The Bitcoin software enabled a digital currency that could be used without any intermediaries or governing authority. This means that Bitcoin could pass from person to person without the need for a bank or any other financial intermediary.
Bitcoin is called a cryptocurrency because the existence of a transaction can be seen by everyone (unencrypted transaction part), but the contents are only known to the people making and receiving each transaction (encrypted transaction).
Thus, the crypto or cryptography part of the word cryptocurrency. As a currency, Bitcoin does not exist in a physical form. There are no coins or notes. It lives natively on the internet. When a Bitcoin transaction takes place, participants who use Bitcoin, their computers specifically, validate each Bitcoin transaction, and it is recorded in a distributed ledger (Blockchain).
How can Bitcoin possibly have value? To have value, typically, something must be relatively scarce and it must be accepted by others for payment. Gold, silver, diamonds, and oil, for example, all derive their value from being both scarce and expensive to mine. How might that translate to Bitcoin?
The first characteristic is that there is only a limited amount of bitcoins available. The original creator stipulated that there would only be 21 million bitcoins.
The second characteristic is how a person or organization can acquire a bitcoin. Like gold, acquiring a new bitcoin, in contrast to an existing tradable bitcoin, requires a unique type of mining.
New bitcoins are provided as rewards to blockchain participants who solve increasingly complex math puzzles every time a blockchain transaction takes place. People who choose to solve these math problems are called miners. They require considerable computing power. In other words, the cost of mining new bitcoins is high. When a puzzle is solved, the miner is rewarded with a Bitcoin. He can now trade that bitcoin openly on the global bitcoin exchange.
The value of Bitcoin is calculated similarly to any currency, by supply and demand. If demand for Bitcoin is high, its value increases. With less demand, the price drops.
You might think that wevwill run out of bitcoins to mine pretty quickly. However, the math problems are getting harder and the speed of awarding them is slowing over time. It is predicted, with a little uncertainty, that the last Bitcoin will be mined in 2140.
To spend and receive bitcoins, users must have an electronic wallet on their computer. This can be as simple as an app on a smartphone or computer. A user can purchase bitcoins from a seller and then use the wallet to send and receive payments.
You dont need to be a Bitcoin miner to acquire a Bitcoin, you just need to buy some on a Bitcoin currency exchange.
Adding a Bitcoin block requires the activity of miners. This creates a form of validation to the transactions. That is, requiring miners in the transaction means we almost eliminate fraudulent activity.
A hacker would need to fake all the processing and electrical power of the miners to fraudulently add a block to the blockchain. Having miners solve math problems to validate adding blocks is called proof of work.
Nobody owns the Bitcoin universe or the public blockchain database. Its remarkably secure, transactions are anonymous, and its fast. The other quality of a currency we discussed is that it must be accepted as a form of payment. bitcoin be used to buy anything. Bitcoin is certainly not perfect and is largely considered a work in progress. Bitcoin has also inspired other digital currencies such as Ether. Bitcoin is a revolutionary new currency. It breaks the financial status quo and raises a whole host of challenges around governance, regulation, legalities, and so much more.