What are Bitcoins?

What is Bitcoin?

The most common question by far. When people hear about Bitcoin they ask: “What exactly is it?” We’re going to explain it here, starting with the basics and working all the way up to the super advanced stuff. We’re also Going to provide plenty of links to useful resources where you can find more information.

Bitcoins are a revolutionary new digital commodity, traded and exchanged all over the world for goods, services, and traditional currencies.

Using an open-source peer-to-peer network, the Bitcoin system has no central server. It is not subject to the control or risk of any single company, individual, organization, or government. It is a protocol, regulated by mathematics and cutting-edge cryptography.

Bitcoins are created on a set schedule over time, and the rate of their creation rate falls until the maximum of 21-million coins has been reached. Thus, their supply is restricted and this scarcity combined with their utility as a payment system has given them a value in the open marketplace.

So what exactly is Bitcoin?

From Wikipedia: “Bitcoin is a digital currency created in 2009 by Satoshi Nakamoto. The name also refers to the open source software he designed that uses it, and the peer-to-peer network that it forms. Unlike most currencies, Bitcoin has no central authority or issuer. Bitcoin uses a distributed database spread across nodes of a peer-to-peer network to journal transactions, and uses digital signatures and proof-of-work to provide basic security functions, such as ensuring that bitcoins can only be spent by the person who owns them, and never more than once.

Bitcoins can be saved on a personal computer in the form of a wallet file or kept with a third party wallet service, and in either case bitcoins can be sent over the Internet to anyone with a Bitcoin address. Bitcoin’s peer-to-peer topology and lack of central administration make it infeasible for any authority, governmental or otherwise, to manipulate the quantity of bitcoins in circulation or induce inflation by producing more of them.”

Bitcoin Facts

Who created Bitcoin?

Satoshi Nakamoto is credited with creating Bitcoin.

Who is Satoshi Nakamoto?

There are quite a few theories on who Satoshi Nakamoto actually is. The official story tells that he is a secretive Japanese programmer.

There are also countless conspiracy theories ranging from a CIA group to Keyser Soze.

How can I get bitcoins?

There are three common ways to get bitcoins:

  • Buy them on Bitcoin exchanges
  • Accept bitcoins as payment for goods or services.
  • Create a new ‘block’ (currently yields 50 bitcoins).

How are new bitcoins created?

New coins are generated by a network node each time it finds the solution to a certain mathematical problem (i.e. creates a new block), which is difficult to perform and can demonstrate a proof of work. The reward for solving a block is automatically adjusted so that in the first 4 years of the Bitcoin network, 10,500,000 BTC will be created. The amount is halved each 4 years, so it will be 5,250,000 over years 4-8, 2,625,000 over years 8-12 and so on. Thus the total number of coins will approach 21,000,000 BTC over time.

bitcoins created
Are New Bitcoins Created?

In addition, built into the network is a system that attempts to allocate new coins in blocks about every 10 minutes, on average, somewhere on the network. As the number of people who attempt to generate these new coins changes, the difficulty of creating new coins changes. This happens in a manner that is agreed upon by the network as a whole, based upon the time taken to generate the previous 2016 blocks. The difficulty is therefore related to the average computing resources devoted to generate these new coins over the time it took to create these previous blocks. The likelihood of somebody “discovering” one of these blocks is based on the computer they are using compared to all of the computers also generating blocks on the network

What’s the current total number of bitcoins in existence?

The number of blocks times the coin value of a block is the number of coins in existence. The coin value of a block is 50 BTC for each of the first 210,000 blocks, 25 BTC for the next 210,000 blocks, then 12.5 BTC, 6.25 BTC and so on.

How divisible are bitcoins?

Technically, a bitcoin can be divided down to 8 decimals using existing data structures, so 0.00000001 BTC is the smallest amount currently possible. Discussions about and ideas for ways to provide for even smaller quantities of bitcoins may be created in the future if the need for them ever arises.

How does the halving work when the number gets really small?

The reward will go from 0.00000001 BTC to 0. Then no more coins will likely be created.

The calculation is done as a right bitwise shift of a 64-bit signed integer, which means it is divided by 2 and rounded down. The integer is equal to the value in BTC * 100,000,000. This is how all Bitcoin balances/values are stored internally. Keep in mind that using current rules this will take nearly 100 years before it becomes an issue and bitcoins may change considerably before that happens.

How long will it take to generate all the coins?

The last block that will generate coins will be block #6,929,999. This should be generated around year 2140.

Then the total number of coins in circulation will remain static at 20,999,999.9769 BTC. Even if the allowed precision is expanded from the current 8 decimals, the total BTC in circulation will always be slightly below 21 million (assuming everything else stays the same). For example, with 16 decimals of precision, the end total would be 20999999.999999999496 BTC.

If no more coins are going to be generated, will more blocks be created?

Absolutely! Even before the creation of coins ends, the use of transaction fees will likely make creating new blocks more valuable from the fees than the new coins being created. When coin generation ends, what will sustain the ability to use bitcoins will be these fees entirely. There will be blocks generated after block #6,929,999, assuming that people are still using bitcoins at that time

But if no more coins are generated, what happens when bitcoins are lost? Won’t that be a problem?

Not at all. Because of the law of supply and demand, when fewer bitcoins are available the ones that are left will be in higher demand, and therefore will have a higher value. So when bitcoins are lost, the remaining bitcoins will increase in value to compensate. As the value of bitcoins increase, the number of bitcoins required to purchase an item decreases. This is known as a deflationary economic model.

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