1. What is money?
To make it clear what bitcoin is, let's compare it with something familiar, namely with traditional money, which each of us is used to.
Let's think, what do you know about bills and coins that you use to pay for somewhat every day?
- 1. You know what they look like, you can touch them.
- 2. You understand their value - it depends on the position of the country in the world and the demand for a particular currency.
- 3. You know that this money is issued by a certain country.
- 4. To get the money, you have to work and get it as a reward.
5. If you make any operations with money in a bank, the bank has access to the information about you and identify you. Accordingly, the bank may forcibly block or withdraw assets,
if decided by the regulator, or transfer information about your assets to the state authorities.
Ordinary money is also called fiat money. So, fiat money is the currency of any country, approved by the country's government. Franks, pounds, crowns, dollars, euros, yen, yuan, and others,
including money on accounts/cards. Fiat (from Latin means decree, edict) means "let it be so". It reflects the symbolism and traditionality of ordinary money. The term has long been unpopular,
but recently it has been used to distinguish cryptocurrency from conventional money.
2. Money is material, but to what extent is bitcoin virtual?
What is the essence of bitcoin? All of the above facts about ordinary money do not apply to bitcoins, and that is the key advantage.
To make it as clear as possible, we'll compare all the points:
Ordinary money is tangible, and it exists in physical form as paper notes or metal coins.
Bitcoin is digital virtual money, it doesn't exist in material terms, you can't touch it. Bitcoin exists only in the Internet space
Imagine if you deposited funds on a card or e-wallet of a payment system, but never withdrew this money, and used only online. It's the same with crypto assets.
Technically, bitcoin is fundamentally different from the regular money that you use online.
A coin of bitcoin is a file that contains data.
But the file that constitutes bitcoin is not a document that users are familiar with.
This file contains a registry with records of transactions and movements of a bitcoin from the moment the coin was created - all the information about who gave it to whom and when.
The records are not in the form of text, but in the form of numbers and symbols - a cipher created by means of a mathematical algorithm called a "hash". Hash is used to preventing anyone from
changing or deleting any of the records.
The bitcoin file is stored in the form of a copy in the network, where other participants and coin files are interconnected - this system is called Blockchain, we will tell you more about it
In such a network, there is a public register of coins, it is visible and filled by the participants of the system.
They do not maintain it in the usual way, the data can not be simply opened, changed, copied, deleted, or saved. Each entry is entered and confirmed using the above cipher - hash. The
cipher is determined through complicated calculations. To make a record, one has to find a cipher in a code of dozens of digits. Just imagine how many options you have to go through to
make this cipher match! This is one of Blockchain's principles, which ensures that the bitcoin is safe.
Although it is impossible to make unauthorized changes in the register, all network participants can see its data and bitcoin files with their history. At the same time, the owner of a wallet
and the volume of their bitcoins cannot be identified - one more principle of Blockchain, the principle of anonymity.
3. What constitutes the value of money and bitcoin?
Conventional money is released by the state and is directly dependent on external factors
National money has a value that depends on the trust of those who use it, to the party that emits it, the emitter of the currency. The supply and demand for money are regulated by the
government and the world market.
If the trust in the state is reduced, the value of the currency drops, the demand for it decreases, and the rate goes down. The reason for the drop in the value of the currency may be the
complicated geopolitical situation of the country, cataclysms, military actions, or political decisions.
The value of bitcoin is formed by several factors
The ideology of cryptocurrency creation is the distinction from conventional money and independence from the state.
Bitcoin emission is limited to 21,000,000 coins. No more can be created.
The demand for bitcoin is increasing and the number of released coins is gradually decreasing.
Mining of coins requires labor, computing resources, and electricity - this is called mining, but we will talk about it later.
4. Who controls fiat money and who controls bitcoin?
Ordinary money and bitcoins exist in different systems.
The national currency is emitted by the country where it is in circulation. The policy of a country is determined by the authorities. At the same time, users of money do not always have a
direct influence on its value, and often do not choose the political decisions on which the currency rate is depending.
All payments and money turnover are controlled by the country's banking system, with the help of which a register of payments is maintained. Your bank account can be blocked, arrested,
forcibly charged off the money, and payment can be canceled. And the central bank can print new banknotes in unlimited quantities, thus reducing the cost of currencies.
The whole system is centralized - there is always an authority that has total supervision.
As for the cryptocurrency turnover, nobody controls it. It is simultaneously monitored by all participants.
The main idea of bitcoin, which was the basis for its creation, is decentralization, in other words, a system where power belongs to everyone and no one at the same time.
It exists in a dimension where all participants are equal, money moves between them directly, without any mediation of regulators.
Payments are validated by the network users who maintain a register of transactions and guarantee their legitimacy.
Fraud is eliminated due to the large number of participants located thousands of miles away from each other, the random selection of users to confirm the transaction, and the principle of
payment registry, these blockchain technologies exclude unauthorized changes. Copies of the register are stored on all computers of the system members.
The work of the blockchain is based on the rules established by the creator of the system, which is arranged to provide for and avoid all possible illegal fraud. The rules are translated for
the program into mathematical principles, which ensure that only those entries that comply with its rules can be recorded in the data register. Changing a record, entering a previous date
there, or any other manipulation would either require so many calculations that it is not possible to make at present, or so many resources or expensive actions that they would never be
beneficial from these manipulations.
No one with any power capacity on their own would be able to take control over such a system. There are no resources in the world that can change data in millions of computers at once.
Nobody can see in the registry who exactly holds the bitcoins or how many bitcoins an individual holder has - no one has access to the money except the owner or someone who has the
This way, there is no central entity that controls the entire system in the world of crypto. However, some people create money for themselves, manage it themselves with a reliable program. And
there is a system that excludes the human factor of error and fraud.
Nobody can forcibly seize, detain, or restrict the circulation of cryptocurrency. Even assuming a state disables the Internet or blocks access to certain sites, crypto assets will remain
intact and exist in network space until the owner disposes of the assets themselves.
5. Who emits fiat money and who emits bitcoins?
Probably everyone knows that national currency is emitted by special productions - banknotes are printed on special equipment, on protected paper with unique features in a strict regime where
ordinary people are not allowed access, and entering and exiting is strictly controlled.
How is Bitcoin emitted?
As already mentioned, the entire system of bitcoin is a huge blockchain network, which maintains records of transactions of coins.
When a user wants to transfer bitcoins to someone, the system sends a signal that notifies all participants of the network. The members of the network receive this notification online and, if they
wish, participate in confirming the payment. They are called miners. Miners provide the bitcoin system with its vital functions, security, block recording, and solve all technical tasks required
for the requirements of the cryptocurrency.
The seller confirms the payment with his signature, which consists of encrypted characters, like all records in the network.
Miners are in charge of verifying the validity of all factors of payment. They identify and verify previous entries in the bitcoin registry, and confirm the coin seller's signature.
Payment confirmation is performed by finding the key to the transaction record as a numeric code.
The code is quite complicated, and, as we have already figured out, there are millions of solutions. To accomplish such calculations, a person may need an insane amount of time, so special
computing power is used for such tasks.
Transactions, i.e. encrypted data in the payment register, are gathered into blocks. It is similar to the way files are collected in folders.
Blocks are limited in size, and therefore, as soon as the amount of data reaches a certain limit, they "close" and a new block "opens".
All these calculations for finding keys, opening-closing blocks are voluntarily made by users-miners, although miners are not altruists since all these searches for keys are rewarded with a
certain amount of coins.
New bitcoins appear in the process of all these manipulations. These bitcoins are rewarded to the miners, and thus emission happens - the total amount of cryptocurrency coins increases.
That's how bitcoins are released.
The mining process is called mining.
The whole system compensates for the absence of a centralized management and control body (bank), as well as a money emission factory.
As the participants are selected randomly for verification, it is almost impossible to organize a conspiracy or fraud, as the rules of the network are not subject to change either by
fraudsters or participants, the creator, or somebody else.
The process of emitting bitcoins is continuous - miners do it professionally, for them it's a business, so the process will stop only with the emission of all the bitcoins stipulated by the
system, which means with the release of all 21 000 000 coins.
Initially, mining was highly profitable because the difficulty of the tasks that were solved in order to produce coins was not very high, they could be solved even with a simple home computer.
But as time passed, the calculations became more complicated and the amount of reward decreased. ( By the way, it ensures that there is no inflation). Increasingly powerful machines were used
for calculations, and special devices were created to solve tasks related to mining alone. The cost of these units is getting higher and higher, while they are quickly becoming outdated.
Additional costs for mining are the cost of electricity needed to run the machines. The participants purposely find places with the cheapest electricity and form huge pools of machines to mine
as many coins as possible.
Moreover, to increase capacity and optimize costs, the miners are pooled into communities, jointly extracting and sharing the cryptocurrency according to their share. In this way, the mining
speed increases, just like each participant's chances of getting a part of the reward.
Taken together, all this complicates and increases the cost of the mining process, making it less and less profitable.