Bitcoin (BTC) Explained

As Bitcoin gets ever more popular, the 97% who don’t know much about it start to Google ‘What is Bitcoin?’, ‘Where do Bitcoins come from?’, ‘ELI5 Bitcoin’… all in search of a Bitcoin explanation.

It’s because Bitcoin is such a nascent and different technology, a type of money that until it was invented nobody had ever come across before. A type of money that each time people hear snippets about it they have their interest peaked more, and want to know what it is.

What’s more, with the printing machine now set to infinity, governments are helping Bitcoin’s inevitability. Bitcoin is the hardest money ever created, every single one of them has been worked for and governments’ quantitative easing and now UBI will only help Bitcoin's cause.

So, if this is your first read of Bitcoin allow me to explain what Bitcoin is.

ELI5 Bitcoin

In short, Bitcoin is a network of trust built on a new form of technology known as blockchain. Its first application is the currency everyone calls Bitcoin.

Bitcoin is a borderless, digital currency that is created by miners who work their hard efforts to compete for every new Bitcoin that is created along with every new block that is added to the blockchain.

There is a limit of 21 million bitcoins that will ever be created, and nobody, and I mean nobody can create any more. The code is open source, which means anybody can audit it.

It's also decentralized on thousands of computers around the world, and no central entity has control of it. In fact if anybody's version of bitcoin is different to the majority of the computers, theirs will be rejected.

With bitcoins (BTC) you can do whatever you like with them, such as save and/or spend them, but whatever you do it’s critical that you keep them very safe, because you should be the only possessor of the private address your bitcoins are stored at.

That’s a very short and simplistic answer, but if you’d like a full explanation of what Bitcoin is, please read on.

Bitcoin Explained

Bitcoin is a digital and global money system, which allows people to send and receive money across the Internet without the need of a third party. As long as the person sending it types in the correct address, the BTC cannot go astray. It will definitely be received by the person it was sent to.

Bitcoin was created by a pseudonymous programmer called Satoshi Nakamoto. To this day nobody knows who Satoshi is, but he/she/they launched the Bitcoin network on 3rd January 2009.

Each bitcoin can be divided by 100 million, and each part of a Bitcoin is called a satoshi, so 100 million satoshis make up 1 Bitcoin.

Once a bitcoin transaction has been sent and confirmed it cannot be reversed. So, it’s imperative that any sender treble checks the address they are sending it to. If you send it to the wrong address, you will likely never see that BTC again.

Bitcoin Mining

Every bitcoin on the network has been mined into creation. At the moment there are about 18.5 million bitcoins, and as I said there will only ever be 21 million. Miners are paid the block reward which is newly minted BTC that appear on the blockchain once a new block is added (roughly every 10 minutes).

The new bitcoins that are created are paid to the miners for their hard work. This is known as the block reward. At the moment the block reward is 12.5 BTC, but every 210,000 blocks this reward is cut in half, an event known as the Bitcoin Halving.

Related Reading:

Bitcoin in Layman's Terms

Why We Need Bitcoin

Why Institutions Love The Idea of Bitcoin

ELI5 Bitcoin - Explain Bitcoin Like I'm Five

ELI5 Bitcoin Mining - Explain Bitcoin Mining Like I'm Five

Quantitative Hardening

With the inflation of Bitcoin being cut in half, the term for the halving is now being dubbed 'Quantitative Hardening'. This is opposed to governments’ quantitative easing, which weakens government backed fiat and will eventually result in the same way every other fiat currency before them has: extinction.

There have been two Bitcoin Halving events before and we have another one in about two weeks time. If you’re reading this in the future, the third halving was in May 2020. The initial block reward when Bitcoin first launched was 50 BTC, and it was cut to 25 after the first halving, and then to 12.5 BTC the last time.

In two weeks the halving will cut the block reward to 6.25 BTC, and then again every 210,000 blocks, which is about 4 years. This will continue until the very last fraction of a bitcoin is minted in around the year 2140.

Difficulty Adjustment

Difficulty adjustment takes place every 2016 blocks, which is about 2 weeks, and it has been hard coded into the Bitcoin protocol, and is arguably the most important aspect of Bitcoin which will make sure Bitcoin never dies.

The blocks take about 10 minutes to mine, but it really depends on the amount of miners mining. The more that get involved, the hashrate goes up and the minting of the blocks will speed up.

If this happens, there will be a difficulty adjustment, which will slow down the process of creating blocks. If there are fewer miners mining the opposite will happen to speed up the mining process.

If some miners stop mining for whatever reason, it will make it easier to mine and earn more Bitcoin, and this will ensure there is always a relatively high demand for mining Bitcoin, which ultimately keeps the network secure.

Public Key

When you create a wallet, whether it’s a hardware or software wallet, you will have what is known as a public key. Your public key should be shared to anyone who wants to send you some satoshis, or bitcoins if you’re lucky.

Your public key is like your ID number, and there’s no way anybody can withdraw anything from the wallet even if they have the public address.

Private Key

Private keys are basically the keys to your Bitcoin vault, and like a public key, they’re a string of numbers and letters. Do not share these with anybody you don’t trust, and keep them safe. It’s recommended to keep them written down on a few separate sheets of paper in a few separate locations just in case disaster strikes.

If you keep your private keys on a digital file somewhere you run the risk of being hacked or phished and if any untrustworthy types get hold of your private key, you can say goodbye to your bitcoins.

Where To Store Bitcoins

You don’t actually store bitcoins anywhere, because technically they never leave the blockchain, but it’s easier to explain by saying “store bitcoins” so I will use that term, too.

The safest place to store your bitcoins is in a hardware wallet. The Trezor and Ledger Nano wallets are the best selling hardware wallets, and I recommend either. They’re both very secure, and are made by industry leaders. If you buy one, make sure it’s brand new, and that the seal hasn’t been broken before.

Instead of having the private key, with a Bitcoin hardware wallet you will be given a seed phrase with 24 random words. Treat this as you would a private key, because it’s basically the same thing.

The beauty of the seed phrase is that as long as you have it, you can get into your wallet on any device. Example, if you have a Trezor hardware wallet, and it gets damaged, you simply put your seed phrase into a new device and it will bring up your accounts.

Bitcoin Adoption Is Inevitable

Bitcoin adoption and use continues to grow every year. It started from absolutely nothing and each bitcoin is worth a staggering $8,000 today. Bitcoin adoption doesn’t depend on things like world events, bitcoin adoption is inevitable, and is happening.

The fact is, Bitcoin is the hardest money ever created. It’s also the most secure network and store of value ever. And its popularity isn’t a surprise to anyone who knows about it.

Bitcoin’s popularity will likely continue to grow. With coronavirus being used as an excuse for unlimited printing press, fiat currencies can only go one way. In fact, every fiat currency in the history of the world has gone to zero. The dollar, the euro, and fiat’s oldest sapling, the pound sterling will all go the same way, eventually.

We’re seeing end games for currencies such as the Zimbabwean Dollar, Argentinian Peso, and the Venezuelan Bolivar, and these world events increase Bitcoin’s inevitability.

In fact their governments have put limits on its people exchanging their local currency for US dollars. They can’t limit Bitcoin purchases, and because Bitcoin is code, it's unconfiscatable.

Bitcoin might be volatile, but it’s a safer currency to hold than the peso, and Argentinians know that. They are fleeing to Bitcoin, along with many others where they’re used to seeing their own currency devalue all too often.

Hyperinflation will likely happen to all fiat currencies, but the US, UK, and EU governments will have their own stablecoin in place long before they do go pop. But how long will people keep faith with their government issued currencies?

People now have a different option. It’s a new type of money: hard money, unconfiscatable money, unmanipulatable money. Bitcoin might be alien to most, and exotic to many others, but its adoption is inevitable.

Enjoy your deep dive and welcome to the Bitcoin standard.

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