What is Bitcoin and how does it work? Forget the banks, enter the blockchain
Imagine having cash that exists solely in digital form, completely independent of banks and governments! That’s the basic idea behind Bitcoin (abbreviation: BTC), a revolutionary global currency that is taking the world by storm.
Forget banknotes or coins; BTC is a special proof of ownership stored in a giant, shared ledger called a blockchain.
Unlike traditional currencies, which are controlled by central banks, Bitcoin works through a decentralized network. There is no single authority that has control over the currency. Instead, a huge network of computers (nodes) running special software (Bitcoin Core) validates transactions and keeps the system running.
Imagine the blockchain as a huge chain of connected blocks that publicly stores all BTC transactions and makes them verifiable for everyone. The blockchain is constantly updated and secured by this global computer network.
By the way, 1 BTC consists of 100,000,000 sats (satoshis). This is roughly comparable to the euro and the corresponding cents.
The mysterious inventor: Satoshi Nakamoto
The year is 2008, and a mysterious figure with the pseudonym Satoshi Nakamoto publishes a groundbreaking white paper in which he describes Bitcoin and the underlying concept. This paper proposed a digital currency that could be used by anyone, anywhere, without the need for a bank.
The basic idea was to use cryptography (think fancy mathematical codes) and computer networks to create a secure and transparent payment system. Incidentally, Satoshi Nakamoto has remained anonymous to this day and has stopped communicating with the outside world since 2011.
How are transactions validated?
To access and spend your Bitcoin, you need a special digital key, similar to a password. This key, the private key, serves as proof of ownership for your specific funds within the ledger.
Advantages over traditional banking: A glimpse into the future?
BTC offers several potential advantages over traditional banking systems:
- Faster and cheaper transactions: Compared to international bank transfers, BTC transactions are significantly faster and cheaper (especially via Lightning Protocol!).
- Financial inclusion: Anyone with an internet connection can send and receive Bitcoin, giving people who don’t have access to banks a way to manage their finances securely.
- Transparency and security: Every BTC transaction is visible in the blockchain, which promotes trust and security. You can trace the history of a Bitcoin payment at any time.
- Direct: Banks and other financial institutions are eliminated as intermediaries, so the exchange takes place directly between the participating parties.
- Global: Transfers between person A in country X and person B in country Y no longer need to be exchanged, because Bitcoin is globally valid.
- Protection against inflation: Bitcoin is designed in such a way that there will only be a maximum of 21 million Bitcoins (the last BTC is expected to be mined in 2140). This scarcity protects against loss of value.
Is There a Catch (or two)?
BTC is still a relatively new concept, and there are a few things to consider:
- Volatility: the value of Bitcoin can fluctuate significantly, making it a riskier investment compared to traditional currencies. BTC is therefore suitable either as a long-term investment, also known as “hodling”. The price trend has risen sharply overall since the beginning of 2009, despite occasional dips. or for trading, provided you know exactly what you are doing.
- (Still) Limited acceptance: Although Bitcoin is becoming increasingly popular, its acceptance as a means of payment is not yet very high compared to established currencies. Check out services like BTCmap.org to find out which stores in your area already accept Bitcoin payments.
- Responsibility for security: The responsibility for protecting your Bitcoin lies with you. This gives you great freedom, but also requires great responsibility. Unless you have deposited your BTC online on an external platform for third-party management, it is important that you keep your private key safe and secret to prevent unauthorized access to your money.