Bitcoin represents an economic phenomenon that has been taking the front page of world’s newspapers for months. Bitcoin is a digital currency and instead of printing banknotes, a list of the registration numbers of each of the “coins” is kept and a record of who owns them. Bitcoin hit its records in December and this graph below represents the bitcoin’s trend in the last years. You will read more about Bitcoin on Women In Finance, but let’s first see more in detail what it is and how it works.
Bitcoin's price is determined by supply and demand. The specific exchange rates are formed in the process of Bitcoin trading on various online exchanges. Just as with any other currency, Bitcoin's price is ever-changing and it is not limited to the number and size of businesses which accept bitcoins as payment, but it depends on a multitude of variables, including geopolitical factors, psychologic and speculative variables.
Bitcoin exchange is based on the peer-to-peer technology, each transaction is publicly made and saved on a shared public software platform.
The Blockchain
The blockchain is a shared public distributed ledger on which the entire Bitcoin network relies. A 2008 paper written by a person (or people) calling himself Satoshi Nakamoto first described both the blockchain and Bitcoin. "Blockchain" refers to blockchain technology in general, or to any other specific blockchain, such as the one that powers Ethereum.
Any given blockchain consists of a single chain of discrete blocks of information, arranged chronologically. Person A sent X bitcoin to person B, who sent Y bitcoin to person C, etc. By tallying these transactions up, everyone knows where individual users stand.
The transactions included in the blockchain are the confirmed transactions; this way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to be done using bitcoins that are actually owned by the spender. Cryptography ensures the integrity and the chronological order of the blockchain.
A transaction is a transfer of value between Bitcoin wallets that gets included in the blockchain. Bitcoin wallets keep both a “public key” (used to make Bitcoin’s transfer from one person to another) and a secret piece of data called “private key”, which is used to sign transactions, providing a mathematical proof that they come from the owner of the wallet. Now, it is easier to understand the etymology of the word itself: crypto means hidden and “cryptocurrency” means that this particular kind of currency is hidden by both a public and a private key to allow transactions. All transactions are broadcast between users and usually begin to be confirmed by the network in the following 10 minutes, through a process called mining.
Example:
15N3yGu3UFHeyUNdzQ5sS3aRFRzu5Ae7EZ sent 0.01718427 bitcoin to 1JHG2qjdk5Khiq7X5xQrr1wfigepJEK3t on August 14, 2017, between 11:10 and 11:20 a.m. (the long string of numbers and letters represent the identity and the address of the person who made the transaction).
Mining
Mining is a distributed consensus system that is used to confirm waiting transactions by including them in the blockchain. It enforces a chronological order in the blockchain, protects the neutrality of the network, and allows different computers to agree on the state of the system. To be confirmed, transactions must be included in a block that fits very strict cryptographic rules that will be verified by the network. These rules are needed to prevent previous blocks from being modified because doing so would invalidate all following blocks.
In conclusion, mining is a kind of technology that prevents the individuals from adding new blocks to the chain, from controlling what is included inside the blockchain and from trying to replace what is included in the blockchain.
Hash Functions in Bitcoin
Hash functions are an essential part of information security as a whole. On a more theoretical point of view, hash function is a mathematical process that takes input data of any size, performs an operation on it, and returns output data of a fixed size.
In the bitcoin protocol, hash functions are part of the block hashing algorithm which is used to write new transactions into the blockchain through the mining process.
In bitcoin mining, the inputs for the function are all the most recent, not-yet-confirmed transactions. To successfully solve a block (“mining”), miners try to combine all of the inputs with their own arbitrary piece of input data in such a way that the resulting hash starts with a certain number of zeroes. Solving the hash for a bitcoin block – that starts with a very high number of zeros – requires an extremely large amount of computation and this means that new bitcoins get mined over a long period of time.
In order to earn Bitcoins through mining, you need to put a huge amount of work necessary to solve a block – and by earning that reward, you're locking in all of the new transactions into a block, which is added to the permanent record of all previous transactions: the blockchain.
Miners have begun to form pools and to share the rewards among themselves: every time a new block is mined, the successful miner receives newly created bitcoins - at first it was 50, then it halved to 25, now it is 12.5 ($146,124.75 as of today January 22nd). The reward will continue to halve every 210,000 blocks – around four years – until it hits zero, at which point all 21 million Bitcoin will have been mined, and miners will depend solely on fees to maintain the network.
Some interesting facts about Bitcoin you might not know:
For the first time, futures on Bitcoin have been exchanged in Chicago
It is not ensured by any Central Bank (not a Fiat currency), but it is derived from a software: Bitcoin was created and issued by “Satoshi Nakamoto”, but nobody actually knows who he is
One satoshi is one hundred million percent of bitcoin 0,00000001
The maximum amount of registration numbers allowed is 21 million Bitcoin
Bitcoin’s patterns do not depend on interest rates or on macroeconomic variables, but only on supply and demand (recently, the high demand of bitcoin made the price hike)
Bitcoin and its related application are strictly limited in China
Bitcoin might be banned soon in South Korea
- Flaminia Saffoncini
Sources: Bitcoin.org, Investopedia
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