Brought to you by the Liquid team to help you make sense of crypto.

Bitcoin explained

In Blockchain, Guides, Beginner

Bitcoin is a cryptocurrency, but it’s also much more than that.

Bitcoin is a challenge. Bitcoin is a revolution. Bitcoin is fight against traditional, restrictive finance.

The birth of Bitcoin sparked from a desire to be able to send value in a digital form without having to involve financial institutions or third parties.

Bitcoin is a cryptocurrency that uses a blockchain network to process and store transactions, which are processed by network contributors, known as miners.

Why does Bitcoin matter?

There are a number of perceived drawbacks to sending money through traditional methods. It can be slow, there may be high fees (especially when sending money abroad) and you have restricted access. Money is often only accessible during working hours.

With Bitcoin, these drawbacks don’t exist – at least not in the same way. You can send your money anywhere, anytime, swiftly with low fees.

Demand for something like Bitcoin was clear. When the Bitcoin whitepaper was published on January 3 2009, finance shifted. Bitcoin showed how powerful a cryptocurrency could be. Blockchain technology was truly introduced to the world.

The adoption of Bitcoin is like to a snowball. It started off slow. Over the first few years Bitcoin was used as an online digital currency, but only within niche communities.

As time has progressed, the reach of Bitcoin has grown. The creator of Bitcoin, Satoshi Nakamoto, conceived the Bitcoin network with one purpose: to create peer-to-peer electronic cash. Today, Bitcoin remains a means of transferring value digitally.

Newcomers to the space should read the Bitcoin whitepaper. It’s a great way to understand the nuances behind Bitcoin and realize the true purpose of its creation.

How Bitcoin works

Bitcoin is decentralized. Computers all across the world work together to maintain the network. This ensures that the Bitcoin network cannot be tampered with, as all of these computers agree on an absolute truth, which is the transaction history of the entire network.

Bitcoin uses what’s known as a consensus mechanism. This is needed to control the network, process transactions and ensure funds are truly spent. Without an effective consensus mechanism a malicious user would be able to exploit the network and carry out double spending.

Reaching consensus means that a general agreement has been reached among a group. A consensus mechanism enables systems like blockchains to reach consensus on proposed changes to a distributed network.

Bitcoin uses the Proof-of-Work (PoW) consensus mechanism, which requires "work" to be done in order to process transactions. This work is done by nodes, also referred to as miners, by using computational power.

We’ve got two explanations here, a simple one and a detailed one. Feel free to skip past either of them. We’ll tell you how to buy Bitcoin at the end.

Bitcoin explained: Simple

Miners compete to solve a mathematical puzzle, the “nonce”. This nonce fits into the upcoming block and enables it to meet a certain criteria. Whoever solves the puzzle first can validate the next block being added to the Bitcoin network’s blockchain.

Mining is carried out using computers that are optimized for this purpose. The difficulty of the process is scaled to account for more or less mining competition to keep the network speed and block creation rate consistent.

Bitcoin explained: Detailed

Miners all across the world compete to process the next transaction, because if they do they receive a financial reward, paid in Bitcoin.

Every transaction in the network is stored in a block. Each block contains the hash of the previous block and a random number, known as a "nonce" that the miners are searching for – a kind of puzzle.

A hash is a set of data that has been re-represented to a fixed size. If you hash data it will provide you with a string of numbers and letters. Changing anything in the data will completely change the hash output.

Hashing condenses a dataset but still allows the ability to verify data integrity.

The hash of the upcoming block has predefined criteria, so the nonce is the unknown value required to meet this criteria. Since the criteria of the hash is known and every part of the block besides the nonce is known, entering the nonce will find the correct hash.

Most often, the predefined criteria is the number of zeroes at the start of the hash. Miners complete "work" using computational power as they search for the nonce. Each miner will generate a random number, combine it with the rest of the block's contents and hash the combination to determine whether their hash matches the criteria, and if they have therefore found the nonce.

The speed at which a miner can complete this action is known as the hash rate. The winning miner receives the right to be the latest blocks authority and receives payment in Bitcoin.

Proof-of-Work (PoW) is therefore based on an economic reward structure. The winning miner receives the reward. Computer power and electricity is not free. The more miners there are competing, the harder it is to compete, and the more expensive it would be to maliciously attack the network.

PoW networks have an average block creation time that must be maintained, so as the computational power in the network changes, so does the difficulty. If more computational power is added, the difficulty increases to maintain the average creation time. If computational power is removed, the difficulty reduces.

How to buy Bitcoin

Perhaps you’ve caught the Bitcoin bug now that you’ve had Bitcoin explained to you.

The next step is to buy Bitcoin. Keep in mind, you don’t have to buy a full Bitcoin, you can buy just a small portion of one.

All you need is a bit of money and a place to buy. Liquid is a great choice for beginners because it’s easy to use – and above all else, it’s safe. We take security very seriously.

To buy Bitcoin, you can deposit to Liquid with your credit or debit card. Alternatively, you can do a bank transfer.

Once funds are in your account, all you have to do is made a trade.

Here’s a video on how to trade on Liquid.

Buy Bitcoin

This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

WRITTEN BY

Liquid

Providing liquidity for the crypto economy.