What is a bitcoin, how does it work, and what is virtual currency used for - Explained for dummies.

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Discover everything about bitcoin in Spanish!

Why has the virtual currency generated so much excitement? What are you waiting for to find out what bitcoin really is?

If you want to quickly understand bitcoin, we have prepared a simple explanation where you will learn about the currency of the internet. But also, throughout this course, you will find an advanced technical explanation about bitcoin, where we delve into its protocol and teach how it works.

What is bitcoin explained for dummies

The meaning of bitcoin is "virtual currency". It is the first cryptocurrency that was created. In summary, it is a currency to be used on the internet.

Is that it? Is bitcoin just a digital currency? Surely this definition is what you will find on most websites, but the digital currency is much more than that. The secret of bitcoin lies in how its protocol works and how it manages transactions.

What is the origin of digital currency?

In order to understand bitcoin a little better, we must go back a few years. Specifically to 1950 when Diners Club was created.

The idea came to life when Frank McNamara, co-founder of this company, was having dinner at a restaurant with some clients and had forgotten his wallet. How could he pay without having cash? That's how he created the first credit card.

In the early years, people distrusted that piece of plastic. Was it safe? Could it be stolen? However, 20 years later, in the 1970s, half of the population in the United States already had a credit card.

Curiosities

According to the definition of bitcoin by Fundeu, the Spanish adaptation is bitcóin, with an accent. In addition, the plural should be bitcoines instead of bitcoins.

Just like credit cards, bitcoin was created to cover certain needs.

The main objective was to create digital cash. That is, to offer a service where you can have a digital wallet with cash, without the need for cards or deposits in banks.

This is achieved thanks to bitcoin addresses. These are hosted within the cryptocurrency network itself. There are no other intermediaries, such as banks.

In addition, due to the wide range of electronic devices nowadays, you can have them available anywhere, stored more securely than traditional cash, which can be stolen or lost.

A system of buying and selling online without being controlled by "Big Brother". The concept is harder than it seems. Currently, when you buy a product on Amazon, it confirms with your bank that you have the money. How could this confirmation be done without a third party?

This problem confused computer experts for decades. Many attempts were made to create an electronic currency, but all failed. The main reason is that none of them were free from a central authority that controlled the system. In this case, a computer server that controlled the transactions.

Bitcoin, the currency of the future.

It was not until 2008 that it was solved, when Satoshi Nakamoto created the concept of bitcoin. The most important thing was not actually creating a bitcoin payment network, considered as digital cash, but doing it in a decentralized way.

This was the missing piece of the puzzle for the financial revolution that cryptocurrencies represented. The reason may be somewhat complicated, but it is key to the functioning of bitcoin.

What is digital currency explained for dummies

The origin of bitcoin dates back to August 2008, when the domain bitcoin.org was registered. On January 3, 2009, the first bitcoin was created. That is, "the first block of the bitcoin blockchain was mined". We will see later what this means.

The authorship of virtual currencies is attributed to Satoshi Nakamoto. Thanks to him, bitcoin is real. However, it is a pseudonym: The person or people behind him are unknown.

The Bitcoin logo is usually represented by a capitalized white B, crossed by two lines on an orange background. Its symbol is ฿, although it can also be found with the bitcoin ticker, BTC.

Among its particularities, it stands out that it is a transparent, public, and secure currency. It is based on a system without intermediaries, where the bitcoin money belongs to you. Contrary to what many people think, digital currencies are traceable, so they are not completely anonymous. In addition, it is a deflationary and decentralized currency. For these reasons, many people think that it can revolutionize the current financial system.

» Related article: If you want to better understand these characteristics, we recommend reading the article on: Definition and characteristics of bitcoin.

» Related article: You can also learn about the implications of bitcoin being a deflationary currency in the article on how many bitcoins are there.

What is the purpose of the bitcoin currency

The digital currency bitcoin was born from a premise that was generated in a chain of emails. It proposes creating a new cryptographic currency that can be used to process transactions without a centralized authority. Therefore, the original idea was to create a new electronic currency, decentralized and cryptographically protected.

In this initial approach, bitcoin serves to acquire goods and services through the internet. For this reason, it has popularly earned the name "internet currency". However, work is being done to also be able to use it for physical payments through a credit card, although this technology is not yet mature.

The main advantage of bitcoin over electronic payments with a card is decentralization. With bitcoin, you can buy something by transferring money directly from your wallet. You don't need any bank or intermediary. It's like having cash, but inside a device.

Digital currency as an investment

Since its creation, its popularity has only continued to grow, which is reflected in its price. Just to give you an idea, in 2009, the first dollar-bitcoin exchange rate was published. At that time, 1.309.03 bitcoins could be bought for one dollar. In other words, the initial price of bitcoin was 0.000764 dollars.

In December 2017, the cyber currency almost reached $20,000. In 8 years, its value multiplied by over 26,000,000. Its popularity increased dramatically.

Many acquired the cryptocurrency at a lower price to sell it at a higher price in the future. In other words, the reality is that bitcoin is also, nowadays, an investment product.

The process of investing in a virtual currency is very similar to the stock market. Using this analogy, you can say that you acquire "bitcoin shares." During the time you hold them, they will either appreciate or depreciate in value.

The difference in investing in the "bitcoin stock market" is that there are no intermediaries who hold or own your shares. You purchase the cryptocurrencies directly from their owner and store them in your digital wallet. Therefore, the savings on commissions for your "bitcoin shares" are considerable, which represents a clear advantage.

The bitcoin ticker is BTC. With this code, you can find the current price of the digital currency on stock exchange systems.

The ticker is an alphanumeric code that is used to identify a specific financial asset listed on a particular stock market in an abbreviated form.

If you want to learn more about how to acquire cryptocurrencies, we recommend that you read how to buy bitcoins safely.

How Bitcoin Works

To know how to use bitcoin it is necessary to understand somewhat more complex concepts. This article will describe them in a simple way, so that you can have a general idea about these bitcoin concepts.

The functioning of bitcoin is based on two pillars: giving independence to the cryptocurrency from any central entity and ensuring the security of its protocol.

Bitcoin operates on a highly encrypted database to perform each of its operations, making it a very secure protocol.

In addition, it can be affirmed that, in a nutshell, bitcoin security relies on three elements: the blockchain network, network nodes, and the Proof of Work (PoW) algorithm.

Blockchain Technology

The bitcoin currency protocol is based on blockchain technology, or chain of blocks. When someone makes a transaction within the bitcoin system, it is recorded in a kind of "data sheet" known as a block.

Each block contains information from multiple transactions, such as the timestamp, wallet identification, or a block verification number. In addition, each block retains a common identification with the previous block. In this way, the blockchain is generated, which contains the entire history of electronic currency transfers.

To better understand the concept of the blockchain of cryptocurrency, we recommend reading the section on what is blockchain.

Network Nodes

The complete information of the bitcoin blockchain, including every single transaction made, is stored in the nodes. Nodes are computers connected to the Bitcoin network that propagate and transmit the transfers.

Since each node stores the complete history of the entire blockchain, it is impossible to hack.

It is not enough to access a computer and modify its history, it would also have to be done on the entire network. This is something practically impossible.

At the time of writing this article, there were almost 11,000 nodes in the world. The more nodes there are and the more countries they are located in, the more secure the network will be. The number of operational nodes can be checked in real time on the website bitnodes.earn.com.

Proof of Work Algorithm: SHA-256. The formula for virtual currency

The Bitcoin system is designed so that adding a block to the network is a costly process (in terms of time and resources). This way, it prevents indiscriminate generation of blocks.

This is accomplished through a Proof of Work algorithm, which is commonly used, for example, to prevent Spam in email. The Bitcoin algorithm is known as Hashcash-SHA-256 or simply SHA-256 Algorithm bitcoin.

The proof of work consists of finding a verification number that contains each of the blocks in the network. The search for this number is done iteratively, through trial and error. In other words, random numbers are tried over and over again until finding a specific number.

This requires a lot of computational power: A computer connected to the Bitcoin system constantly performing search operations. Each of these connected computers is known as bitcoin miners.

Mining: How Cryptocurrencies are Created

Miners are other nodes in the network. In addition to storing the transaction history of the network (the blockchain), they contribute computing power from computers to perform the transactions. Their main objective is to find the nonce of each block recorded in the bitcoin blockchain. Once they find it, they register it in the network.

As mentioned, this work is done by iteratively trying possible verification numbers. Since it requires a lot of computational power, this activity is incentivized and miners are rewarded with digital bitcoin currency for each block they solve.

Cryptocurrency mining is highly competitive and requires high-powered equipment. Special equipment of high cost is typically used. Additionally, these machines must be connected 24/7, which consumes a lot of electrical energy.

In summary, mining is a project that requires investment and has maintenance costs. However, the appreciation of electronic money like bitcoin has made mining remain profitable to this day.

To learn more about mining or the PoWT algorithm, you can visit the section on how bitcoins are created.

Bitcoin, how much is it worth

Like any other currency, the value of electronic money bitcoin varies. Traditional currencies have governmental and historical backing behind them. This causes their quotation to be quite stable. However, the value of currencies varies daily. For example, in countries with political instability, currencies can have more volatility and their price can vary to a greater extent.

The price of bitcoin, like traditional currencies, is calculated with the law of supply and demand. That is, if there are many people who want to buy and few people who sell, the seller will raise the price to earn more money and the quotation of bitcoin will rise. On the other hand, if there is not much demand, the merchant will lower the price to get rid of them, even at a lower price. In this case, the quotation of the cyber currency would decrease.

This happens hundreds of thousands of times a day. The price we know, whether it goes up or down, is the result of the closing of these trade agreements. Therefore, the real price of bitcoin depends solely on the market's confidence in the electronic currency.

Will it be a stable currency in the future?

Currently, as a technology in full development, the market for this cryptocurrency is very volatile and its value can vary greatly. Currently, the value of 1 bitcoin varies depending on the market's confidence in its future. It is therefore normal for the price of the electronic currency to decline when there are a series of news and statements against it.

However, many experts are already talking about the bitcoin standard, analogous to the gold standard. Gold is a scarce resource, so throughout history its value has not fluctuated much. Bitcoin is also a limited resource, as it is a deflationary currency. When the bitcoin economy consolidates, these experts believe that the existence of a fixed number of bitcoins will stabilize its value. According to the theory of the bitcoin standard, the price of the cryptocurrency will remain much more constant over time.

However, this comparison between bitcoin and gold is nothing more than a theory. No one can know for certain the future of cryptocurrencies.

Possible improvements to the virtual currency

The system created by the bitcoin and other cryptocurrency blockchains is not final. There is a team behind them that maintains and improves it.

One of the main challenges they face is reducing bitcoin's energy consumption. As mentioned, mining requires very powerful equipment with high electricity consumption. The bitcoin network consumes as much energy as a medium-sized country like Lithuania, Uruguay, or Guatemala.

In response to this, one of the solutions is for the blockchain to migrate from the Proof of Work system to one based on Proof of Stake.

Additionally, another objective is the anonymity of bitcoin. The goal is to protect users against third parties who may obtain any type of information through their transactions.

Over time, the cryptocurrency protocol will continue to develop and adapt to the needs of its users.

Advantages and disadvantages of the internet currency

In conclusion, we want to show you the advantages and disadvantages of bitcoin.

If you want to delve deeper into the topic, we have prepared a specific article with all this information. In it, we also present the benefits and drawbacks of the most well-known cryptocurrencies. You can find it at the following link.

» Related article: Advantages and disadvantages of bitcoin and other cryptocurrencies.

Main advantages

• It is a decentralized system. No third parties are involved.
• It is a global and fast system, offering clear advantages over traditional banking.
• It is not anonymous, but it uses pseudonyms. Nobody can profit from your banking information.
• It is secure. It cannot be counterfeited. Its protocol is designed to prevent double spending.
• It is cheap. The costs of its transactions are considerably more affordable than those of traditional banking.
• It is a completely transparent system. Its code is open and transactions are published.
• It allows for micropayments due to the high divisibility of the currency.
• You can make instant transfers 24 hours a day, 365 days a year.
• They do not take up space.
• There is a limit to their issuance. Their value cannot be manipulated by governments.

Main disadvantages

• Currently, it is a very volatile asset. Its price can vary considerably within hours.
• It is not yet globally accepted and no one assures that it will be in the future.
• Bitcoin exchanges still have to invest a lot in security.
• Transactions are irreversible. If you make a mistake, you will have lost your bitcoins.
• Bitcoin has attracted many people without financial knowledge, which has led to the emergence of numerous cryptocurrency scammers.
• The creation of bitcoins consumes a lot of electrical energy.

Summary of what virtual currency is

Too much information about bitcoin at once? Don't worry, it's normal not to understand everything at once. To conclude, we will review the most important terms with a summary of bitcoin. The most important characteristics we have seen from the definition of bitcoin are that:

• More than being a digital currency, bitcoin is a payment network, whose goal is to serve as "digital cash". Its protocol is also called Bitcoin.
• Among the characteristics of bitcoin are: decentralization, transparency, and that it is a deflationary and NOT anonymous currency.
• It marked the birth of blockchain.
• Its operation is based on the SHA-256 Algorithm and the PoW system.
• Bitcoin is used to acquire goods, although it is also used as an investment tool.

Still confused? Maybe watching this video about bitcoin for dummies can help you solidify the concepts even more.

Could a video about what digital currency is help you understand bitcoin?

And you? Do you think bitcoin is the currency of the future?

We hope that after the article of bitcoin for beginners you have learned everything about bitcoin. If you still have any doubts, you can ask any question in the comments. We are even open to suggestions.