ERRRR… How Does Bitcoin Work??? | Ultimate Beginners Guide…

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Unless you’re that old lady fishing around in her gigantic purse for a checkbook in the grocery lineup.

You’ve probably gotten used to the idea of a paperless cash economy by now, I mean, who wants to carry around a bunch of bills and coins, when you can just tap your card, and get the same adrenaline rush, followed by the same instant regret.

Maybe it isn’t surprising that a completely digitized form of currency namely Bitcoin is becoming more popular.

Today we’re going to discuss Bitcoin, in a bit more detail, because it’s the most recognized cryptocurrency at the moment.

What is it that makes Bitcoin transactions different from shopping on Amazon with a credit card digitally?

Well, you might already know that while normal electronic transactions still involve conventional money, Bitcoin is decentralized.

Meaning that its distribution and exchange aren’t controlled or regulated by a government or authority.

And the technical side of things is also very different, traditional currency goes through a central payment processor like your credit card company.

But all Bitcoin transactions whether you’re purchasing goods or just sending Bitcoins to your friend, (Because you’re a nice guy), are processed by a large, distributed network of computers running special software.

Whenever a transaction occurs, the network records the senders and receivers Bitcoin addresses and the amount transferred, and enters this information onto the end of a ledger, or record called a Blockchain.

The Blockchain is updated over 100 times per day, and is sent to every computer that processes Bitcoin, because each transaction is encrypted with public-key cryptography.

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And verified by multiple points in the network, to ensure that every computer that processes Bitcoin is using identical correct copies of the Blockchain, this makes it virtually impossible to counterfeit. 

This verification process is performed by what are called Bitcoin miners, computers, or other processing devices that individuals like yourself connect to this large processing network, the mining software that runs works by grouping recent transactions into blocks.

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Which are only accepted by the rest of the network if the block is hashed correctly, which requires the computer to find correct numerical values which is a time-consuming and intensive process.

But, what’s in it for the members of the processing network? I’m glad you asked, so once a computer successfully processes a block it is then added to the Blockchain, and the system generates a new Bitcoin that goes into the miner’s digital wallet as a reward.

So, your computer ends up literally creating money for you out of nothing… WOW, THAT’S AWESOME! Where do I sign up? You mean I can just have my computer running and never have to work again?!

Sorry, it’s a bit more complicated than that it takes a lot of processing power to generate an appreciable amount of Bitcoin.

And since the system is designed for it to take about 10 minutes to successfully process a block the difficulty of mining generally increases.

As more nodes join the network, not to mention the costs of entry are fairly high, in the early days you could mine Bitcoin on your spare laptop, then for a while, high-end graphics cards were popular choices thanks to their highly parallelized number-crunching optimized architectures.

But these days (Though it should be noted that this doesn’t necessarily apply to other cryptocurrencies), Bitcoin can only really be profitably mined using specialized mining appliances called ASIC miners.

Unlike graphics cards these can only be used for Bitcoin mining and they can cost thousands of dollars each, and they suck a ton of power, and due to high electricity rates in many parts of the world can kill any chance of profitability for the average person.

It’s obvious why people are mining Bitcoin, I mean there’s profit to be made but why do other people want it?

Well, some people are mistrustful of banks and governments to keep their money secure and have a lot more faith in the Bitcoins Blockchain system.

Especially as more and more retailers begin to accept cryptocurrency, others like the anonymity that Bitcoin offers.

The only thing that necessarily ties you to a particular Bitcoin address is an encryption key, plus, you could grab a new address for each transaction you make.

In fact, many paid VPN services accept Bitcoin payments, for people who are concerned about staying anonymous. 

Others look at Bitcoin as an investment, but you should tread carefully here, because Bitcoin is completely unregulated and there is no guarantee of its value.

So, investing lots of money in Bitcoin at least for now is considered “Speculative level risk”.

However, the system is designed so that no new Bitcoin will be produced, leading some to believe that down the line it’ll be, a more secure virtual commodity.

That will provide a hedge against inflation of traditional currencies, kind of like how some people invest in gold bars for the same reason.

This sounds cool in theory but, right now Bitcoin is a bit of a roller coaster, the value of 1 Bitcoin recently jumped from a few hundred dollars in 2015 to $14,000 around in 2017.

And while watching the value of Bitcoin spike suddenly, can be thrilling if you’ve got some in your digital wallet, I would recommend you don’t sell everything you have and put it into Bitcoin, just so you can get on the latest craze.

Thank you for reading, make sure to discover more of my other blog posts that you will find helpful and interesting.

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