What Is Bitcoin: The First Cryptocurrency Explained

How does Bitcoin work?

Bitcoin transactions exist on a public digital ledger called the blockchain. The blockchain stores bitcoins’ transactions in blocks, which are appended one after another. Bitcoin transactions are permanently stored in a block and are public and irreversible. No single party controls the system.

Bitcoin’s blockchain is open-source, meaning the code is readily and publicly available for all to see. A significant proportion of those on the Bitcoin network must approve a new block before adding it to the blockchain. The whole network is secured by the Proof-of-Work (PoW) consensus mechanism, enabling high security without relying on a central party and keeping the system open and decentralized.

How was Bitcoin created?

The entire financial landscape came under increasing scrutiny during the Great Recession of 2008. Bitcoin was born as a reaction to this event. An individual or a group of several individuals (no one knows for sure) using the name Satoshi Nakamoto published a white paper in 2008 to discuss the problem of centralized management of funds and the need for trust, credibility, and accountability when managing the public's money. They argued that transactions have the potential to be undone or tampered with by centralized parties, and that these parties create a world that advantages them over everyday people. 

Enter Bitcoin. The idea behind Bitcoin was to enable transactions without an intermediary. Instead of depending on external banks and financial organizations to ensure a system's stability with traditional methods, the Bitcoin network employed cryptographic validation on a decentralized blockchain.

How is Bitcoin used?

Bitcoin's primary purpose is to act as a method of online payment. It’s an alternative to traditional fiat currencies like the U.S. dollar or the euro but without centralized management.

Bitcoin provides several useful applications, such as:

1. Self-custodial store of value – A Bitcoin user holds sole possession of their coins. Each user has a private key that ensures security as it remains with the user—or those the user gives access to—and isn’t stored anywhere else. 
2. Alternative investment – Users can purchase bitcoin as a form of alternative investment to help portfolio diversification. Many users are now embracing cryptocurrency as an option to add traditional stocks and bonds to their investment portfolios.
3. Make purchases – More than 2,300 U.S. businesses accept bitcoin as a form of payment, enabling users to make purchases using the cryptocurrency. Large corporations such as PayPal and Microsoft also accept bitcoin. Many services are available that let users link their credit cards to their cryptocurrency accounts or crypto wallets, enabling them to use bitcoin similar to fiat currencies and traditional accounts.
4. Substitute a currency – Individuals in some countries—especially developing countries with volatile currencies—can use cryptocurrency as an alternative to their country's fiat currency. Bitcoin offers citizens an inflation hedge and allows them to store value without oversight by a central bank or the government, especially in countries with weak local currencies.

What is Bitcoin mining?

Bitcoins are generated through a rigorous, decentralized practice called mining, which requires Bitcoin miners to run advanced resources like high-tech computers with large amounts of electricity to mine blocks, enabling transactions and securing Bitcoin's network in return for fresh bitcoins. Miners must solve complex mathematical problems using software to mine a new block. Once solved, they receive rewards in the form of new bitcoins. Presently, each new block adds 6.25 bitcoins into global circulation, although this number halves around every four years as the supply flattens to 21 million.

Miners generate new bitcoins at a set pace thanks to Bitcoin's predetermined algorithm. As a result, mining bitcoins is a highly cutthroat industry. It becomes challenging to turn a profit as more and more miners enter the mining network.

Since the entire process is decentralized, no third-party developer or intermediary can modify the system in a way that would improve their profits without controlling a majority of mining power. Any action that fails to adhere to Bitcoin's algorithmic protocol will face rejection by each Bitcoin node.

How does mining work?

Bitcoin mining is a complex process that requires adequate resources, time, and technical know-how. We can break down the Bitcoin mining process into four simple steps.

1. The first step encompasses the miner to consider the feasibility and profit potential. There are two factors to take into account.

1. Hardware – Bitcoin miners need advanced hardware to solve complex mathematical problems and mine new blocks. The demand for this hardware—called Application-Specific Integrated Circuits (ASICs)—is high. Users can often buy mining rigs from online retailers or suppliers. It’s essential to consider the condition of the hardware before purchasing; a used rig is a viable option, especially when starting.
2. Electricity – All forms of crypto mining require a significant amount of electricity to run. Miners often set up rigs at mining farms if they deem the task profitable.

1. The next step is downloading and installing Bitcoin mining software on the hardware. The software will allow miners to connect their hardware to Bitcoin's blockchain, which divides work among miners.
2. It's challenging for individual miners to compete with established mining farms. However, there's a solution to this: Bitcoin mining pools. Miners can participate in a pool, where they become a part of a group that can collectively compete with larger mining companies. An operator usually runs the pool, and users must pay a fee to contribute. The rewards aren't as high but will increase consistency and the chances of competing.
3. After connecting the necessary hardware to a power outlet and connecting it to the blockchain, miners must simply add a Bitcoin address to receive rewards and start mining.

What is a Bitcoin wallet?

A Bitcoin wallet is a digital wallet that allows users to hold Bitcoin and other cryptocurrencies such as Ethereum, Dai, Dogecoin, XRP, and more. These wallets keep users' cryptocurrencies secure with unique private keys, which ensure that the holder is the only individual with access to the wallet. Wallets allow users to authorize transactions that occur on the blockchain.

What is proof-of-work?

Miners use advanced computer hardware to mine new blocks and validate bitcoin transactions. Once a block is mined and the network is secured, the miner has "proved" that they underwent the task of mining to generate new coins. This process is called proof-of-work (PoW). As a result, miners act as the network's validators by dedicating their time and using their computational power and electricity to mine new blocks.

PoW uses an immense amount of electricity and power—with new blocks often mined at mining "farms”—making it incredibly complex and power-intensive. Networks like Ethereum are now focusing on shifting to a proof-of-stake (PoS) consensus mechanism that will use less energy and hardware.

Is Bitcoin a good investment?

Whether or not it’s a good investment depends on one’s volatility tolerance, risk tolerance, and their thesis for the future of Bitcoin. 

Just like any cryptocurrency, Bitcoin is a volatile investment. The space is so immature that there’s constant news about price fluctuations––greater than 10%. If one invests in Bitcoin, they must be willing to tolerate the volatility.

Also, just like other cryptos, Bitcoin is a risky investment. Since the space is new, there’s uncertainty about the long term. Bitcoin is less risky than most others, thanks to its high liquidity and existing adoption, along with the fact that it’ll still maintain its existence over the next 10-15 years. Compared to bonds or stocks, however, it’s risky. 

The thesis for Bitcoin centers around it being the hardest, most secure, and most decentralized form of money. While other cryptocurrencies may have more features, many may prove to be superfluous. Bitcoin is great at what it does and is relatively decentralized with billions of dollars of security backing it. It also is the clear leader among PoW chains, so if one believes in PoW’s superiority to Proof of Stake, it might make Bitcoin an attractive investment. 

All in all, there’s no answer to that question, and potential investors should do their own research in whatever asset they acquire. 

How to buy bitcoin?

Mining is a power-intensive activity that may not currently be viable for the average citizen. Instead of mining Bitcoin, you can buy it. One bitcoin is usually costly, but you can buy smaller portions on cryptocurrency exchanges like Coinbase using fiat currency.

Another option is to invest in other cryptocurrencies like Ethereum or Worldcoin. The best part about Worldcoin is you can receive a share of cryptocurrency for free. Worldcoin aims to provide every person on Earth with their fair share of Worldcoin without paying a penny. 

At Worldcoin, we use safe and secure methods to protect your identity while ensuring you enjoy the benefits of cryptocurrency in a growing digital economy. To know more, subscribe to our blog and stay updated on the latest and greatest advancements in the world of cryptocurrency.