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What is bitcoin
BTC to USD
Bitcoin is a decentralized digital payment system.
It is ‘digital’ because it exists only on electronic devices that connect to the Internet.
You’ve probably heard other posts that answer the question of ‘what is bitcoin’ define it as ‘a virtual currency.’ That is for the same reason.
It is decentralized because it is not controlled from a central point.
It is also often referred to as a cryptocurrency, and that is because it uses cryptography for security and user address system.
All those descriptions are accurate, but it is easier to understand how Bitcoin works if you see it as a ‘digital payment system.’
And to even better understand how it works and how different it is from, for example, a bank or PayPal, you should be aware of the concept of a ledger.
Indeed, a critical component for any digital payment method is a ledger. This is a record of who owns what and at what time.
When you send money through your PayPal or bank account, a ledger is updated to reflect new balances.
The account next to your name is reduced by what you sent (debited), and the recipient’s account is increased (credited) by the same margin.
PayPal, banks, or other centralized payment systems store their ledgers on computers (servers) they own or control.
They also have the monopoly to update their ledgers through their agents or tellers (both human and machine).
Before computers, the bank ledgers were on paper filed in cabinets.
Bitcoin has a ledger, too, and it is known as a blockchain.
However, how Bitcoin’s ledger is stored and updated is what makes it very different from the centralized digital payment systems.
There is no company or central authority with the responsibility to keep and maintain the Bitcoin ledger.
Instead, independent computers form a network, and they collaborate to perform the function—anyone can join and leave the system at will.
The Bitcoin network is peer-to-peer because there is no central server to coordinate the interaction of connected computers in the network.
And since one does not need permission to join or leave, it is also described as permissionless.
For them to have a coherent interaction amongst themselves, the computers on the Bitcoin peer-to-peer network are guided by a set of engagement rules (a protocol).
The protocol is part of the core software a computer has to install to join the network.
And the core software is the code Satoshi Nakamoto wrote and released in early 2009. Other developers have continued to update it through consensus.
Now back to the ledger—the blockchain.
One of the first things a computer that joins the Bitcoin network does, is to copy the latest version of the Bitcoin ledger from other computers on the network.
With every node having a copy of the ledger and with no central server, there is a big challenge, however.
How do the computers on the Bitcoin peer-to-peer network agree on the status of the ledger?
What is bitcoin mining
Bitcoin mining means either of two things, depending on whether you are an ordinary Bitcoin user or someone who provides a computer to support the system.
What is bitcoin mining to the ordinary user of Bitcoin?
Bitcoin mining is the process by which computers on the Bitcoin peer-to-peer network update and synchronize the copies of the shared ledger to reflect your transactions.
In basic terms, it is a consensus process for determining valid transactions to add to the ledger.
When you send bitcoins, you are requesting the network.
You want it to update the shared ledger so that what is recorded next to your public address (public key) is reduced. Meanwhile, what is recorded next to the recipient’s public address is increased by the same margin.
Every second of the hour of the day, tens of thousands of users are making similar transaction requests.
As a result, the ledger has to be continually and continuously updated to reflect new changes.
So how do all the computers agree to update the copies of the ledger they have uniformly?
That is where Satoshi Nakamoto demonstrated his brilliance.
What happens cannot be considered consensus in the strictest application of the word.
What happens is that each of the unique types of computers on the Bitcoin network known as miners collects all the transaction requests made within ten minutes into a batch known as a block.
The miners then have to compete in hashing the block to find a value that the protocol automatically presents to them.
The first computer to find that value will have its block of transactions recognized the next valid on the blockchain.
And then, every other node will synchronize their copy of the shared ledger with the version of the miner that won the competition.
And the process repeats itself every ten minutes.
What is bitcoin mining to someone who provides a computer to the network?
The winning miner gets a reward of newly released bitcoins. They also get to keep the transaction fees that users attach to their transactions.
The reward and the transaction fees act as an incentive for people to keep computers on the network as miners, which helps to maintain the shared ledger.
Wired in the Bitcoin core protocol is the rule that there can only be 21 million bitcoins.
Once every four years, the mining reward issued halves because the cap of 21 million is being approached.
At the moment, the reward won after every ten minutes is 12.5 bitcoins. Sometime in May 2020, that will halve to 6.25 bitcoins.
The last bitcoin will be released as a mining reward sometime in the year 2140.
After that, the transaction fees will become the primary incentive to keep a miner running.
How to mine bitcoin
Mining Bitcoin is making a powerful computer available to the Bitcoin network, and collaborate with others to maintain the shared ledger.
In return, the owner of the computer hopes to win the mining reward and the fees that users attach to their transactions. And it is because of this reward that you probably want to know how to mine bitcoin.
It is important to point out that mining Bitcoin is becoming harder with time.
And that is because the computation power needed to crack the mathematical problem the protocol provides every ten minutes is becoming more difficult over time.
In part, that is because more people are joining the process, and more importantly, they are coming in with more powerful computers.
In the early days—around 2009— you could mine Bitcoin with your simple CPU desktop, and you still stood a chance to win the reward.
Then some people figured out how to mine bitcoin using graphics processing units (GPUs), and that gave them an edge. Soon CPU desktops stood no chance.
Over the years, the network has moved from GPUs and learned how to mine bitcoin using very powerful application-specific integrated circuit (ASIC) chips.
The ASIC miners have a higher hash rate, meaning they do calculations a lot quicker. But they are also way more expensive than CPUs and GPUs.
And even with ASIC chips, you now you need multiples of them if you are to stand a chance of winning a mining reward.
And you also may need to join a mining pool to stand an even higher chance.
A mining pool is a group of people who pull their computer resources together and act as a unit on the Bitcoin network.
When they win a reward, they share it according to the contribution of each member.
So, to mine Bitcoin today, you need to have a significant capital that would allow you to buy the latest ASIC miners.
You indeed need to set up a huge mining operation, which also requires a cheap source of reliable electricity.
For even better results, you may need to join a mining pool.
But there is the option of cloud mining, and this includes;
- Leasing a mining machine from a provider,
- Renting a general virtual machine and turning into a bitcoin miner or
- Leasing hash power from a company that runs bitcoin mining operations.
The cloud mining option has several advantages, including not having to deal with the physical mess or running the machines, such as the noise they generate.
But the option also has some disadvantages.
In particular, leasing hashing power comes with the risk of scams, where you are made to believe you have a hashing power, but it turns out you do not, and you are involved in some form of a Ponzi scheme.
How to buy bitcoin
The easiest way to get to own some bitcoins is to buy from those who already have. It is, therefore, vital learning how to buy bitcoins.
And the first thing to know about how to buy bitcoin is where to buy. Fortunately, there are places online where you can buy and sell bitcoins. These platforms are known as exchanges.
There are two primary types of exchanges; those that sell on their own behalf and those that facilitate people to buy from one another.
The first step to buying bitcoins is to identify an exchange that will meet your needs.
And that is in terms of the amount you want to buy and the payment method you can use.
It is also important to identify an exchange that is open to serving customers from your country or state of residence.
It is common for exchanges to decline to serve people in particular regions because of legal constraints.
There are now hundreds of exchanges to choose from, and therefore it is unusual not to find one that is perfect for your needs.
Aside from the payment options they accept, other factors to look at include security as well as how long they take to complete a transaction.
Whatever exchange you use, you should expect to be asked to identify yourself.
Due to pressure from regulators, exchanges are being forced to ask for photo IDs, especially for people intending to buy high volumes.
If buying from a peer-to-peer exchange such as Localbitcoins or Paxful, use the reputation system to pick the best rated and reviewed sellers.
The peer-to-peer exchanges also have escrow services.
Once you initiate a purchase, the bitcoin will go into an escrow account, and the seller can only release it to you once you’ve made payment.
Before you begin to buy bitcoins, you should have a wallet ready.
This is an application on your phone, desktop, or a unique device known as a hardware wallet.
The general procedure of how to buy bitcoins goes as follows;
- Identify the most appropriate exchange for you
- Sign up using your email address
- Confirm the email address
- Provide proof of your identity by use of a photo ID or passport
- Launch a purchase by picking offers on the exchange
- Make payment for the purchase using a credit card, wire transfer, or whatever payment method they accept.
- Receive your bitcoins
- Transfer your bitcoins to your wallet