What is Bitcoin and Bitcoin Investing?
For all the crypto rookies out there, here is a tutorial on how Bitcoin works. By reading this blog, you will quickly and effortlessly understand how Bitcoins are created and I bet that you’ll agree that this is the simplest explanation of Bitcoin you’d ever see. The concept of Bitcoin can be tricky at first. So, to help you understand, let me show you a short story.
Imagine there are two people in the countryside. Let’s call them Mark and Mary. Mary has pineapple, and she wants to give it to Mark, who has zero pineapples. After Mary gives the pineapple to Mark, she now has zero pineapples, and Mark has one pineapple, which he stores inside his little brown bag.
And we know this because we can physically observe the transaction. It’s almost as if we can physically touch the pineapple as if we were standing with them there in the countryside. There’s only one pineapple here, not two, not three. You can’t just pull pineapples out of thin air. This type of in-person exchange is something we can all understand, right?
Let’s take a step back, and ask ourselves, what happens if Mary gave Mark one digital pineapple? How does he know that he’ll be the only owner of it? Because it’s a digital pineapple, how does he know that Mary didn’t make ten copies of that pineapple and she gave copies to other people as well?
This could be a problem because (a) Mark could not be sure that his digital pineapple is the real one instead of a copy and (b) if there were more than one real pineapple around, say, the value of that pineapple would drop after a greater supply, basic supply, and demand kicks in here.
One solution would be to bring in a third party to keep track of the transaction on a ledger. Let’s call this person, Mr. Green, the accountant. He could write down on his ledger that Mary gave Mark one digital pineapple, which is stored in his brown bag.
So, that way someone is keeping track. This solution has a major drawback because Mr. Green, the accountant could also manipulate his ledger and just create more entries. Therefore, creating fake pineapples as well.
There is no trust in this scenario cause whilst it solves the trust issue in relation to Mary and Mark, the integrity or trust in the system relies on a single entity, Mr. Green, the accountant.
Trust issues can get in the way of every single transaction... not with cryptocurrencies.
So, this solution doesn’t work but what if there were ten accountants in charge of keeping track of the transaction, what if all ten had copies of the exact same ledger? Now we are getting somewhere, but there is an even better solution.
Instead of just ten accountants observing the transaction in the beautiful countryside with Mary and Mark, what if there were thousands of them? A huge network of people who all have a copy of the same ledger that keeps track of every single pineapple transaction? At a simplified level, that is exactly how Bitcoin works.
Let me explain, Bitcoin is kind of like the pineapple in our example with the difference that unlike a pineapple, every Bitcoin has a unique identifying code to it. That said though, even though each one is unique, any Bitcoin is interchangeable with any other Bitcoin.
The little brown bag that Mark used to store his pineapple is called a digital wallet for Bitcoin. And just like the real wallet, every wallet belongs to its owner.
The accountants spread across the world are called miners and the common shared ledger that all the miners have copies of is called the Blockchain. So, why would the accountant or miners have any interest in participating in a Blockchain network?
Well, by offering to verify third-party transactions, they can also mine Bitcoins. By using their computers, to solve highly complex mathematical equations, they can create or mine Bitcoins, which of course increase the value of their respective wallets.
It’s important to note that unlike traditional currency which can be forced and which any central bank can decide to print more of at will, this is the only way that new Bitcoins can be created.
Furthermore, there’s a maximum amount of Bitcoins that can be created, which again is not the case for traditional currency, where there is no maximum amount of money central banks can ever print, which has caused periods of very high inflation in history.
As more and more Bitcoins are mined, the mathematical problems to be solved become increasingly difficult, which means that year after year it becomes more and more difficult to mine Bitcoins.
And, therefore fewer and fewer Bitcoins are being created. All of these contributes to reducing supply for Bitcoins whilst demand and usage is likely to increase. All of which in turn contributing to Bitcoin prices rising.
It’s estimated that all 21 million Bitcoins that can ever be created would be mined by the year 2140.
It’s estimated that all 21 million Bitcoins that can ever be created would be mined by the year 2140. After that, Bitcoin miners will still have an incentive to verify transactions in the Blockchain by charging transaction fees.
So, that’s it, this is a very quick and very high-level explanation of how Bitcoin works. For day-to-day use of Bitcoin, really there isn’t much else you need to know but if you are looking to invest and profit from Bitcoin, make sure to check the links at the bottom of this video.
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