What is bitcoin and how does it work?

What is bitcoin and how does it work?

Both a cryptocurrency and a cryptographically secure blockchain, discover in this article what Bitcoin is.

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Virtual digital currency, or cryptocurrency, is not issued by a banking unit. It has no physical existence and is not subject to the oversight of any government or central agency. It does not incur transaction fees or transfer delays like traditional currency, also known as “fiat currency” or “fiat currency”. Bitcoin therefore makes it possible to make online payments without an intermediary.

At the end of 2010, Bitcoin was equivalent to around €0.40. In January 2017, its price exceeded €1,087 and today, at the beginning of May 2022, it is worth more than €36,000. But its value is extremely volatile with frequent intra-day variations. This phenomenon is related to the fact that its value is determined only by supply and demand. The quantity of Bitcoins was voluntarily limited by its creator to 21 million units, a figure which will probably be reached around the year 2140. The computer code of the blockchain will not be able to go beyond. It is this relative scarcity of Bitcoin that makes it valuable, knowing that today 19 million Bitcoins have already been mined.

Since 2009, about a hundred cryptocurrencies have appeared and these various virtual currencies each have unique characteristics and applications. They also do not have a significant value, but a relative market value. Among these cryptocurrencies, there is therefore Bitcoin, but also Ether, Cash, Litecoin, Ripple or even Dash.

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Where does Bitcoin come from?

The Bitcoin system was developed in 2009 by an anonymous person who bears the pseudonym Satoshi Nakamoto. He explains his mathematical theory in the Bitcoin white paper which defines the theoretical bases for the structuring of this network. We still don’t know who actually created Bitcoin. Indeed under this pseudonym hides perhaps a single person or a group of individuals. Satoshi Nakamoto is nevertheless today one of the biggest fortunes in the world. He is currently one of the 50 richest individuals. Indeed, Satoshi Nakamoto holds on his wallet, or virtual purse, 980,000 Bitcoins, the equivalent of approximately 58 billion euros.

What is the purpose of Bitcoin?

At the end of 2008, a financial crisis is looming. Specialists believe that Satoshi Nakamoto’s project consists in freeing himself from banks and States, the responsibility of which is then called into question in the world crisis. Satoshi Nakamoto never really commented on this subject, but he states in his writings that the technical means of the time were insufficient. It has therefore developed a more efficient alternative system which makes it possible to dispense with traditional financial institutions. According to him, this new system would eliminate the high costs associated with banking transactions and the risk of fraud. It thus creates an electronic payment system based on cryptography and therefore without an intermediary, unlike the traditional model.

How does bitcoin work?

Any new user must choose a wallet, or wallet, available on computer or mobile. The wallet then creates a first Bitcoin address, but it is possible to create others as needed. By communicating their Bitcoin addresses, the owners of a virtual wallet can be paid or pay other users.

Bitcoin is based on an asymmetric cryptography system that includes a public key and a private key. The balance of the wallet is coded thanks to the public key of its owner. At the time Bitcoins are transmitted from one user to another, the payer must sign the transaction with their private key. This transaction is then broadcast on the network. After identifying the encrypted signature of the paying user, the paid user receives the Bitcoins and can in turn transmit them. There is therefore transaction verification and a public list of all transactions is collectively available and accessible through the network of Bitcoin nodes.

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Bitcoin works using, among other things, the blockchain mechanism. Satoshi Nakamoto invented blockchain technology to guarantee the security of transactions and therefore of Bitcoin users. Blockchain translates into French as “chain of blocks”. It designates a technology that uses cryptography to store and transmit information transparently and 100% securely. The blockchain is in fact a database in which it is possible to find all Bitcoin transactions carried out by all users. A Bitcoin exchange constitutes an encrypted and locked transaction called a “block”. Blockchain, on the other hand, refers to all transactions and therefore all blocks created by users.

Bitcoin technology is said to be pseudonymous and not anonymous. There is no real anonymity, as all transactions are identified by the name of the user’s wallet. Moreover, the blockchain does not use a single server, but all the computers in the network, each device being called a “node”. We then speak of a decentralized authority system: to modify a chain of blocks, all the members of the blockchain must validate the modification.

A transaction cannot be modified after signing. All members of the network are informed of the transactions and confirm them within minutes by a mining mechanism. The transactions are grouped together in the form of “blocks”. , cryptographically secured during the mining phase and interlinked. Mining involves securing blocks by solving very complex mathematical problems that validate transactions. Following the mining phase, new cryptocurrency units are put into circulation. These units are called “rewards”. For Bitcoin, a reward today is equivalent to 12.5 Bitcoins, but this value halves every 4 years.

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A miner’s job is to verify the transaction and secure it cryptographically. For this, it uses a complex algorithm, that is to say a calculation to encrypt each transaction. The difficulty of these algorithms can be adjusted to maintain a constant block processing time. Bitcoin is the result of a computer calculation carried out on hundreds of computers. Mining is carried out using computer equipment called “ASIC”.

The blockchain protocol is subject to regular updates, which allows it to be more efficient. Among them, the late 2021 Taproot update enables better network privacy and lower transaction costs. Simple transactions have become indistinguishable from transactions involving multiple signatures.

How is Bitcoin used?

Bitcoin is, among other things, considered by investors as a safe haven. This type of investment is very different from a traditional investment. Investors seek out assets like cryptocurrencies because their value cannot be manipulated by a central body. On the other hand, the evolution of inflation and interest rates in the world’s major economies influences the demand and therefore the value of Bitcoin. Its price is very volatile, so it is a very risky asset. However, many speculators invest in this “digital gold”, so called because it is a capped value.

With Bitcoin, it is also possible to make purchases of all kinds such as a luxury car or insurance, but not all brands offer this option. There are Bitcoin debit cards rechargeable in cryptocurrencies and/or fiat currencies. They can be used wherever payment by card is possible.

It is therefore possible to buy, sell or exchange Bitcoins, knowing that they represent a risk for investors, its value being very volatile.

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