoin, starting a short period after each halving event. This means that the price goes up steeply since supply decreases drastically after the halving has passed.

Miners do not have to worry about bitcoin running out. If the release of new Bitcoin eventually has come to an end, the miners will still get the rewards from the transaction fees.

Further Reading

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