Bitcoin guide. Explaining BTC in simple words

Bitcoin is the world’s first and most popular cryptocurrency, which was invented in 2008 and launched in January 2009. The real identity of its creator or creators is still not known. Bitcoins cannot be touched, as they are not banknotes or physical coins. With electronic money on a bank card, bitcoin also has little in common.

Bitcoin is digital money with its own rules for conducting operations that cannot be violated, regardless of anyone’s will, since mathematical laws will not allow this.

The goal of the creator of Bitcoin was to create money that people can use to pay each other directly, without mediators. Money, the credibility of which would be provided not by the economy of a particular country, but by the mathematical rigor of the system. This was just very relevant at a time when another economic crisis flared up in the world, which began with the mortgage crisis in the United States. Then ordinary fiat money depreciated and many people lost their savings.

Bitcoin runs on the blockchain, a system that has been likened to a large ledger containing all the records of what happens to cryptocurrencies. And each bitcoin owner has an independent, but an identical copy of this ledger or its part.

The entries in all the ledger parts are true and the same and no one can change that. Neither banks nor the government, nor the creator of the cryptocurrency can forge these records, as this would require a huge amount of energy and computing resources. In other words, there is no single controller in the blockchain, the system is governed by virtually all participants. Built on mathematical calculations, the system protects the digital currency from counterfeiting or hacking.

Bitcoins are generated by a network of miners, which can be either large companies whose shares are traded on the stock exchange or individuals who mine at home.

If the limit of traditional currencies is infinite, then there can be no more than 21 million bitcoins. Most of the bitcoins have already been generated and are in circulation. Part of the coins is lost forever, or rather, about 30% of the total volume of bitcoin, as the owners of some bitcoin wallets have forgotten their private keys.

Bitcoins are made thanks to miners. Mining is the process of generating cryptocurrency using computing equipment. Miners are rewarded for mining bitcoins.

The revolutionary features of bitcoin that distinguish it from all other types of money: – you do not need a bank to transfer money to someone; – It is impossible to block the transfer, freeze money in the user’s wallet or get back completed transactions; – Cryptocurrency has no physical equivalent – no banknotes or coins made of precious metals; – no one can issue bitcoins bypassing the system; – bitcoin is anonymous, there is no concept of registration and although you need to specify the email address to which it is attached to open a bitcoin wallet, absolutely no personal data is required, anyone can participate in the network on the Internet. We only know wallet address symbols, no names, surnames and passport data, since the wallet is not tied to the user’s identity, everyone can create an unlimited number of wallets and details; – the bitcoin rate is not subject to banks and financial regulators. However, you can’t exactly call it stable either. The cost of this cryptocurrency, like many others, is capable of making wild jumps both up and down. The cryptocurrency market turned out to be receptive, for example, to Elon Musk’s tweets. The statements of the billionaire have already brought down Bitcoin many times, and then brought it to the top again; – Researchers have identified several reasons for the frenzied popularity of bitcoin. Among them are the distrust of market participants in the global financial system and traditional currencies, the desire to hide their transactions, as well as the interest of users in electronic money and payment technologies; All these features and advantages are provided by the blockchain, the principle of which can be explained in minutes, even to those who are completely far from programming.

When the policy or actions of the authorities collapse the exchange rate of an ordinary currency, people begin to be interested in bitcoin and its price rises. The less trust in the government, the higher the rate of decentralized cryptocurrency. In general, we can conclude that the price of a cryptocurrency rises every time fiat money proves its insolvency. The turning point was the global economic crisis of 2008 when the largest states began to inject colossal sums into the global economy. World GDP for the first time since the Second World War showed a negative trend. Keeping funds in fiat money has become simply dangerous. It was then that major players became interested in a decentralized alternative to fiat money. In 2017, there was a massive crypto boom that allowed bitcoin, with some price fluctuations, to reach its current price of $47,000. People who managed to buy it earlier suddenly became fabulously rich. At that time, on the wave of hype that was associated with the ICO boom, there was a jump in the rate when bitcoin rose above $4,000. The new record was explained by the rapid growth of investor confidence, demand in the Japanese market, which assigned the status of legal tender to the cryptocurrency, and the emergence of the Segregated Witness protocol, which solved the issues of scalability of the bitcoin network, reduced the speed of transactions and fees. Also, amateur investors, inspired by forum stories and media materials about people who got rich on bitcoin, contributed to the rise in the price of the cryptocurrency.

The blockchain stores the full list of transactions for the entire existence of bitcoin. There are a lot of transactions in the system, so they are divided into blocks. Blocks are added to a sequential chain, resulting in a blockchain. The block stores the addresses of wallets involved in the transaction. For example, wallet A transferred x BTC to wallet B. Blockchain is just a data storage system, but the data is not stored on a centralized server, unlike others, but distributed throughout the network. How does this technology produce perfect money without a single controlling owner? Blocks in the bitcoin blockchain are just transaction data. In the case of blockchain, all blocks are stored on thousands of computers of all participants in the network, and no one has more rights than any other participants. This is called decentralization. Each time a new block is added, the parties update the data by sending information about the new block to each other. If one of the computers is hacked and a change is made, the other copies will not match and the system will simply reject the changed block.

New bitcoins are mined by adding blocks to the chain, a process called mining. Miners take new transactions, pack them into blocks, and try to add a new block to the chain. To add a block, you need to solve a complex mathematical problem. The miners’ computers are working day and night to solve it first. When the task is solved, a new block is added to the chain, data about it is sent to all parties. All participants in the system check whether the problem is solved correctly and if so, a new bitcoin is mined and it is received by the miner who first solved the task. This is how miners make money. The difficulty of the task is constantly calibrated by the blockchain algorithm to mathematically limit the number of bitcoins issued. No one can issue BTC, how to print regular money. This is provided by a mathematical algorithm that does not care about who you are and what your status is.

The prefix crypto in the name hints at the use of encryption algorithms. Each block is encrypted, and all transactions contained in the block participated in the cipher. It is worth changing at least one character in a transaction and the block cipher will change unrecognizably, while each block stores the cipher of the previous one. It is worth trying to change the transaction, and the whole chain will break. Network member computers will notice the difference.

Bitcoins are stored in crypto wallets. To start using them, you need to know something important about them, on which the safety of your bitcoins will depend: – The public key is the address of your wallet. If someone wants to send you bitcoins, they need to know this address; – The private key is the password to your wallet. If you want to send bitcoins to someone, then you need to present this password to the system; – A SEED phrase is like a secret question. The SEED phrase consists of twelve random words, with which you can restore access to the wallet if the private key is lost. When you create a crypto wallet, you get these two keys. They are interconnected by tricky mathematical operations, which now we will not go into. There are two base types of crypto wallets: – Wallet on your device. You download the program, register a wallet and receive keys, after which you can make transactions with bitcoin; – Online wallet. Register and all your bitcoins are stored in the cloud. However, you need to understand that in this case, the service has access to your wallet. If you lose your smartphone with a crypto wallet, then you will lose this money. With an online wallet, there will be no such problems, but centralized services will have access to your money. Many crypto holders sooner or later end up storing the seed phrase to their wallets in cloud notebooks. They are easy to hack or lose access to them, so it is much more reliable to immediately choose an online service with cool security protocols.