Erik Weijers, 10 months ago

Bitcoin for beginners

Bitcoin is digital money. But that is like saying the internet is a sort of library. We have to start somewhere but there is so much more to say! Another try: Bitcoin is digital money that is not under the control of any government.

Ok, let's continue with another piece of the puzzle: you can send this digital money all over the world, with no significant cost and without anyone having to give you permission first. You don't have to wait until after the weekend, and you don't have to hand over a passport or proof of address to join the network. It's truly peer-to-peer.

The problem and the invention

In computer science, the "Byzantine Generals Problem" had existed since 1982. With the advent of Bitcoin, the problem was solved. Why the name? Imagine that in ancient times a city had to be besieged. The generals are standing at a great distance from each other, waiting for the command to attack. When they receive a note from a courier with the word: attack - how do they know that this is a genuine message and not a false message from the enemy?

Let's translate this to the problem of a payment network. How do we reach agreement in a decentralized payment network where not everyone can trust each other? That was the problem that Satoshi Nakamoto, the pseudonymous creator of Bitcoin (and many before him or her) wanted to solve. Because a money system in which someone is in charge - there are problems with that, as we all know.

Which problems? Well, money in bank accounts can be frozen. Also, a central bank can print money, making your savings worth less. Bitcoin (BTC) prevents both of these things. As an owner of Bitcoin, you truly own your money. No one can block your transactions, freeze your credit, or issue extra Bitcoin to themselves, thereby causing inflation of the money supply.

What is the blockchain?

The blockchain is a chain of "blocks" of new transactions. A block of about 2,000 transactions is added every ten minutes. Tens of thousands of copies of that transaction history exist around the world. Each so-called node checks candidate transactions and puts its approval under a new transaction block every ten minutes. This distribution ensures that there is no central point that a government could attack. The same goes for the miners (see below).

The Bitcoin blockchain is thus a transaction history: an online database that is updated every ten minutes. In itself not very revolutionary, you might think. What is ingenious is the way Bitcoin ensures that no transactions can be changed. The deeper a transaction block is "buried" among others, the more unlikely it becomes that the transactions can still be modified.

How does this work? The blocks in the blockchain are linked together with 'hashes' - a kind of digital fingerprint. The hashing is what miners do, and it takes a lot of energy: it's solving a complicated cryptographic puzzle. And because the hash of a block depends partly on the transaction data in the block, you can't mess with the transactions in a block without changing the hash and the chain would be broken.

Therefore, after a certain "depth" of blocks, it is practically impossible to change transactions anymore: it would take too much computing power. Compare it to building a skyscraper. You can impossibly change the walls of the fourth floor if the construction has already progressed to the tenth floor. That's the principle of proof-of-work: It guarantees the immutability of the transaction history.

Why should I buy Bitcoin?

Nowadays, all kinds of parties are buying Bitcoin. Not just individuals but also businesses, traditional financial institutions and even countries. They will all give you a slightly different reason why they came to that choice. But the reasons always leads back to what Bitcoin the invention is at its core. Namely, a way to store and trade money without a central authority being able to change it or manipulate its value.

A few examples:

  • During the war in Ukraine, ATMs stopped working. Ukrainian refugees used Bitcoin to get their money across the border into Europe.
  • Bank accounts of people from Nigeria were frozen because they were protesting police brutality. They used Bitcoin to keep functioning.
  • The bank accounts of Canadian truckers and their supporters were blocked by the Canadian government. This happened during the protests against the covid policy. By receiving Bitcoin donations, they were able to remain funded.
  • The U.S.-listed company MicroStrategy bought 5 billion worth of Bitcoin as the company saw the purchasing power of their cash dollars rapidly diluted.
  • El Salvador has no currency of its own and depends on IMF loans for dollars. It wants to reduce this dependence on the dollar, so it has introduced Bitcoin as legal tender and bought Bitcoin for its treasury.
  • Migrants whose families do not have bank accounts in the homeland pay high transaction fees to send money back. With Bitcoin (on the Lightning Network), it's done instantly. In an app and almost for free.

In all the above cases, the central theme is: independence. It is a way of stashing your money without counterparty risk. A way of being able to keep some of your assets and transactions out of the dominant and sometimes repressive system.

'Repressive': isn't that a big word for Western societies? Not necessarily. Money creation by (central) banks causes the devaluation of our savings, also in Western countries. That can go up by ten or twenty percent or more per year. An unsolicited form of tax on our hard earned money. As the issuance of new Bitcoins is fixed per protocol (21 million will ever come into existence), as an owner of BTC you don't have to worry about this.

Can't Bitcoin be copied?

There are now thousands of crypto coins. So why is Bitcoin special? Can't it be copied or improved? A short answer is: yes, Bitcoin can be copied and changed. In fact, it has been done many times. After all, it is an open source protocol. But no pretender to the throne has even come close to gaining the same popularity as the original. However, other crypto projects are doing other kinds of things. "Niches" are emerging.

Why does Bitcoin remain so popular compared to the copycats? Compare it to Wikipedia. I could copy Wikipedia and try to make my own version of this encyclopedia more successful. The chances of that succeeding are not high. After all, there is already a Wikipedia. Why would all the writers and developers - and all the websites that link to it - suddenly start working for my Wikipedia?

But how about improvements? In the early years in crypto, several coins were launched that were a copy of Bitcoin with certain variables tuned differently - for example, the number of transactions per block. They never matched the success of Bitcoin. Many of the things they wanted to achieve - such as a higher number of faster transactions - can be built on a layer "on top" of Bitcoin: the Lightning Network. The Bitcoin protocol itself can remain unchanged.

There are admittedly things that Bitcoin cannot do. It is a rather inflexible, 'conservative' protocol. It is less easily programmable. Ethereum is the programmable alternative on which things are being adapted at a rapid pace. But that doesn't give Ethereum the niche that Bitcoin has occupied: immutable, hard money.

Where can I buy Bitcoin?

You can buy Bitcoin from an exchange or a broker. A broker is a highly regulated firm that offers the service of buying or selling crypto coins for fiat money (euros, dollars, etcetera). A broker usually has excellent customer service. Exchanges act as intermediaries between buyers and sellers. They offer trading pairs (e.g. BTC against ETH) and let the market determine the price. LiteBit has traditionally been a crypto broker and now has an exchange in beta.

How do transactions work?
Another option is to get paid in Bitcoin. At an exchange, you get a Bitcoin wallet (address) to which someone else can transfer Bitcoin. Or you can buy a hardware wallet (a kind of USB stick) or install a software wallet (app). Other people can transfer BTC to that address as well.

Doing a Bitcoin transaction is not very different from a bank transaction, at least from the perspective of the user. Instead of a bank account number, you enter a long number, which is the address. You confirm the transaction on your hardware wallet or - if you're doing it on an exchange - by a verification code on an Authenticator app or in your email.

Read more:

How secure is Bitcoin?

What does HODL mean?

What is the value of Bitcoin?

What are the benefits of Bitcoin and other crypto?

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