What makes Bitcoin work ?

  • Bitcoin is essentially a public ledger anyone can view at any time
  • There will only ever be 21,000,000 Bitcoin
  • Each Bitcoin is divisible into 100,000,000 Satoshi's (so you do not have to own a full bitcoin)
  • There are currently about 17,000,000 BTC in existence
  • New ones are created every 10 minuets as a reward for mining (processing transactions) and validating the blockchain.
  • Instead of Banks - MACHINES process transactions a process known as mining.
  • The Machines are run by mining pools and miners.
  • Mining Pools will have many miners working for them all over the country / world.
  • A miner has 1 or more bitcoin mining rigs and just maintains the hard ware for which he gets a reward , your fee.
  • If you want to send 52.234 BTC to someone in another country it may cost a fee of 100,000 satoshi which goes to the Mining Pool and is subsequently divided up amongst the Miners.
  • New coins are also bought into existence buy the Mining process. At the moment this is 12.5 coins every 10 minutes.
  • Bitcoin by its self can only handle 7 transactions a second, but to be used as a world currency this needs to be in the 10,000s per second. In 2017 Bitcoin experienced Scaling Problems. Transactions got slow (up to a day) and expensive because the mempool was very full. So a second layer has been built called The Lightening network this will hopefully solve all scaling issues.
The 7 network effects of Bitcoin.
The 7 network effects of Bitcoin are as follows:
  1. Speculation - As a novel, cryptographically-backed asset class with the potential for appreciation and high volatility, Bitcoin is perfect for speculators with a high tolerance for risk. HODL!!!
  2. Merchant Adoption - Merchants will increasingly accept Bitcoin because they can increase their profit margins by avoiding credit card fees and chargebacks.
  3. Consumer Adoption - Consumers can use Bitcoin to save money at certain vendors. For example, getting a 20% discount on Amazon by spending Bitcoin through Purse. Additionally, consumers can buy things with Bitcoin that they cannot buy (easily) in any other way. Consider: An American can buy Persian rugs or Cuban cigars online despite trade embargoes. Bitcoin increases the efficiency of the economy, particularly in niche areas such as these.
  4. Security - Merchant, consumer, and speculator adoption lead to a higher price and thus incentivise more miners to participate and secure the system. The decentralised, immutable transaction ledger also serves as a form of Triple Entry Bookkeeping, wherein Debits plus Credits plus the Network Confirmations of transactions increase trust and accountability across the system.
  5. Developer Mindshare - Bitcoin is a dumb and predictable network with simple rules and a publicly-auditable codebase. It is fertile ground for the development of complicated algorithms, machine-to-machine payment protocols, smart contracts, and other tools. Its decentralised nature allows for innovation without permission. Altcoins (such as Litecoin and Ethereum) pose little threat as Bitcoin is already dominant as a store of value and as a medium of exchange in the cryptocurrency space. If you harbour doubts about the importance of this currency network effect — or worry about altcoins overtaking Bitcoin in some other way; I would point you to Daniel Krawisz with an insightful and though-provoking article on the subject: The Coming Demise of Altcoins. Ultimately, developers will continue to flock to Bitcoin.
  6. Financialization - Bitcoin will eat up progressively more of the market share of legacy banking institutions in areas such as remittances, micro-payments, peer-to-peer lending, and the exchange of stocks and securities. This process has already begun (consider NASDAQ's support of Open Assets/Coloured Coins for the transfer of securities, NYSE's investment in Coinbase, etc.). Old money risks dying out lest it embrace new protocols such as Bitcoin.
  7. Adoption as a World Reserve Currency - Eventually all transactions will be settled on the blockchain, including house titles, stock purchases, car titles, and other monetary instruments and currencies. Network effects one through six culminate in this final network effect. Any newcomer in the realm of cryptocurrency or traditional currency, for that matter; would need to beat Bitcoin in all seven of these areas. This is unlikely considering the pace of development in Bitcoin Core, the level of investment in Bitcoin companies around the world, the growth in Bitcoin's user base, and on and on; Further price increases will only accelerate the process. Finally, a speculative attack could dramatically boost the value of Bitcoin almost overnight.

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