What is bitcoin?
If you’ve been reading the news recently, you’ll have probably heard about Bitcoin’s mysterious founder, Satoshi Nakamoto. Nakamoto is widely regarded as a pseudonym. Recently, an Australian entrepreneur put himself forward as the real Nakamoto, making headlines across the world, but this claim was later retracted. So what exactly is bitcoin, and why is there so much interest in it?
Bitcoin is a digital currency – the virtual equivalent of dollars, euros or pound sterling. It’s identified by the letters BTC, and was invented in 2008 by the enigmatic Nakamoto. Since then, it’s made a big impact.
In 2015, the number of merchants accepting bitcoin payments rose over 100,000, including huge companies like PayPal, Microsoft, Dell and Time Inc.
There aren’t any intermediaries in bitcoin transactions; it works through peer-to-peer deals, backed up by network nodes, recorded in a public register known as the ‘blockchain’. There are various subunits – millibitcoin, microbitcoin and satoshi. Bitcoin’s value is highly volatile, but in 2016 one unit was worth about $445.
The other point about bitcoin is that it is a decentralized system; there are no central banks controlling the supply of money. In addition, it’s a pseudonymous currency; in other words, funds are not linked with named individuals or entities, but rather bitcoin addresses.
Bitcoin has attracted some controversy due to its existence outside the institutional banking and governmental framework. However, big merchants now accept it as a valid payment method, and some economists have praised it as an exciting innovation.
What is bitcoin mining?
When any new bitcoin transaction is completed, it needs to be authenticated and placed with a list of other verified transactions on the blockchain.
Because bitcoin is not regulated, to verify these transactions and make sure they are not duplicated, computers across the globe race to complete a computation that proves this is the case. To do this, computers are trying to create a unique 64-digit hexadecimal number (although confusingly it includes letters as well as numbers) for that bitcoin.
While no advanced math or computation is involved in finding this number it is basically guesswork and with the total number of possible guesses for each of these problems being in the realm of trillions, it’s incredibly arduous work. As of June 2021, the chance of guessing this number correctly is around one in 17.59 trillion!
Once this hash is found it goes into a public ledger so anyone can confirm the transaction for that particular bitcoin happened. Roughly every 10 minutes a new block is added to the blockchain, through a process known as bitcoin mining.
The computer that solves the computation first gets a reward. However, rewards for Bitcoin mining are reduced by half every four years. As of 2021 should you solve this computation correctly (and first) you’d receive around 6.2 bitcoins, or about $225,000.
By mining, you can earn cryptocurrency without having to put down money for it. Bitcoin mining is a very energy intensive process, which requires a lot of computer power to run 24 hours a day. Indeed, bitcoin mining uses more electricity annually than the whole of Argentina.
In the absence of miners, Bitcoin as a network would still exist and be usable, but there would never be any additional bitcoin. This time will eventually come as the total number of bitcoins will be capped at 21 million. However, because the rate of bitcoin “mined” is reduced over time, the final bitcoin won’t be circulated until around the year 2140.
If you have any questions about bitcoin, let us know by commenting below.