In October 2008, a mailing list for cryptographers published an article (called a 'white paper') titled: 'Bitcoin: A Peer-to-Peer Electronic Cash System'. Written under the pseudonym Satoshi Nakamoto, the document outlines an entirely new monetary system in just nine pages.
Nakamoto left the project in late 2010, never revealing his true identity. The inventor of Bitcoin managed to combine multiple existing concepts and technologies into a new digital currency. Among other things, he solved the double-spending problem. Although Nakamoto is the inventor of bitcoin, he is not the inventor of what we now call 'cryptocurrency'. As early as 1998, the cyberpunk Wei Dai described a currency based on cryptography.
What is bitcoin and how does it work?
- What is Bitcoin?
- How does Bitcoin work?
- Who invented Bitcoin?
- Is Bitcoin safe?
- How do you get bitcoins?
- How many bitcoins are there?
- What makes Bitcoin so special?
- How do you start with bitcoins?
Content
What is Bitcoin?
Bitcoin is a digital currency specially designed as money for the internet. Bitcoin transactions are verified and recorded through a process called "bitcoin mining." The mining process also creates new bitcoins, causing inflation without the help of a central bank or authority. On special trade exchanges it is possible to exchange euros for bitcoins. Like traditional currencies, bitcoins can be used for various purposes, for example as a means of payment or as a store of value.
In order to carry out a transaction, a user must prove that he is the owner of a certain address. When you create a wallet, you receive a so-called public and private key. The public key forms the basis for a bitcoin address, on which you can receive bitcoins. The private key should be used if you want to send bitcoins from your address to someone else. For example, most wallets ask for your set password if you want to send a transaction. Private keys come in different forms, the most common form at the moment is the so-called recovery seed. This seed consists of twelve or twenty-four words and always gives you access to your coins.
A bitcoin wallet can be compared to a key ring on which important keys are attached to carry out transactions. Bitcoin is a complicated new technology: to fully understand it you will have to study it for a while. In the next section, we'll take a closer look at how bitcoin works behind the scenes.
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How does Bitcoin work?
Bitcoin works on the basis of blockchain technology. A blockchain is a chronological chain of transaction data that is virtually unchangeable. With bitcoin, all transactions are bundled on average every ten minutes and processed in a block. Such a block is added to the existing chain of blocks and thus a blockchain is created.
A blockchain can be compared to a regular database. For example, a blockchain can be used to keep track of account numbers and the corresponding balance. However, a blockchain differs from a regular database on an essential point. The way data is stored and especially where is completely different. With bitcoin, anyone can download a copy of all transactions and store them on their computer. A computer that keeps track of and updates the entire transaction history is called a full node. This makes the blockchain a distributed ledger.
Nodes are important in a decentralized network like that of Bitcoin, because they verify transactions for miners before bundling them into a block and adding them to the blockchain. Because the transaction history of bitcoin is stored on tens of thousands of computers, it is impossible to shut down the network. There is no single point of failure.
In the early days of bitcoin, miners were simply consumers solving mathematical puzzles with their computers. The mining market has now been professionalized and miners are united in so-called pools. They are now solving extremely complicated puzzles with ASICs (Application Specific Integrated Circuit). Whoever solves the puzzle first can add a new block to the blockchain and will receive 12,5 new bitcoins as a reward. This replaces the role of the central bank (which normally regulates money creation).
Who invented Bitcoin?
We talked about it briefly in the introduction to this page. Satoshi Nakamoto is the inventor of bitcoin and described his idea in the bitcoin white paper. Nakamoto combined several previous inventions such as b-money and HashCash to create a fully decentralized electronic cash system that does not rely on any central authority. The main innovation was to use a distributed computing system (called a “Proof-of-Work” algorithm) to conduct a global "election" every ten minutes, allowing the decentralized network to reach consensus on the state of transactions. This fixes the double spend issue.
The bitcoin network was started in 2009, based on the white paper that Nakamoto published earlier and has since been improved by dozens of programmers. The implementation of the Proof-of-Work (mining) algorithm that provides security and resilience to bitcoin has grown exponentially and now exceeds the combined processing power of the world's best supercomputers.
In 2011, Nakamoto disappeared and left the responsibility for further developing bitcoin to a group of volunteers. The identity behind the pseudonym was never revealed. It is important to realize that neither Satoshi nor anyone else has any power over the network. The system is completely public and can be viewed by anyone. Bitcoin has no secrets.
In practice, the identity of the inventor matters little. Do you know who the inventor of the wheel is? No, but it is still used by billions of people in the world. Because Bitcoin's software is open source, everyone can see how it works.
Is Bitcoin safe?
The protocol behind bitcoin is built on cryptography. The digital currency network has never been cracked and never fooled. Is bitcoin not hackable? Yes, everything can be hacked, even bitcoin. However, the stories where the media talks about 'bitcoin has been hacked' are wrong. Exchanges that trade bitcoins have been robbed in the past, but the bitcoin itself, or the protocol, has never been cracked.
Experts prefer to talk about 'security'. This is how it works: the older a transaction is in the network, the deeper it is in the blockchain. To turn a transaction into a block, you need at least fifty percent of the computing power of the entire network. While this is theoretically possible, there are currently no companies or other organizations that can provide as much computing power as bitcoin's network.
In the image above, part of the blockchain is visualized. As you can see, the blocks are also numbered. Each new block found has a reference to the block before it. If you have a transaction in the last block, the chance that it can be changed is immensely small, yet when accepting large amounts we prefer to wait for a transaction that is three blocks 'deep'.
How do you get bitcoins?
The easiest ways to get bitcoins are:
- Accept bitcoins for work
- Mining bitcoins with special hardware
- Purchase bitcoins from a broker
Accepting Bitcoins
Are you an entrepreneur? Then you can simply accept bitcoins for the goods or services you provide. There are even initiatives that help accept bitcoins. In Arnhem, for example, there are more than a hundred shops that accept bitcoin in addition to the euro. This initiative is known as: Arnhem Bitcoin City† Besides Arnhem, there are also other cities that have organized similar projects, including Ghent and Ypres in Belgium.
As an employee, you may be able to convince your employer to have your salary (partly) paid in bitcoin. A well-known trade office from Nijmegen took the lead in this. They came earlier in the news by paying all their employees partly in crypto currency. It turned out to be a first. Or you can trade with trading robots like the bitcoin trader.
Mining bitcoins
The search term 'bitcoin mining' is undoubtedly doing well with the major search engines of the world. Keeping track of the bitcoin ledger and getting bitcoins for it is something that appeals to many people. However, mining bitcoins is no longer for the average consumer.
Anyone who wants to make money mining bitcoins needs a budget of hundreds of thousands of euros and the chance of breaking even (quito run) is not even certain. In China, mining farms have emerged that have now become serious companies with dozens of employees.
Buy bitcoins
In addition to the above options, the easiest way to obtain bitcoins is to buy them from special trading offices. We call these offices 'bitcoin brokers'. In the Netherlands (and Belgium) you have a wide choice. For buying digital coins, see our extensive Buying guide† For each coin it is explained what you should pay attention to and how the purchase process works.
How many bitcoins are there?
It is often written that a maximum of 21 million bitcoins will be in circulation, but is that actually true? As described earlier on this page, a block is found and processed every ten minutes. When finding a block, the block finder (the miner) also gets new bitcoins. At the time of writing, a miner gets 12,5 new bitcoins per block, but this has not always been the case. To better understand the issue of new bitcoins, let's go back a bit in the past.
On January 3, 2009, the first bitcoin block, the so-called genesis block, was mined by Hal Finney and Satoshi Nakamoto. When mining this block, 50 new bitcoins came into circulation. The number of bitcoins put into circulation per block is halved every 210.000 blocks, roughly every four years.
If we calculate, we do not get a round number, but slightly less bitcoins than 21 million. The exact number is: 20.999.999,9769. Apart from that, of course, a lot of bitcoins have already been lost. This is because people lose their private key and with it access to their bitcoin address and the right to send.
What makes Bitcoin so special?
Bitcoin is special because it was the very first cryptocurrency. In the meantime, the bitcoin name has become a global phenomenon that almost everyone in the world knows. Similar to brands such as Apple, Coca-Cola and Zalando.
In addition to bitcoin, other cryptocurrencies have also been added, such as litecoin and monero. While these coins may be technically better than Bitcoin, they are not worth more. This is partly because bitcoin has become a real 'brand' (as in a brand). But the value of bitcoin also comes from another aspect. The bitcoin network, which consists of thousands of computers spread around the world, provides a network that is extremely secure.
The Bitcoin blockchain is the largest and most secure blockchain in the world. No other country can provide this much computing power and no other cryptocurrency comes close. This makes bitcoin safe and 'certain'.
How do you start with bitcoins?
This was the end of this talk! We hope you have become a bit wiser and are as excited about bitcoin as we are. Do you want to start trading cryptocurrencies yourself? Then view our Cryptocurrency Buying Guide and learn step-by-step how to create a wallet and how to purchase your first crypto coins.
YouTube video
The video below was created by a few crypto enthusiasts. Want to learn even more about bitcoin? Then the episode 'The Bitcoin Gospel' by VPRO Tegenlicht is an absolute must.