How Bitcoin Works in Really Simple Terms

[Max2140]

Hi all,
Here is the website that explains Bitcoin, Bitcoin blockchain, and Bitcoin economic model, in really simple terms - How Bitcoin Works
I hope it will be helpful for those who want to get BASIC understanding of Bitcoin and its unique characteristics and features.

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[Bttzed03]

Hey Max,

I think I can speak on behalf of the majority members here that we prefer posting a summary of the content than just a link to your website. Can you do that please? That will be more helpful for Bitcoin beginners who came to the forum to learn. I'm not judging your intention but we've seen a lot of posts that are only meant to redirect us to ads-filled websites before.   

Hi all,
Here is the website that explains Bitcoin, Bitcoin blockchain, and Bitcoin economic model, in really simple terms - How Bitcoin Works
I hope it will be helpful for those who want to get BASIC understanding of Bitcoin and its unique characteristics and features.

[Twentyonepaylots]

Well he literally do that for us to visit his own website, but as you being a newbie I get it, you just want to contribute with your capabilities especially to your fellow newbies however things like this should be in simple sheet as well. You could have just sum it up here so we won't take a long time for the page to load in another page. Besides, this topic has been here already for ages, what someone who is new here is just to make use of the search button.

[Max2140]

Sure, it makes sense. You are right that our website is not completely educational as we provide instant Bitcoin purchase service AND free Bitcoin robo advisor service. However, there are no ADS on our website at all. I will post a summary of "How Bitcoin Works" content in this thread. Here we go.


BITCOIN DEFINITION & CHARACTERISTICS


Bitcoin Definition

Bitcoin is a digital store of value and a disinflationary digital currency designed to facilitate financial transactions without a centralized intermediary and government control.
You can read the original Bitcoin whitepaper by clicking on the following link.


Bitcoin Characteristics

Bitcoin has the following unique characteristics and distinctive features.

Decentralized. No one controls Bitcoin as its blockchain is globally distributed.

Censorship-Resistant. Governments and central banks cannot take control over Bitcoin.

Trustless. Nobody has to trust anybody else in order the Bitcoin network to function.

Irreversible. Bitcoin transactions are irreversible unlike traditional banking transfers.

Pseudonymous. Bitcoin addresses do not contain any personal information.

Divisible. Every Bitcoin is divided into 8 decimal places (0.00000001 BTC).

Limited Supply. Bitcoin has a disinflationary economic model and a fixed supply of 21 million.

Fast Settlement. Bitcoin transactions are fast, cost-effective, and cross-border.


BITCOIN ECONOMIC MODEL


About Bitcoin Scarcity

The most important advantage of Bitcoin is its unique disinflationary economic model that makes it an excellent investment alternative to gold and traditional fiat currency. Total Bitcoin supply is fixed at 21 million. As of August 2020, around 18.45 million bitcoin have already been mined, which is roughly 88% of the total supply.

The current disinflationary Bitcoin economic model will transform into a deflationary model once the last Bitcoin is mined. This is how Bitcoin economic model works in contrast with the traditional fiat system. No more Bitcoin will be mined beyond 2140 and the total Bitcoin supply will be only decreasing for such reasons as lost Bitcoin and mistaken Bitcoin transaction.


Bitcoin Inflation Rate

The current block reward amount is equal to 6.25 BTC per Bitcoin block and decreases by half every 210,000 blocks, or approximately every four years. We estimate that around 900 bitcoins will be mined on daily basis until the next Bitcoin halving event in 2024.

Bitcoin block reward will be reduced to 3.125 BTC per block at this time and Bitcoin inflation rate will drop below 1% first time ever. Notably, Bitcoin inflation rate will become equal to 0% when the last bitcoin is mined, presumably in 2140. Once the last bitcoin is mined, the Bitcoin economic model will become purely deflationary.


HOW BITCOIN BLOCKCHAIN WORKS


What Is Bitcoin Blockchain?

First of all, bitcoin is a digital asset and therefore does not have physical monetary value like a gold or fiat currency. Rather, bitcoin is just a record on the Bitcoin blockchain that confirms bitcoin ownership. Bitcoin blockchain is a distributed ledger of timestamped bitcoin transactions that are bundled into blocks. The Bitcoin blockchain is immutable and bitcoin transactions are irreversible. Bitcoin network consists of thousands of Bitcoin miners and Bitcoin nodes.


Role of Bitcoin Miners

The security of the Bitcoin network is ensured by Bitcoin miners. Bitcoin miners use powerful computers to solve complex cryptographic problems to validate Bitcoin transactions and receive a Bitcoin reward. This computing process is called “proof-of-work”. The first miner that finds the solution to the cryptographic problem and creates a new Bitcoin block, receives a Bitcoin block award. This is how new bitcoins are created. Each Bitcoin block is mined every 10 minutes on average, which is roughly 144 blocks per day.

Besides block rewards, Bitcoin miners earn Bitcoin transaction fees that are currently much smaller than the block reward amount. Specifically, they receive transaction fees for verifying and processing Bitcoin transactions included in the block they have mined and added to the Bitcoin blockchain. We expect that Bitcoin transaction fees will increase substantially once the last Bitcoin is mined and no more block rewards are available. Miners are driven by financial incentives and they tend to prioritize Bitcoin transactions with the highest transaction fees.


How Bitcoin Halving Works

Each Bitcoin block is mined every 10 minutes on average, which is approximately 144 blocks per day. The Bitcoin production decreases by half every 210,000 blocks or approximately every four years. The last halving event took place in May 2020 and Bitcoin miners currently receive block reward of 6.25 bitcoins per block. Subsequently, roughly 900 bitcoins are mined every day until the next Bitcoin halving event in 2024. This is how new bitcoins are created.


Bitcoin Halving and Price Increase

Bitcoin’s inflation rate is decreasing based on the mathematical algorithm, unlike the inflation rate of fiat currencies. We expect that the lack of new supply will cause the future increased demand for Bitcoin. Besides that, Bitcoin halving has been historically an extremely positive event for Bitcoin price action. Based on the recent Kraken report, halvening kicked off Bitcoin bull runs with price appreciation of 9,000% and 3,000% in 2012 and 2016, respectively.


Next Bitcoin Halving Event in 2024

Next Bitcoin halving event is expected in 2024, when Bitcoin block reward will be reduced to 3.125 bitcoins per block from the current amount of 6.25 bitcoins per block. This means the daily Bitcoin supply will be reduced to approximately 450 bitcoins per day from the current supply of approximately 900 bitcoins per day. We assume that Bitcoin price will continue increasing in the foreseeable future, due to the algorithmically predetermined decrease of its supply and presumably steady if not increasing demand for Bitcoin from both institutional and retail investors.


Bitcoin Improvements

A new Bitcoin block is created on average every ten minutes, with the block size limited to 1 MB. Therefore, Bitcoin block can accommodate only a limited number of Bitcoin transactions and it takes approximately ten minutes for Bitcoin nodes to verify them. As a result, Bitcoin has a scalability problem because of the limited number of Bitcoin transactions that can be processed in a given time. Bitcoin community has been trying to resolve the scalability issue, considering various technical improvements of the Bitcoin protocol.

Fortunately, some of these attempts were successful. For example, Bitcoin technical improvement SegWit increased Bitcoin block size by removing signature data from Bitcoin transactions. The Lightning Network proposal aims to make Bitcoin scalable by introducing instant payments that occur off-chain. Lightning transactions offer considerably lower fees and faster settlement times than do Bitcoin on-chain transactions.

[seoincorporation]

I don't like what the site says about the secure storage of bitcoin...

They recommend to send the bitcoins to their site for a 6% fo interest winned anually, so, we can say that's the bait, i can see the business running with all the investors money, it will not be the first time it happens.

So, i would recomend to stay away from that site.

[Bttzed03]

Sure, it makes sense. You are right that our website is not completely educational as we provide instant Bitcoin purchase service AND free Bitcoin robo advisor service. However, there are no ADS on our website at all. I will post a summary of "How Bitcoin Works" content in this thread. Here we go.

Thanks for posting the summary. @seoincorporation left a feedback about your site already and I'll leave it to the judgement of the readers here if they want to visit.

Anonymous. Bitcoin addresses do not contain any personal information.
Fast Settlement. Bitcoin transactions are fast, cost-effective, and cross-border.

Bitcoin is Pseudonymous. While it's true that no name is associated to bitcoin addresses every time you send and receive btc, it doesn't mean that it's completely anonymous. Once you have been identified as the owner of the wallet, all the previous transactions in it will be linked to you since all of them are on the blockchain.

Ever since bitcoin became popular, one of the common issue thrown at her was the slow confirmation time. It's 1 block containing 1MB (or 4 for segwit tx) worth of transactions every 10 minutes. That is slow in comparison to other cryptocurrency transactions and to VISA or other cards that confirms in a couple of minutes/seconds. If you're going to compare it with clearing of checks that usually takes 2-3 days, then yeah bitcoin transactions can be faster depending on the network congestion and the fees tied to the transaction. It usually takes days if you send using a low fee while the network is heavily congested.

What Is Bitcoin Blockchain?

First of all, Bitcoin is a digital asset and therefore does not have physical monetary value like a gold or fiat currency.

You might be mixing Bitcoin (the blockchain) and bitcoin (the digital asset - cryptocurrency) here.

[Max2140]

The replies had a better explanation than the site   

This is just wrong. Please read the website content first before posting such statements.

[Max2140]

I don't like what the site says about the secure storage of bitcoin...

They recommend to send the bitcoins to their site for a 6% fo interest winned anually, so, we can say that's the bait, i can see the business running with all the investors money, it will not be the first time it happens.

So, i would recomend to stay away from that site.

I need to clarify this. We do not accept Bitcoin from our customers. We partner with BlockFi, which offers the most competitive annual Bitcoin interest rate of up to 6%. How BlockFi makes money? They take your Bitcoin and lend it to institutions that need it for trading or hedging purposes. Importantly, they lend your Bitcoin on over-collateralized terms, meaning borrowers have to secure the Bitcoin loan with USD in the larger amount than the loan itself. BlockFi holds its crypto holdings with the custodian company Gemini. Gemini is a Qualified Custodian and a New York trust company regulated by the New York State Department of Financial Services, with solid reputation in the crypto space. I would say that your Bitcoin is secure once its deposited with BlockFi. As of Q1 2020, BlockFi received over $650 million in crypto deposits from their clients and managed funds with 0% loss rate.

[Max2140]

Sure, it makes sense. You are right that our website is not completely educational as we provide instant Bitcoin purchase service AND free Bitcoin robo advisor service. However, there are no ADS on our website at all. I will post a summary of "How Bitcoin Works" content in this thread. Here we go.

Thanks for posting the summary. @seoincorporation left a feedback about your site already and I'll leave it to the judgement of the readers here if they want to visit.

Anonymous. Bitcoin addresses do not contain any personal information.
Fast Settlement. Bitcoin transactions are fast, cost-effective, and cross-border.

Bitcoin is Pseudonymous. While it's true that no name is associated to bitcoin addresses every time you send and receive btc, it doesn't mean that it's completely anonymous. Once you have been identified as the owner of the wallet, all the previous transactions in it will be linked to you since all of them are on the blockchain.

Ever since bitcoin became popular, one of the common issue thrown at her was the slow confirmation time. It's 1 block containing 1MB (or 4 for segwit tx) worth of transactions every 10 minutes. That is slow in comparison to other cryptocurrency transactions and to VISA or other cards that confirms in a couple of minutes/seconds. If you're going to compare it with clearing of checks that usually takes 2-3 days, then yeah bitcoin transactions can be faster depending on the network congestion and the fees tied to the transaction. It usually takes days if you send using a low fee while the network is heavily congested.

What Is Bitcoin Blockchain?

First of all, Bitcoin is a digital asset and therefore does not have physical monetary value like a gold or fiat currency.

You might be mixing Bitcoin (the blockchain) and bitcoin (the digital asset - cryptocurrency) here.

Thank you for your feedback. I really like your comments and agree with all of them. In reality, I wanted to explain Bitcoin in very simple terms and that's why tried to avoid technical and other nuances. Regarding the anonymity of Bitcoin network transactions, the most appropriate explanation would be "Bitcoin is RELATIVELY anonymous" and I actually used this wording initially. Regarding the settlement of Bitcoin transactions, I would say it depends. It's still not VISA speed but on other side, fees are much lower if we are talking about multimillion transfers. Would be interesting to see what are Bitcoin transaction fees beyond 2140 though. Finally, Bitcoin word is capitalized when we are talking about the concept and network. You are right. Thank you again for your contribution!

[Bttzed03]

~
Thank you for your feedback. I really like your comments and agree with all of them. In reality, I wanted to explain Bitcoin in very simple terms and that's why tried to avoid technical and other nuances.

We can't really avoid the technicalities even if we try to dumb it down for the masses. I've tried that in the past but I feel like it made them more confused

Regarding the anonymity of Bitcoin network transactions, the most appropriate explanation would be "Bitcoin is RELATIVELY anonymous" and I actually used this wording initially. Regarding the settlement of Bitcoin transactions, I would say it depends. It's still not VISA speed but on other side, fees are much lower if we are talking about multimillion transfers. Would be interesting to see what are Bitcoin transaction fees beyond 2140 though. Finally, Bitcoin word is capitalized when we are talking about the concept and network. You are right. Thank you again for your contribution!

I'd prefer sticking to Pseudonymous but whatever works for you. As long as they understand they're not completely anonymous.

I only touched the speed and not the processing/transaction fees in my first comment because I agree that it's still way cheaper compared bank transfers especially of that magnitude. Who knows what's going to be by 2140. I personally don't want to dabble on that as we don't even know if people will still use bitcoin at that time. It could be obsolete by then.


On responding to each post, you might want to consolidate them rather than doing it one by one. What you did was actually against the (un)official forum rules. You can edit your last post and include the first two thru copy-paste then delete them after.

[Max2140]

~
Thank you for your feedback. I really like your comments and agree with all of them. In reality, I wanted to explain Bitcoin in very simple terms and that's why tried to avoid technical and other nuances.

We can't really avoid the technicalities even if we try to dumb it down for the masses. I've tried that in the past but I feel like it made them more confused

Regarding the anonymity of Bitcoin network transactions, the most appropriate explanation would be "Bitcoin is RELATIVELY anonymous" and I actually used this wording initially. Regarding the settlement of Bitcoin transactions, I would say it depends. It's still not VISA speed but on other side, fees are much lower if we are talking about multimillion transfers. Would be interesting to see what are Bitcoin transaction fees beyond 2140 though. Finally, Bitcoin word is capitalized when we are talking about the concept and network. You are right. Thank you again for your contribution!

I'd prefer sticking to Pseudonymous but whatever works for you. As long as they understand they're not completely anonymous.

I only touched the speed and not the processing/transaction fees in my first comment because I agree that it's still way cheaper compared bank transfers especially of that magnitude. Who knows what's going to be by 2140. I personally don't want to dabble on that as we don't even know if people will still use bitcoin at that time. It could be obsolete by then.


On responding to each post, you might want to consolidate them rather than doing it one by one. What you did was actually against the (un)official forum rules. You can edit your last post and include the first two thru copy-paste then delete them after.

Thank you for your comments. It all makes sense to me. It looks like we are on the same page here.

[odolvlobo]

Some things that I would fix:

We estimate that around 9,000 900 bitcoins will be mined on daily basis until the next Bitcoin halving event in 2024.
...
This is how new bitcoins are created. Each Bitcoin block is mined every 10 minutes on average, which is roughly 1,440 144 blocks per day.
...
Each Bitcoin block is mined every 10 minutes on average, which is roughly 1,440 144 blocks per day.

6 x 24 = 144
144 x 6.25 = 900

First of all, Bitcoin is a digital asset and therefore does not have physical monetary value like a gold or fiat currency.

Fiat currency is also "digital". Neither fiat nor gold have "physical" monetary value, whatever that is.

The Bitcoin supply production decreases by half every 210,000 blocks ...

That's a common misconception. The supply is constantly increasing every block until it reaches 21 million. The production is halved at the halving.

We expect that the lack of new supply will cause the future increased demand for Bitcoin. ...

Another common misconception. Supply and demand are independent. One does not effect the other (in a normal market). Also "new supply" is just production. "New supply" is not supply. People use the term "new supply" in order to support their misconceptions regarding supply and demand.

... Besides that, Bitcoin halving has been historically an extremely positive event for Bitcoin price action. Based on the Kraken cryptocurrency exchange data, halvening kicked off Bitcoin bull runs with price appreciation of 9,000% and 3,000% in 2012 and 2016, respectively.

Yet another misconception. The Bitcoin price has been rising dramatically throughout its history. There is no correlation with halvings. People that correlate price rises and halvings are cherry-picking the data.

Currently, Bitcoin investors usually store their Bitcoin holdings in cold or hot wallets. Cold wallets are usually hardware flash drives such as Ledger or Trezor wallets, while hot wallets are provided by online services such as Blockchain or cryptocurrency exchanges.

Your definitions of hot vs. cold are wrong. Hot and cold describe if the wallet is connected to the internet or not. A hot wallet is connected and a cold wallet is not.

Trezor and Ledgers are cold wallets because they connect via USB and are not accessible from the internet.

Blockchain or cryptocurrency exchanges are not hot wallets. They are "custodians". They hold your bitcoins and you have an account with them (not a wallet). Custodians use hot and cold wallets to hold your bitcoins.

Examples of a hot wallet are Electrum, Mycelium, and Bitcoin Core -- basically any wallet that stores your keys on your phone or laptop.

[Max2140]

Some things that I would fix:

We estimate that around 9,000 900 bitcoins will be mined on daily basis until the next Bitcoin halving event in 2024.
...
This is how new bitcoins are created. Each Bitcoin block is mined every 10 minutes on average, which is roughly 1,440 144 blocks per day.
...
Each Bitcoin block is mined every 10 minutes on average, which is roughly 1,440 144 blocks per day.

6 x 24 = 144
144 x 6.25 = 900

Thank you for your note! The typo has been fixed and numbers should be correct now.

First of all, Bitcoin is a digital asset and therefore does not have physical monetary value like a gold or fiat currency.

Fiat currency is also "digital". Neither fiat nor gold have "physical" monetary value, whatever that is.

My point was that you cannot exchange physical bitcoin for a good or service, though you can do it with cash (coins or banknotes) or hypothetically, with a gold bullion.

The Bitcoin supply production decreases by half every 210,000 blocks ...

That's a common misconception. The supply is constantly increasing every block until it reaches 21 million. The production is halved at the halving.

Thank you for your comment. The wording has been changed.

We expect that the lack of new supply will cause the future increased demand for Bitcoin. ...

Another common misconception. Supply and demand are independent. One does not effect the other (in a normal market). Also "new supply" is just production. "New supply" is not supply. People use the term "new supply" in order to support their misconceptions regarding supply and demand.

"Supply" has been changed to "Production". However, when demand exceeds supply, prices tend to rise. I'm talking about the relationship of price to supply and demand (supply and demand curves) in economics.

... Besides that, Bitcoin halving has been historically an extremely positive event for Bitcoin price action. Based on the Kraken cryptocurrency exchange data, halvening kicked off Bitcoin bull runs with price appreciation of 9,000% and 3,000% in 2012 and 2016, respectively.

Yet another misconception. The Bitcoin price has been rising dramatically throughout its history. There is no correlation with halvings. People that correlate price rises and halvings are cherry-picking the data.

I partly agree with you but tend to trust Kraken research team. Here is their Bitcoin Halving Report

Currently, Bitcoin investors usually store their Bitcoin holdings in cold or hot wallets. Cold wallets are usually hardware flash drives such as Ledger or Trezor wallets, while hot wallets are provided by online services such as Blockchain or cryptocurrency exchanges.

Your definitions of hot vs. cold are wrong. Hot and cold describe if the wallet is connected to the internet or not. A hot wallet is connected and a cold wallet is not.

Trezor and Ledgers are cold wallets because they connect via USB and are not accessible from the internet.

Blockchain or cryptocurrency exchanges are not hot wallets. They are "custodians". They hold your bitcoins and you have an account with them (not a wallet). Custodians use hot and cold wallets to hold your bitcoins.

Examples of a hot wallet are Electrum, Mycelium, and Bitcoin Core -- basically any wallet that stores your keys on your phone or laptop.

That was a really helpful comment and relevant changes will be made shortly on our website. Thank you for your detailed explanation.

[minersday]

Hi all,
Here is the website that explains Bitcoin, Bitcoin blockchain, and Bitcoin economic model, in really simple terms - How Bitcoin Works
I hope it will be helpful for those who want to get BASIC understanding of Bitcoin and its unique characteristics and features.

You can do better  . This is not the way to make people visit your website or blog post. I think you should find a better way to convince people to visit your platform to read your work.  With this kinda way, no one will actually visit your platform. Better luck next time mate..

[GeorgeJohn]

Hi all,
Here is the website that explains Bitcoin, Bitcoin blockchain, and Bitcoin economic model, in really simple terms - How Bitcoin Works
I hope it will be helpful for those who want to get BASIC understanding of Bitcoin and its unique characteristics and features.

bitcoin is really a cryptocurrency which know one monitored even state and federal government because is decentralized in all ramifications, it real good for changes of goods and services for the betterment of life, many people to are into cryptocurrency because of the usefulness of it in societies

[k@suy]

I find it really resourceful. It speaks even to five-year-olds and laymen. I would recommend it to anyone who wants to learn about bitcoin from scratch. Thanks so much for the link.

I dont think that bitcoin can be taught to all most especially to kids because if the older people is really having a hard time to understand about bitcoin so much more the kids? I think it we can teach bitcoin to ages 18 and above because they are matured enough already to understand certain things like cryptocurrency and block chains.

[Max2140]

I find it really resourceful. It speaks even to five-year-olds and laymen. I would recommend it to anyone who wants to learn about bitcoin from scratch. Thanks so much for the link.

Indeed, the site has all the information that one would need to know about Bitcoin. It's really useful for those who are new to Bitcoin and cryptocurrency in general.

Thank you very much for your feedback and kind words about Digital Finance website! I'm really glad you liked the content.
We also have absolutely free online Bitcoin Robo Advisor service on our website, if anyone is interested.

[verita1]

On the link "How Bitcoin works" there is a broken link.
In the following paragraph: Bitcoin holders can generate substantial income by depositing their Bitcoin to a Bitcoin interest account link

404 page not found

[Max2140]

On the link "How Bitcoin works" there is a broken link.
In the following paragraph: Bitcoin holders can generate substantial income by depositing their Bitcoin to a Bitcoin interest account link

404 page not found

Thank you so much for pointing this out. The broken link has been fixed!