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What is Bitcoin

Mario Aguayo - Posted: July 17, 2018

Token, Protocol, Software?

You may have heard the name Bitcoin used in different ways. Someone may mention the "Bitcoin Protocol", or you might have heard someone talk about the "Bitcoin Token". Each of these are one individual piece of the whole solution.

The Bitcoin Protocol is the instrument that is used to manage and track the transactions between individuals using a Bitcoin. The Bitcoin Protocol allows transactions to happen between individuals without the need of a third party to monitor or manage the transaction. This decentralized way of monitoring the exchange of funds is the cornerstone of cryptocurrency and the basis for all other cryptocurrencies in existence.

A Bitcoin is to Bitcoin Protocol as the dollar is to a bank. A Bitcoin is the actual ownership of value, as a digital asset that is saved to a digital wallet. Similar to how you would store a physical dollar in a physical wallet, the digital Bitcoin is stored in a digital Bitcoin wallet. When you hear mention of a "price" of Bitcoin, it is a single Bitcoin that is being discussed. Keep in mind, there are units of bitcoin that are less than one bitcoin, the most common being the Satoshi.

Lastly, Bitcoin is not a token, it's a coin - because it has it's own independent blockchain.

How Bitcoin Works

To understand how Bitcoin works let's take a brief look into how any currency works. Currency as explained by wikipedia is: "a currency is a system of money (monetary units) in common use, especially in a nation. Under this definition, US dollars, British pounds, Australian dollars, and European euros are examples of currency." 

In the physical world we use dollars to represent transactions of goods between two different people. In Bitcoin the theory is the same, however where they differ is that Bitcoin is a digital asset. This means that with Bitcoin, instead of being reliant on a traditional banking system, it relies on the decentralized trust that is achieved by the Bitcoin network. 

Where do you store Bitcoins

Just like you may have a wallet for your credit cards or cash, you would also have a wallet for your Bitcoin but instead of it weighing down you back pocket it resides in a file that can be stored on a phone, computer, or even a USB drive. This Bitcoin Wallet has two main components; the public address, and the private key

The Public Address

The public address for a wallet is similar to an email address you have for your emails. You can freely share this address, as it is the way to receive Bitcoin from other users. Each Bitcoin Wallet offers you solutions to share this address with other users. The first and simple solution involves sharing a QR Code that links to your address. The second option is by displaying the entire public address which is a complex configuration of numbers and letters called a "hash". Refer to the graphic below for an example of both options.
*Do not send Bitcoin here, as this is a dummy address any crypto sent to this address would be lost*

The Private Key

If the public address is like your email address, then the private keys are your password. The private key is utilized to "sign" transactions that happen from your wallet. It is similar to a pin code for a debit card, and without the correct private key, then the Bitcoin Wallet can not send or withdraw funds. It is vitally important to note that you should never share the private key information as it may expose you to theft. Read more about private keys from our guides

Transactions

Ok so now we know where to store Bitcoin, so lets take a look at how people can use Bitcoin. A Bitcoin transaction occurs when a portion or whole Bitcoin is transferred from one wallet to another. This transfer can take place either in person or online. When a transaction occurs it needs to be recorded in a digital file often referred to as a block. When a block is created and validated by the network it is added to the last created block on the blockchain, which is a digital ledger of all transactions that occurred on the Bitcoin protocol. The validations take place digitally across the thousands of nodes, or computers, that listen to the Bitcoin network for new transactions and validate them with a process called mining.

To better illustrate the process lets look at a real life example of how these transactions take place. In our example we have two users, Jane (a customer in the United States) and Celia (a merchant in Italy).

Jane is in the market for a new Italian leather handbag. She found the perfect bag online, when she selects the bag and heads to the checkout Celia's online store offers her two different payment options: European euro and Bitcoin. Since Jane is in the states, she is unable to pay in euro's, but she can pay in Bitcoin.

When she selects Bitcoin, she is presented with a QR code, similar to the one that she has for her Bitcoin Wallet, however where they differ is that this QR code has pre-set information such as the item she is purchasing, Celia's merchant information, and the price. Jane scan's the QR code and sends the appropriate Bitcoin amount to Celia.

When the transaction occurs, it creates a new addition to a block, which is represented by the sheet below. This block acts as a ledger for the transaction and shows the transfer of funds from Jane to Celia. In the block you have the details of of the balances transferring between the two users based on their wallet addresses, in our graphic below we just use names for easier readability.

Once it is recorded on this block it is added to the blockchain as a verified transaction. The blockchain has every Bitcoin transaction recorded from the beginning, also known as the Genesis Block. The Genesis Block contains the information from the very first transaction.

In the graphic below the yellow block on the left is the Genesis Block. Immediately to the right is the blue block, which holds the information of the second transaction, however in addition to the transaction information it contains a unique identifying element known as a "block-hash". This block hash references the block previous to the current block, which would be the yellow or Genesis Block. The next transaction is the pink block and similar to the blue block it also holds a unique block-hash, however it references the blue block since it was the block immediately before the pink block.
Verifications

We mentioned earlier that the transaction needed to be verified, but how does this happen? Since Bitcoin transactions happen on a decentralized network, transactions need to be verified by not one singular entity, instead it relies on thousands of computers, also known as nodes to track and verify each transaction. These nodes are all connected via the internet, which allows them to listen to the Bitcoin network for new block creations and verify that they are correct. Once a majority of nodes reach a consensus then the block is successfully added to the blockchain and the rest of the nodes on the network update their own respective blockchains independently.

This is a process called "proof-of-work", which allows bitcoin to operate in a completely decentralized way. IN the graphic below, you see an illustration of how these networks are connected with each other and that there is no main central point of entry.


How to Acquire Bitcoin

Now that you know where to store Bitcoin, how to use Bitcoin, and what Bitcoin does, the only thing left is to know where to get it. The good news is that getting access to Bitcoin has never been easier, and chances are you know someone who already owns some. Which by the way is the easiest place to start.

Friends

Most people who have Bitcoin now were introduced by a friend. Transactions between friends is very common. Similarly to how you may ask a friend for change for a $20 bill, you may also ask a friend for $20 worth of Bitcoin. If you do this process you will have to get a Bitcoin wallet setup, which can be done on most smart phones making it easy to get started and trade with friends. Be prepared, if you do create your own wallet be sure not to share the private key information as this would leave you exposed to people taking Bitcoin out of your wallet. 

Exchanges

A quick entry point and something that has grown in popularity in the recent year has been the simplicity of exchanges. Popular exchanges like Coinbase, Binance, and Gemini allow users to quickly signup for an account, however with the standard verification process it can take a couple of weeks to actually be allowed to trade or purchase cryptocurrencies. An important note to make is that if you choose to signup for an account on an exchange you should be sure not to store all your cryptocurrencies on them. You can read more about why it is important not to store too much crypto on exchanges in our guide A Brief History.

Mining

Another often heard solution is mining. Mining is the process of using computers to solve a complex math problem, and at the same time verify transactions and blocks on the blockchain. Each time a computer arrives to the correct solution for the math problem, they are rewarded with a portion of Bitcoin. 

Crypto Providers

Finally you can also get crypto using a service which acquires them for you, which takes out the guess work of where to start. CBlocks for example, acquires cryptocurrencies for our clients, assists with creating your digital wallets, and offers protection and security though a cold storage solution. Cold storage is the process of owning a Bitcoin wallet that has never been connected to the internet, making it extremely difficult to hack or compromise. You can learn more about our process by checking out our FAQ section on our page.  
Mario Aguayo
Mario has been a developer for the past 3 years and lover of everything tech all his life. He uses his tech skills and natural inquisitiveness to help others learn about tech.

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