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For the uninitiated, the words “cryptocurrency”, “bitcoin”, and “blockchain technology” all refer to the same thing – something you don’t quite understand, but which you know is important right now.
All these words are interrelated, so it’s hard to get a grip on what “bitcoin mining” is without understanding how Bitcoin works.
Here’s a brief guide that takes you through the basics, from blockchain, to bitcoin exchange.
What Is Blockchain Technology?
Blockchain technology is the backbone of cryptocurrency and Bitcoin.
Blockchain technology was invented for cryptocurrency, and cryptocurrency utilises blockchain technology, but blockchain can also be used for other purposes.
A blockchain is literally a chain of blocks of data, but how this chain is updated and maintained is revolutionary.
The blockchain starts with a network of computers, or “nodes”. On its own, this is just the internet. Users in the network all contribute to information held in the blockchain.
Again, by itself this isn’t that special. Information on Wikipedia is also controlled by a community of users, rather than being written by a single publisher.
However, ultimate control of the Wikipedia database rests with Wikipedia’s “administrators”. Whenever someone accesses a Wikipedia page, they get a version of the “master copy”, which is managed by a central authority.
Blockchain has no central authority, because every node on the network is also an “administrator” of the blockchain.
When a “transaction” happens, the transaction is broadcast across the whole network and each user updates its own record independently. Rather than have a “master copy”, or central authority that every user relies upon, the official record is agreed upon by network consensus.
This is what is so revolutionary about the blockchain revolution – it is a completely decentralised technology.
A blockchain is hosted on millions of computers simultaneously. This means that the information held on a blockchain is public, instantly verifiable, and also incorruptible, because there is no centralized version of this information to hack or to lose.
In the digital world, trust is all about providing “authentication” (identity) and “authorisation” (permission).
In other words, you need to prove you are who you say you are, and that you’re allowed to do what you’re doing.
Blockchain technology relies upon cryptographic keys to provide authentication. You don’t need to know how this works, just that “private keys” prove ownership and provide authentication.
The “authorisation” part is supplied by the network as a whole. To authorise transactions, the network applies the rules upon which it was designed. Preset protocol rather than a central authority is in charge of the ledger.
What is Cryptocurrency?
Since the 1990s, people had been trying and failing to made digital currencies work. A big problem for digital currency was finding a way to prevent the same user from spending the same money twice.
Previous attempts at digital currency had been ‘trusted third party’ systems, meaning that they relied on a central authority to maintain the ledger of transactions and to prevent double spending.
As we’ve already seen, there’s no need for this central server with blockchain technology. The third party is replaced by the network as a whole and every user keeps their own record of balances.
With cryptocurrencies, “authentication” and “authorisation” provides the trust.
But this trust is not based on reputation or a legal contract, but by maths, by “private keys” and protocol.
That’s what puts the crypto in cryptocurrency – the database is secured by big numbers and strong cryptography.
What is Crypto Mining?
So far, we’ve seen how blockchain technology and cryptocurrency work by sharing responsibility for administration across an entire network.
Every node in a network has a record of transactions, and instead of a master copy or central authority, the official record is decided by consensus.
But how is this consensus reached without a central authority?
Satoshi managed to answer this question through cryptocurrency mining.
If one user sends another a bitcoin, this transaction is signed by the first user’s “private key” and then broadcasted across the network. The transaction is immediately known across the whole network, but it is not immediately “confirmed”.
This is where crypto mining comes in. When a transaction is confirmed, it is included in a “block” that is is added to the “blockchain”, which becomes permanently unalterable.
“Mining” is essentially the task of finding and confirming transactions, and for performing this vital task, the miner is rewarded with a token of cryptocurrency.
To prevent abuse, the miner must satisfy certain conditions by providing ‘proof of work‘, which in this case means expending huge amounts of computational power.
The mechanics here are complicated. The way the system is set up basically means that you have a large group of mutually distrustful, hardworking administrators with an incentive to uphold the system.
Because a cryptocurrency has no regulator, any user can be a miner. But where most cryptocurrencies are concerned, mining is no longer a hobbyist’s game.
For instance, mining one bitcoin would take an average computer hundreds of years. Nowadays, most bitcoin mining is done in massive, purpose-built operations
What is Bitcoin?
Which brings us to the central question of ‘what is Bitcoin?’
Bitcoin is a cryptocurrency, the first and most famous cryptocurrency. It was invented by an unknown individual or group called Satoshi Nakamoto in 2009.
You’ve probably heard of Bitcoin in association with the fact that bitcoin value has shot through the roof. In January 2013, one bitcoin was worth $13, as of November 2017, it is worth over $6000.
But why is something that doesn’t really exist now more valuable than physical gold?
The reason is essentially the same, regardless of what currency you’re talking about: people widely use it and believe it has value.
But unlike normal currencies, bitcoin won’t suffer from inflation. Central banks print money, but Bitcoin was programmed so that the computational problems faced by bitcoin miners get more difficult over time. In other words, like gold, Bitcoin has a limited supply.
How Bitcoin Works?
So, given that bitcoin is so valuable, how does it work in the real world?
Just like you don’t need to understand the internet to use Google, you don’t really need to understand how blockchain technology works to take advantage of it. To start using Bitcoin, all you need is a bitcoin wallet.
The basic function of a bitcoin wallet is to store private keys, which you need to access a bitcoin address and spend your funds. These can come in the form of desktop wallets, mobile wallets, online wallets, or even “paper wallets”.
What Can You Buy with Bitcoin?
In the past, Bitcoin was only a viable currency on the shadowy dark web. Nowadays, more and more businesses are accepting cryptocurrencies.
In 2014, Microsoft added Bitcoin as a payment option for digital content, and Expedia now takes bitcoin for hotel bookings. There are also plenty of gift card businesses that accept bitcoins.
In the UK, you can buy gift cards for 177 retailers from Gift Off. Two months ago, in September a Bitcoin transaction was made in Texas for a newly built custom home.
Brick and mortar establishments that accept Bitcoin remain the exception rather than the rule, but there are a whole gamut of online uses for Bitcoin, from online gambling to trading gold bullion.
Other Types of Cryptocurrency
Bitcoin was the first and is by far the most famous cryptocurrency, but there are now hundreds of different cryptocurrencies, all with very different applications. Most alternatives to Bitcoin have very little non-speculative value, but they’re are a couple worth knowing about.
Ethereum is the second most prominent bitcoin alternative. It’s the brainchild of young genius Vitalik Buterin, who invented the cryptocurrency to run “smart contracts”.
Litecoin is another well-known cryptocurrency. It was released shortly after Bitcoin and billed as the silver to Bitcoin’s “digital gold”. Litecoin is faster and more numerous than bitcoin, and has encouraged the creation of several other “light coins”, like Dogecoin and Feathercoin.
The emergence of all these cryptocurrencies has given rise to a vast market for investment and speculation.
This market experiences a great deal of volatility, with some coins gaining as much as 100% in one day, only to lose the same value the next. The extreme volatility of the market is partly due to hype, but if you are lucky, there is real money to be made.
You need to have some technological savvy if you want to get into trading. Not all cryptos are created equal, and if you want to invest and trade cryptocurrencies, you’ll need to know more about their individual properties.
Cryptocurrencies also tend to balloon in value only once a platform has been invented that makes them accessible to the general public. Therefore, being tech-savvy and getting in early helps.
What Are ICOs?
ICO stands for Initial Coin Offering, and if you are looking for the biggest trend in cryptocurrency at the moment, you’ve found it.
ICOs are similar in principle to Initial Public Offerings (IPOs), whereby a company makes its very first sale of stock to the public. In the case of ICOs, a blockchain project or cryptocurrency offers units of a newly created currency in exchange against currencies like Bitcoin.
If there is demand for the new currency, it can be traded on cryptocurrency exchanges. Ethereum’s ICO is the most famous blockchain crowdfunding project. Offering ETH against 0.0005 Bitcoin each, the Ethereum Foundation raised $20 million.
Like trading cryptocurrency, ICO investment is a risky business. Most ICOs end in losses for all involved. A few however, pay big. ETH is now worth 0.05 BTC, so an early bet on Ethereum would have seen your investment increase 10,000 percent.
Remember, if you would like to get involved in the world of blockchain and cryptocurrency, make sure you have a solid understanding of everything before you do, and always keep updated with the lastest news!