What is Bitcoin and how does it work?

Bitcoin is a digital currency, works as if it were Dollar, Euro, Real, etc., except that there is no central controlling body. We will explain more details below.

The motivation for the creation of Bitcoin was the 2008 crisis. For those who do not remember, the banks were responsible for a global crisis (we will not go into detail about the crisis here in this article, if you are interested, search for “subprime crisis” ).

A limitation of humanity according to Satoshi Nakamoto (creator of Bitcoin) is that the only way to transfer money over the internet was through a bank or a finance company.

As logical as it may be to need an institution to track and account for transfers, this model has many disadvantages, such as:

Cost: Account Maintenance Fees, Transfer Fees, etc.

Limitations: maximum daily transfer limit, advance notice, working on weekdays only, etc.
Economic control: Potential to cause greed crises and government-linked monetary expansion policies.
The question arises: would it be possible to use a non-bank dependent currency to be electronically transferred? The answer is yes, through complex cryptographic and distributed computing techniques.

Before we explain a bit more about how Bitcoin works, it is important to note that BTC was created in 2008 by Satoshi Nakamoto (this is the creator’s nickname, which remains anonymous to this day, nobody knows his real identity), through a paper titled Bitcoin – A Peer-to-Peer Electronic Money System. The term “peer-to-peer” refers to transfers made between two parties, end-to-end. You can interpret this as a direct transfer from one person to another without an intermediary.

Following the launch of the concept, a developer community began to develop the protocol, and the number of interested people began to grow, both in development and in use of the system. The currency that was worth $ 0.003 cents a unit in 2010 (when it began to be publicly traded), 7 years later was worth $ 19,800.00 (at the end of 2017), accumulating a 660000000% appreciation (660 million percent !!).

Perhaps you are wondering why the price has gone up so high. This is a matter of supply and demand, the greater the interest in using the currency, the higher the price that will need to be paid to purchase a bitcoin. In this video we explain the fundamentals for bitcoin pricing.

Before you understand how Bitcoin works, you need to understand what a currency is. In the past, people used gold to trade goods among themselves. Then papers (which served as collateral for gold reserves) were used instead of gold itself. This is how the monetary system emerged.

In principle, every coin issued by a bank had to be backed by gold, meaning each value described in the coins corresponded to a quantity of gold stored.

But over time, paper money was no longer gold-backed, as governments wanted to be able to print more money according to their own political will and interests. For those who do not know, printing money no longer generates wealth, only generates inflation. The winners are governments, as it is an indirect way to raise money from the people (the government sells money to the population, which ends up buying and suffering inflation). This excellent article explains how the process works, explaining the origin of world crises. In short, printing money is a more efficient way for the government to take money from the population than by raising taxes because the population does not directly realize the effect. This is a serious problem and you need to be aware of it.

Therefore, currently no government currency is backed. There is simply no ballast that protects the capital circulating among individuals. The only value a currency has is that the government has determined it would be, and people only accept that currency because it is law in the country (not willingly). The difference in value between the Brazilian Real and the US Dollar is in the amount of paper printed. Those who print the most (to collect revenue) devalue their own currency the most.

The Brazilian Real that was worth $ 1 in 1994 today is worth a lot less. This is called inflation. But do not think that the United States does not inflate its own currency either, as they do. Brazil is only worse. The world floating exchange rate process is chaotic, with dozens of currencies experiencing constant inflation by all governments.

In this context, Bitcoin is different because it is a currency that has no relationship with governments or institutions. The value of the BTC currency is defined by the market (the more people are interested in the currency, the higher the price rises, and vice versa, following the economic law of supply and demand). No one can create more bitcoins of their own accord as governments do. The amount of Bitcoins in circulation follows a programming code known to all, which cannot be changed. That is, it is the return of the free market concept to a currency in the economy, with no artificial growth, no manipulation, no policies involved.

Unlike government currencies, which can be printed and issued at the will of governments, Bitcoin is scarce as there is a limit on BTC currencies that will be issued (21 million is the limit set in the original code). Thus, Bitcoin is characterized by being a deflationary currency, ie it does not allow infinite new emissions, being similar to gold.

Ask yourself, if governments no longer need gold as currency, if their government currencies are so stable, why do all governments have millionaire gold reserves stored in their coffers? Is this a protection for crises? This is a fact, well known among economists.

Gold, although valuable and has the advantage that it cannot be artificially manipulated by governments, has the disadvantage that it is difficult to store and use everyday as currency.

Bitcoin, on the other hand, has all the features a currency needs. More and more establishments have been accepting Bitcoin as a medium for exchanging products and services. Other people have used Bitcoin as a store of value, or in other words as an investment. After all, if one day Bitcoin becomes a world reference as a medium of exchange (quite a possibility in the future), the price of a bitcoin could easily be over $ 1 million. Today the bitcoin price (in reais) is approximately:
BTCBitcoinR $ 29,118.47
Read the article where we explain everything about buying bitcoin in Brazil.

Bitcoin Features and Advantages:

  • It is decentralized. That is, it is not controlled by any institution; Transaction validations and records of all system operations are performed by users themselves from specific rules, resulting in thousands of computers worldwide working for the network. Better understand how this works in the blockchain article.
  • It is open source. Anyone with technical knowledge can analyze and understand exactly how the system works, unlike banks that do not reveal their systems.
  • The transactions are public. To enable system security, all transactions are verified and validated and can be consulted at any time by anyone, creating a 100% transparent environment.
  • Transactions are fast. Unlike bank transactions, which take place during business hours and usually take days to process, the Bitcoin system runs 24/7, and an average transaction takes about 10 minutes to process.
  • There are no continental barriers. Sending bitcoins to a neighbor or person on the other side of the world has no time or fee difference.
  • The rates are low. While banks can monopolize and create high transaction fees (especially for transactions to another country), rates on the Bitcoin network are very low by definition.

Summary of How The Technology Behind Bitcoin Works

There are two main agents that work with Bitcoin: miners and full nodes. Full nodes are copies of all transactions already occurring on the bitcoin blockchain network, it is a complete system history. All accounting is based on full nodes.

If John has 3 BTC and transfers 0.1 BTC to Maria, you may know that John actually had 3 BTC and now has 2.9 BTC thanks to full nodes.

Note: The smallest unit of BTC (ie the smallest possible amount of transfer to someone) is 0.00000001 BTC. This amount is also called 1 satoshi. 100 million satoshis equals 1 BTC. This is an advantage because divisibility is an important feature for a currency.

The bitcoin network currently has over 10,000 full nodes around the world. Everyone is responsible for validating each of the transactions. This ensures a lot of security for the system.

Miners, on the other hand, are responsible for creating the blocks of the blockchain network. Simply put, they guarantee the immutability of the system. First, miners create a block, then full nodes validate that block and introduce it into the blockchain network. A block consists of a collection of thousands of transactions.

To group thousands of transactions and form a block in the blockchain, it takes a lot of computational power. The greater the computational power of a miner, the more likely it is to form a block before the others. Therefore, miners are rewarded for each block mined. This reward is given in bitcoins.

Final considerations

The popularity of Bitcoin has only grown over time. Governments are increasingly concerned about regulatory measures, and the market as a whole has become a place of uncertainty and speculation.

On the one hand, some argue that Bitcoin is a bubble that will one day burst. On the other hand, experts argue that this is the future of money, something that may even become bigger than the dollar itself. If before buying Bitcoin you want to understand why the price of Bitcoin has gone up so much, watch the video below calmly:

3 Comments

  1. Sahev Hazra January 22, 2020
  2. Sahev Hazra January 22, 2020
  3. Sahev Hazra January 22, 2020

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