What is Bitcoin and how does it work?

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Blog

Published

Dec 15, 2021

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nbx.com

What is Bitcoin and how does it work?

Published: 2021-04-02

If you are just starting out with Bitcoin, you are not alone.

2020 has been an exceptionally good year for Bitcoin, which has now gained a widespread reputation. In 2009, Satoshi Nakamoto launched Bitcoin and catapulted the world into what would become a cryptocurrency revolution. Because it’s the most valuable and most used cryptocurrency, it’s important to start your cryptocurrency journey by understanding how it works and why it’s valuable.

What is Bitcoin?

Bitcoin is a decentralized, peer-to-peer currency hosted on a blockchain network. With the help of Bitcoin wallets, anyone can send Bitcoin anywhere in the world, at any time, without the involvement of any third-party. First, Bitcoin's value comes from the fact that it is peer-to-peer electronic cash. This means that it allows online payments from one person to another without any intermediaries involved, and without a governing body monitoring the process. In addition, the Bitcoin concept developed digital scarcity. To understand what that means, however, it is important to zoom out on what Bitcoin is at the most basic level and why it was created. Back in 2008, anonymous developer Satoshi Nakamoto introduced the Bitcoin White Paper, which describes Bitcoin as a technology. A year later, the Bitcoin network was launched with a simple computer that mined the first block in the blockchain.

What is a blockchain?

Before we go into the meaning of mine, it is important to understand what a blockchain is. A peer-to-peer database or "blockchain" is kept online and secure by a wide variety of computers around the world, and is thus owned by a diverse group of individuals. This is in stark contrast to how data around the world is managed and stored, since no central organization controls a blockchain. Instead, anyone who has a powerful enough computer can be mined.

What is "mining" and who can mine?

Mining is the process of verifying Bitcoin transactions and creating new bitcoins. In the early days of the Bitcoin network, almost anyone could be a Bitcoin miner through committing to always having a full copy of the Bitcoin database (blockchain) downloaded. Now, however, being a Bitcoin miner involves making an investment in a highly specialized mining rig, because as more miners flock to the Bitcoin network, its code is designed to make it more difficult to mine. According to current statistics, this difficulty changes automatically every 2016 blocks. This difficulty is measured by the amount of calculations required to fully verify a group of Bitcoin transactions or “create a block.”

Through both verifying that users have the right to send bitcoins they are trying to send and that those bitcoins reached the right destination, miners make sure that the Bitcoin network is always secure. If you’re wondering what their incentive is for doing so, it all comes down to two streams of income. First, miners earn the transaction fees that are paid by Bitcoin users to send bitcoins. Next, they are directly responsible for the creation of new bitcoins and can earn a reward for doing so, which we outline below. Since miners are also everyday users of the Bitcoin network, they reinforce the truth that Bitcoin is truly peer-to-peer and has no need for any sort of bank or intermediary to keep running.

To summarize, Bitcoin mining is the process of verifying that Bitcoin transactions are legitimate and adding them to Bitcoin's blockchain (shared database). Every 10 minutes, the miners race to add a new block of transactions, and the first miner to do so correctly "wins" the block reward, which is currently 6,25 Bitcoins. Since the launch of Bitcoins, this has always been the only way new Bitcoins are issued. This race to be the holder of the block reward is like a digital gold rush because only 21 million Bitcoins will ever exist. Therefore, each miner has a strong incentive, based on Bitcoin's known scarcity, to collect as much Bitcoin as possible, as well as for investors, scarcity is one of the drivers of existing demand.

Who controls Bitcoin?

As mentioned above, Bitcoin is decentralized. That means that it's controlled by its users and not by any single company. Essentially, Bitcoin users can be broken down into two groups, which are: Bitcoin miners and Bitcoin investors. If all miners stopped mining, then no new Bitcoins would be made. If all investors sold their Bitcoin, then its value would plummet extremely. Therefore, it's both groups together that keep Bitcoin going - and going, which is reflected in its growth (see History of Bitcoin on Wikipedia for historical prices).

How can I get my first Bitcoin?

You don't need to be a miner or have any sort of specialized, technical knowledge to buy your first bitcoin.

The easiest way to do so is to buy it from a cryptocurrency exchange. Simply, sign up for an account on NBX and deposit a fiat currency of your choice. From there, you can buy Bitcoin once your account is verified (see What is KYC? in our Knowledge Base). At that point, it's up to you to decide whether you want to hold on to it like an investment, trade it, or even spend it for goods and services.

Remember, Bitcoin is a currency too!

Read our guide about how to buy bitcoin on NBX.

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