The crypto universe is ever-expanding and diversifying, built upon a foundation of Blockchains. Blockchain technology and its consumer adoption are on par with the uptake of the Internet in 1994. Nearly 30 years later, for more than half of the world’s population, the Internet has developed and transformed the way we work, play, and live. It is estimated that Blockchain will reach a similar level of market penetration in the next 15 years, so learning about it now couldn’t be more important.

Bitcoin, Blockchain, and crypto have dramatically changed how we view money and currency since Bitcoin’s inception in 2009, but to most people, they are still concepts that seem far-fetched, too good to be true, or simply too mind-boggling to fathom. Often perception overrules reality and creates obstacles to progression. Breaking down misconceptions clears the path to enlightenment. To understand how Bitcoin, Blockchain, and crypto work, you need to first understand a little about how financial services currently operate.

‘Normal’ money and Bitcoin

For most people, money exists in the form of paper or plastic and small metal disks. It’s readily accessible from a hole in the wall and is used to pay for goods and services with a simple tap. For most, their physical money is stored safely in bank and savings accounts, where salaries are deposited, out of which bills are paid. But in reality, this isn’t quite true. Imagine if everyone in the world decided to get up now and withdraw all their money at the same time. It simply couldn’t happen because there isn’t enough physical money in circulation in the world for such a scenario and in the past when this has occurred, banks have actually run out of money from a “bank run” on cash.

Most transactions that take place today are digital, they are in some ways “I owe you” instructions from one person or organization to another. We entrust third-party banks or credit card companies to oversee these instructions and facilitate, regulate, verify, and manage anything that may go wrong. Currencies like the dollar, euro, pound, and yen, lose value when a banking authority prints more money due to simple supply vs. demand. Bitcoin works on the principle that there is no physical money at all. It is purely digital and it doesn’t lose value in the same way because you cannot just make new Bitcoin out of thin air, it must be mined through the rules hardcoded into its base code. It doesn’t need a third person to facilitate any transactions between two individuals. It utilizes Blockchain technology to ensure fairness, transparency, honesty, and security. The more contributors there are to the Bitcoin network, the stronger and more resilient it becomes.

How does Blockchain work?

The nitty-gritty of how the Blockchain works can fill several books. And although the theory is fascinating, that level of in-depth breakdown is not really necessary. If you are interested to learn more check out my other article What is Blockchain? However, to get you started this abridged version will suffice:

The Blockchain is a database of information in the form of blocks of data linked together in a chain. New blocks are created every 10 minutes or less, depending on the Blockchain design. Data is continuously added to the Blockchain and is kept secure by using cryptography – a way of encrypting it so that others cannot alter or delete the information.

The Blockchain itself isn’t stored on a central computer or network. Instead, copies of it are saved on hundreds of thousands of computers across the world. When a new block of data is submitted for addition to the Blockchain, it needs to be verified by the majority of these computer users, who will check specific criteria to authenticate its validity. Once verified, the Blockchain is updated and everyone around the world updates their copy to this new version. Therefore, the system is considered to be decentralized, run by everyone, and cannot be corrupted by individuals looking to line their pockets. It’s also extremely difficult to hack because each block of data is linked to the one before and after it with cryptography, so in essence once data is put on the Blockchain it will always remain on the Blockchain.

Bitcoin Explained

Bitcoin is a digital payment system thought of by many as “cash for the Internet” and was first conceived in 2009 by Satoshi Nakamoto (a pseudonym – their real identity is still unknown). It uses the Blockchain as a type of public ledger, whereby data added to the Blockchain are simply transactions or instructions to send Bitcoin from one user's wallet to another.

Bitcoin can either be purchased or earned. There are approximately 19 million BTC (Bitcoins) currently in circulation out of a possible 21 million. It was capped at 21 million from the outset to mimic the finite amount of physical gold in the world. They are created and given as rewards to the people who verify the transactions on the Blockchain. In the beginning, the rewards were very high (50 BTC) for relatively little computational work. Gradually the amount of work increased whilst the rewards decreased by half every 4 years on average. The reward currently stands at 6.25 BTC, which by today’s price is valued at nearly £200,000.00.

Continue reading in part 2 of this mini-series to learn more about Bitcoin's dominance, the risk vs reward of crypto investing, and how to buy crypto.

By: Alvin Michael

The views and opinions expressed herein are the author’s and are not intended to be used as advice to trade on the crypto markets.

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