o gain a better understanding of what a bitcoin is, it is easier to separate the subject into two popular topics. There is bitcoin the digital currency and bitcoin the blockchain.
Both are perfectly intertwined to demonstrate the first of its kind, cryptocurrency.
Bitcoin the Digital Currency
Bitcoin enables payments to be sent directly between participants, removing the need for a bank / transaction medium. It is created and held digitally. You can’t physically hold a bitcoin in your hand but you can still store it in your wallet. The wallet can be both physical and digital.
You can use bitcoin for purchases, similar to conventional FIAT currencies like dollars, pounds, or yen. You can also keep your bitcoin as a store of value, similar to gold, silver, or diamonds.
Bitcoin the Blockchain
Bitcoin has a its own blockchain. This blockchain is a digital ledger filled with every transaction that has ever been processed via the Bitcoin network. A blockchain is not centralized and is supported by the participants of the network. All transactions are accessible and transparent.
The security of blockchain is maintained by the cryptographic coding that is processed during every transaction. Participants in the network process these transactions and in turn are awarded with bitcoins.
The game changing characteristic of bitcoin is decentralization. No single institution controls the bitcoin network, instead it is maintained by coders and miners. The coders maintain the security of the network via cryptography and the miners use dedicated computing power around the world to process the transactions.
Bitcoin solves ‘double spending’, a common issue with electronic currency up until this point. Double spending is when electronic currencies are copied and re-used. This is prevented by the governing cryptographic code and the incentive to process every transaction correctly.
Traditional currencies have an unlimited supply, central banks control the supply of cash in the modern world. Money can be printed on demand. This causes the value of traditional currencies to depreciate every year and is called inflation.
Bitcoin has a fixed supply of 21 million. At the moment there are over 17.5 million in circulation. The supply is tightly controlled by the governing cryptography. Bitcoins are rewarded to miners every hour. This reward will continue at a diminishing rate until the maximum supply of 21 million is reached.
Providing demand continues to grow and with supply reducing, bitcoins will continue to appreciate in value.
When performing a transaction through the bitcoin network, you can send your currency peer to peer without any transaction medium. To do this all you need is the address for the individual you wish to send the currency to. Although this address is quite different from where you live. This address is a unique key containing 26-35 characters. These characters can be both letters and numbers. This is due to the encryption that is keeping your bitcoin safe.
The network is not concerned with the identity or reasoning for the transaction, but is more concerned with making sure the exact amount of bitcoin is both available to send and sent securely. Transactions are therefore one way and irreversible.
Bitcoin is designed to be fully divisible so that the exact amount of currency can be transferred no matter how small the transaction. The smallest unit of a bitcoin is a satoshi, named after the the creator of bitcoin ‘Satoshi Nakamoto’. One Satoshi is equal to one hundred millionth of a bitcoin (0.00000001).