What is bitcoin and how does it work?

As a decentralised digital currency, Bitcoin avoids the oversight of traditional financial institutions like banks and government regulators. Instead, it is based on decentralised computing technology and cryptography.

Copies of the entire history of all Bitcoin transactions are stored on servers all over the world. A node is a type of server that can be created by anyone with access to a spare computer. These nodes use cryptography to agree on who owns what coins, rather than having to rely on a trusted third party like a bank.

Each and every exchange is broadcast to every other node in the network. Every ten minutes or so, miners compile these transactions into a group called a block, which is then added permanently to the blockchain. Here you will find the final bitcoin ledger.

Virtual currencies are stored in digital wallets and can be accessed through client software or various online and hardware tools, much like traditional coins are stored in a physical wallet.

Currently, bitcoins can be divided into thousands of smaller units, called millis, and hundreds of thousands of smaller units, called satoshis.

Bitcoins and wallets are merely the result of mutual agreement within the network as to who is the rightful owner of a given number of coins. When making a purchase on the network, a private key is used as identification and as proof of ownership of the funds being spent. As the name suggests, a "brain wallet" is a method of storing and using virtual currency in which the user only needs to remember their private key.

Can I exchange my bitcoin for cash?

Bitcoin, like any other asset, can be sold for fiat currency. This can be done at any of the many online cryptocurrency exchanges, but it can also be done in person or over any form of communication, making it possible for even the smallest businesses to accept bitcoin. Bitcoin does not come with an official method of exchanging it for another currency.

The Bitcoin network is not based on anything of intrinsic worth. After abandoning the gold standard, many national currencies have become more stable than the gold standard itself.

The point of bitcoin is unclear.

Bitcoin is an online currency that enables instantaneous monetary transfers. The goal of the digital currency was to offer an alternative payment system that could function independently of any single authority while otherwise functioning identically to conventional currencies.

Can I trust bitcoins?

Bitcoin's cryptography is based on SHA-256, an algorithm developed by the United States National Security Agency. There are more possible private keys (2256) to try before cracking this than there are atoms in the universe, making cracking this practically impossible (estimated to be somewhere between 1078 to 1082).

While there have been high-profile hacks of bitcoin exchanges that resulted in stolen funds, the stolen digital currency was always stored by the exchange on behalf of customers. In each of these instances, it was the website itself that was compromised, not the Bitcoin network.

It is theoretically possible for an attacker to take over the entire Bitcoin network by taking control of more than half of all nodes, at which point they would be able to convince everyone that they were the sole owners of Bitcoin and permanently record this fact in the blockchain. As the network size and number of nodes increase, however, this becomes impractical.

The fact that bitcoin has no single governing body is a real issue. This means that if a user makes a mistake when making a payment through their wallet, they are completely out of luck. No one can help you if you misplace your Bitcoin password or send money to the wrong address.

Naturally, it could all fall apart once quantum computers become practical. Since much of cryptography depends on mathematical calculations, quantum computers may be able to execute them in a fraction of a second despite being fundamentally different from traditional computers.

Explaining the process of "bitcoin mining."

In addition to facilitating the creation of new Bitcoins, the mining process ensures the continued operation of the Bitcoin network.

The network broadcasts all transactions, and miners compile batches of them into blocks by solving a cryptographic calculation that is difficult to generate but simple to verify. If the miner is correct, the new block is broadcast to the network and added to the blockchain. The miner receives a portion of the newly created bitcoin as payment.

It is a feature of the Bitcoin software that the total supply of bitcoins will never exceed 21 million. The universe can never hold more than that. By 2140, all of these coins will have been issued. About once every four years, the software halves the reward for mining bitcoin, making the task much less profitable.

At the time of Bitcoin's release, even a low-end computer could mine the cryptocurrency almost instantly. These days, mining a bitcoin requires a lot of expensive equipment—typically high-end graphics cards that are good at crunching through the calculations—and, when combined with the price volatility of bitcoin, it can sometimes be more expensive than it's worth.

As an additional incentive, senders can tack on transaction fees of varying amounts for miners to consider including their transaction in a block. Even after all coins have been mined, these fees will remain to incentivize miners to keep at it. The Bitcoin network wouldn't function without this.

Who created Bitcoin?

In 2008, an academic white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System was uploaded to domain after its purchase. The paper detailed the concept and architecture behind a decentralised digital currency.

"The root problem with conventional currencies is all the trust that is required to make it work," wrote the author, who went by the name Satoshi Nakamoto. Central banks have to be trusted not to devalue their currency, but fiat currencies have a checkered past.

The paper was published in 2008, and the software it described was released to the public on 9 January 2009, officially kicking off the Bitcoin network.

After Nakamoto and other developers worked on the project together until 2010, when Nakamoto abandoned it, the project continued to develop without him or her. Nakamoto, whoever they may be, has not made a public statement in a long time and their true identity has never been revealed.

Now that the software's source code is publicly available, anyone can access it, use it, and make modifications to it without cost. The software is being actively developed by numerous companies and organisations, including MIT.

Why does bitcoin have so many issues?

The bitcoin mining process has been criticised for being extremely energy intensive. As of the beginning of 2021, the University of Cambridge was expected to use more than 100 terawatt hours of energy per year, according to an online calculator that keeps track of energy consumption. If you want some context, in 2016 the UK used a total of 304 terawatt hours of electricity.

Critics have also suggested that criminal activity is linked to cryptocurrency because of its convenience for conducting illicit transactions. Bitcoin's public ledger could be useful for law enforcement, but cash has served this purpose for centuries.

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