How do bitcoins work? If you have opened this study, you will probably have asked yourself this at least once in your life.
The bitcoin cryptocurrency is the first ever to exist, created way back in 2008 by a still unknown person, known by the pseudonym Satoshi Nakamoto.
The goal was to create a network on which it was possible to make peer-to-peer payments, without intermediation and without having to depend on a central server. To do this, Satoshi based the entire infrastructure on blockchain and cryptography, starting a real revolution.
In the next paragraphs we will cover the topic as extensively as possible.
To begin with, we will provide a definition in simple words.
We will then see how the Bitcoin blockchain and the cryptocurrency of the same name were born. Unfortunately we will not be able to answer the question "who is Satoshi Nakamoto?", an almost legendary person and still shrouded in mystery after 15 years.
Next we will move more on the practical. We will see what bitcoins are and how they work, dedicating ourselves above all to the topic of blockchain and miners.
After that we will be able to understand what bitcoins are for, exploring the various use cases known to date.
We will see where it is possible to make a payment with bitcoins and where to buy them, introducing the figure of cryptocurrency exchanges.
We have a lot to talk about: let's start with the definition of bitcoin.
- What is a bitcoin?
- BTC: a little history
- How does Bitcoin work?
- Who creates bitcoins? Bitcoin Mining
- Bitcoin value: where does it come from?
- How to buy bitcoin?
- Bitcoin euro and bitcoin dollar quotation
- How much can you earn with 100 euros of Bitcoin?
- BTC: what does the future hold for us?
What is bitcoin?
What is Bitcoin? Bitcoin, usually abbreviated to BTC, is the most famous and capitalized cryptocurrency in circulation, as well as the first ever.
It is a real currency, but only present in digital format. It can exist thanks to the underlying structure: the blockchain. We will delve deeper into the topic shortly.
The value of bitcoin is given by several factors that we will explore later. However, blockchain and innovation give it a decidedly notable growth potential.
To date there are just over 19 million examples of BTC (now you know how many bitcoins exist). The maximum offer is immutable and set at 21 million, a number that we will reach in over a century.
Considering that a good percentage has been lost, scarcity is certainly an element that gives further value.
However, let's find out more about the birth of BTC, and then delve into the more technical aspects.
BTC: a little history
The idea of Bitcoin was born on October 31, 2008, the day on which the whitepaper signed with the pseudonym Satoshi Nakamoto was published.
A term widely used in the world of cryptocurrencies, the whitepaper is a summary document that technically illustrates the project, its purpose and its execution.
Satoshi described the method of creating and maintaining a database containing financial transactions, which had a double peculiarity.
First of all, to be validated and finalized, the movements did not require any guarantor or intermediary. Exactly the opposite of what happens with the classic circuits that we use every day.
Furthermore, the database itself was replicated and kept updated in real time on various nodes of a network, so as not to depend on a single central server.
A system was therefore emerging that was free from controls but at the same time safe and non-manipulable. We would like to make an addition, dispelling a false myth: by "free from controls" we mean that no one will be able to censor us; However, each transaction is permanent and can be followed by anyone. It is therefore difficult to withdraw funds without losing your anonymity.
Staying on the topic of security, the Bitcoin whitepaper also described how to avoid double spending, one of the main obstacles in the world of electronic money.
This concept refers to the possibility of spending the same unit of value twice.
When the money is physical, it is easy to avoid this problem: the expense itself implies that the transferor no longer owns the sum.
Instead, when the currency is virtual, a method is needed to authenticate it and make it become "unique" in some way. Blockchain makes this possible; in the following paragraphs we will delve deeper into the various technicalities.
The other fundamental point described in the whitepaper concerned the method of issuing Bitcoin, as well as the flow.
Unlike a Central Bank - which can issue money at its own discretion - the rate of creation of new bitcoins is defined within the relevant source code.
As we said, there would never have been more than 21 million specimens. The issue would have reduced over time, halving approximately every 4 years (a phenomenon called bitcoin halving).
According to these numbers, the last fraction of bitcoins will be issued in the year 2140.
Curiosity: Bitcoin's genesis block, i.e. the first block of its blockchain, contains a very significant phrase. It reads “Chancellor on brink of second bailout for banks”.
This is the headline from The Times magazine of January 3, 2009, the day the genesis block was created.
The period was that of the aftermath of the 2008 financial crisis, during which the debts of at-risk banks were nationalized through so-called bailouts.
Bitcoin was born like a phoenix from the ashes of that malfunctioning economic-financial system, offering an alternative for the first time in history.
This is exactly where the big change lies: no longer a currency managed by a few but a free, decentralized asset capable of breaking down diversity.
Now that we know a bit of history, let's roll up our sleeves and get more technical.
How does Bitcoin work?
How do Bitcoins work? To answer this question, we need to focus on two key elements: blockchain and cryptography. Only in this way will we be able to have a clear understanding of the process that regulates the functioning of Bitcoin. Let's do it!
The Blockchain
We can imagine the blockchain as a huge database containing various data tables. It is divided into many units called blocks.
In the Bitcoin blockchain, a new block is added approximately every 10 minutes. In this way a "chain" is created in which each link (precisely the block) is independent but indivisible from those who precede it and those who follow it. Hence the name blockchain, literally translated as chain of blocks.
Inside this database are all Bitcoin transactions, from its genesis to today.
What distinguishes the blockchain from a traditional database is the distribution across all nodes participating in its network. By doing this, even if one or more nodes are not reachable there will always be some active. The system therefore guarantees perfect stability.
In addition, there is no central controller, i.e. a server that coordinates the activity.
The validation of transactions is performed by the nodes in a democratic way, following a distributed consensus algorithm called Proof-of-Work, which we will return to.
Another characteristic of the blockchain is transparency: anyone can read the data contained within it at any time.
This is also the reason why transactions can be easily validated: just check that the sender can afford to spend those BTC and that the signature is authentic, nothing more.
To understand the concept of signature, we need to talk about encryption, so be patient a little longer, it will be worth it!
The last peculiarity of the blockchain, already anticipated a few lines above, is immutability.
Once blocks are validated, modifying one becomes more and more expensive with each new block that follows.
We will understand why better after clarifying the concept of mining, don't worry. For now, just keep in mind that it is this aspect that makes the BTC chain one of the safest structures around.
Let's shift the focus to cryptography so we can continue to put the pieces of the puzzle together.
Cryptography
Bitcoin is made safe and reliable by cryptography.
When we send Bitcoins (or fractions of them) to someone, the private key that holds them is a must.
It is an alphanumeric string that allows us to spend our Bitcoins, a sort of digital fingerprint with which we sign the transaction.
A public key, also called address, is associated with a private key. The latter is derived from its private key through an encryption algorithm called ECDSA (Elliptic Curve Digital Signature Algorithm). It has the particularity of being non-invertible: from the public key you NEVER get to the private one; let's add "fortunately": possession of the private key allows you to spend the bitcoins associated with it.
Finally, another fundamental peculiarity: it is possible to verify the authenticity of the signature even without having the private key. This is how nodes validate transactions so easily.
In summary: thanks to cryptography we can sleep peacefully knowing that our BTC is safe.
Who creates bitcoins? Bitcoin Mining
Who creates bitcoins? Who are the miners? We have finally reached the point where we can answer.
Mining is how new blocks are created and validated, increasingly expanding the blockchain's distributed ledger. The miners are those who make special computers available to bring the procedure to life.
The protagonist of the scene is called Proof-of-Work, the distributed consensus algorithm based on energy consumption. Each node involved in the mining procedure must solve a probabilistic calculation, a real hard work. All by competing with other miners.
We can imagine mining as a continuous extraction of numbers from an urn containing millions of millions of them, until someone draws one lower than a certain threshold. This level is a dynamic parameter, which changes as the number of extractions performed per unit of time varies.
A block of Bitcoin must be created every 10 minutes.
If we started extracting more numbers (outside of our metaphor this means that the number of miners increases) we would risk taking less time. Consequently, it is necessary to increase the difficulty of the probabilistic calculation, so as to ensure compliance with the correct timing. Everything is automatic: the system is specially designed for this purpose.
The extraction we are talking about is actually hashing.
The function takes an input and outputs its hash, a random alphanumeric string 256 bits long.
Here is a SHA-256 calculator to convert anything you want to write to a string.
The same input will always generate the same output, which makes the string easily verifiable.
The first miner to find a hash smaller than the threshold (example: hash starting with ten zeros) wins. Each node will therefore have to do its utmost to calculate as many hashes as possible in the shortest time.
Initially it was possible to be competitive even with a simple PC.
Over time, machines (ASICs) optimized to perform as many hashes as possible per second were invented. In doing so, the difficulty increased; therefore, today much more hashing is needed to find the solution and validate a block.
Every time a block is mined, the validator receives Bitcoin (BTC) as a reward for their hard work.
To make it possible for even less powerful miners to participate in the network, so-called pools exist.
The power of all participants flows into them, resulting in them validating blocks much more often than individual miners.
Once the block is mined and the reward is received, it is distributed to all participants in the pool, proportionally to each one's computing power.
In fact, nowadays all miners rely on pools, otherwise they would rarely collect rewards.
“Bitcoin mining is how new blocks are created and validated, increasingly expanding the distributed LEDGER of the blockchain”
Bitcoin value: where does it come from?
The price of BTC bitcoin is trivially decided by supply and demand.
If buyers outnumber sellers, the price rises. On the contrary, if those who sell exceed those who buy, the price falls. It works like this for all financial assets: from shares to precious metals and commodities such as gold and silver.
However, the price is rarely a reflection of the value of the underlying asset. This is due to the huge speculation component.
In cryptocurrencies, we know, it is dominant, which is why we must pay attention to the phases of euphoria, otherwise purchases at exaggerated prices. At the same time, you must be prudent and analyze each project carefully: it is easy to be tempted by something that has no intrinsic value.
But the questions now are different: under the layer of speculation, what is the intrinsic value of BTC? What is it given by? What are bitcoins for?
Bitcoin was born as a means of decentralized exchange of value, establishing itself over time as a store of value, a safe haven with which to defend oneself from inflation and diversify one's portfolio. Therefore, the better it performs these tasks, the greater its value will be.
When talking about the use of bitcoins as a form of money, the main variables at play are trust and adoption by people, companies and merchants. The more they grow, the more successful bitcoin will be as a currency.
Scalability technologies, such as the Lightning Network, also help in these terms, as they make small payments less expensive and faster.
Historically we have seen a growing trend in adoption, trust and volumes on the Lightning Network. We expect that we will continue to go in this direction. If you want to delve deeper into the topic, you will find a video on LN at the end of the paragraph.
To the question “what can I buy with bitcoins”, we could potentially answer “Everything!”. In fact, bitcoins lend themselves to being spent in any context; it all depends on how much sellers and buyers want to rely on it.
As a store of value, bitcoin's value comes from scarcity and its demand as a financial asset.
Scarcity is mathematically defined and cannot be changed.
The question depends on the attractiveness of bitcoin for investors. That is: is it easy to invest in it? Is it worth doing?
Demand increases (and attractiveness improves) as “traditional” financial vehicles move towards Bitcoin.
A fund or company will not want to buy bitcoins on BINANCE and hold them in a wallet: it is too difficult and risky. Therefore, they will look for an ETF, an ETP or a similar product.
The more companies and large funds publicly invest in Bitcoin, the more it will become a strong asset in terms of reputation, fueling a positive feedback loop. At the moment, this trend is also clearly growing.
We can therefore say that, for now, Bitcoin is succeeding on all fronts. What does the future have to offer? We can't know but we want to be optimistic.
How to buy bitcoin?
We have several methods available to buy bitcoins in our country.
First of all, let's mention centralized exchanges, real companies in the sector where we can deposit traditional currency and purchase coins and tokens.
Among this category we find giants such as Binance, OKX and Bitget, companies that invoice billions of dollars every year thanks to the commissions they apply to each transaction. Fortunately, it is possible to contain these costs thanks to agreements; if you want to sign up to an exchange, do it using one of our referral codes, so you can save. Here they are:
You can also buy bitcoins from other CeFi (centralized finance) entities. Among these, Nexo is one of the best known.
For those who already own cryptocurrencies, DEXs (decentralized exchanges) are a valid option.
"Exchanges like Binance are cheap and allow us to buy bitcoins easily and safely"
Bitcoin euro and bitcoin dollar quotation
Where to follow the bitcoin euro price, or the btc usd one? There are plenty of sites available.
One of the best known is CoinMarketCap, a portal specialized in cryptocurrencies and which offers all the information we need.
From here you can view the price of bitcoins in euros, even if the default currency is the US dollar. Not bad: just change it using the appropriate button located at the top right.
CoinMarketCap and similar portals offer real-time bitcoin-dollar exchange rates. However, if we wanted to have something more professional in our hands, we should turn to TradingView, the reference platform for technical analysis.
TradingView allows us to consult real-time graphs on stocks, indices, raw materials, Forex, economic parameters and obviously cryptocurrencies. An indispensable tool for any investor and trader at an absolutely competitive price.
How much can you earn with 100 euros of Bitcoin?
Before closing, let's answer with a smile to one of the most sought after questions of all: how much do I earn if I invest 100 euros in Bitcoin?
Those who have been following us for a long time know well how we think: we believe in well-thought-out investments, which require experience, study and time. We are not for the waves of exaltation that put capital at risk. So, here is our answer.
It is not possible to determine a priori how much an investment will yield, be it 100, 100,000 or 1 euro. Certainly, if things go well, the greater the initial investment, the greater the profit; at the same time, this will also apply in the event of collapses and losses.
We can also state with sufficient certainty that 100 euros will not be enough to change your life: the times when it was possible, at least with bitcoin, are long gone.
Logically, if BTC were to rise significantly in valuation, we could achieve really interesting gains. For example, if we could get a total of 200 from 100 euros, it would be a very high performance of 100%, something you don't see every day.
In short, it's right to dream of a better future but be careful about exaggerating. There are no limits, as long as you have three indispensable elements: knowledge, experience and above all patience.
BTC: what does the future hold for us?
What will happen in the future? We would like to be able to answer this question but the market will decide.
However, it seems that the adoption of blockchain is something inevitable; as the first to arrive, Bitcoin should retain an important role in this new scenario.
Want to know more about cryptocurrencies and blockchain? Below is the first episode of my free course on the topic.
This article was translated from Italian by permission of Luca di The Crypto Gateway
