Lecture 5: More Bitcoin Questions Answered

LECTURE 5: More Bitcoin Questions Answered

Lecture 5: In this lecture I want to answer some questions you might still be having about Bitcoin...

In the last lecture you learned that Bitcoin is a digital currency that uses Cryptology to encrypt transactions recorded on a decentralized ledger called the Blockchain.  But there are some more Bitcoins questions I think need to be answered before we move on.

Question 1: Who created Bitcoin?

There is a lot of mystery surrounding the creation of Bitcoin.  As a matter of fact, nobody really knows exactly who created it.  It is either a single programmer in collaboration with other programmers, or a group of programmers together that created Bitcoin under the name Satoshi Nakamoto.

There has been a lot of speculation as to the exact creator and even some programmers have come forward claiming to be Satoshi Nakamoto.  But the true identity of Satoshi has yet to be confirmed and remains a mystery.

Now just keep in mind, Bitcoin does not need an owner or a company to function.  As a matter of fact, Bitcoin is designed specifically to be a peer-to-peer network, where transactions happen directly between users without a central authority.  So, it is a positive that Bitcoin does not have an owner… just like it is a positive the Internet does not have an owner. 

So, Satoshi Nakamoto is the creator of Bitcoin… but we really don't know who that is.

Question 2. How is Bitcoin created?

Bitcoin is created through what is called mining.  Now, I do not want to make this course overly technical in nature, so I am going to keep this short.

Remember, the Blockchain is the public ledger of all Bitcoin transactions.  Identical versions of the ledger called blocks are linked together like the links of a chain.  And in order to make sure the new blocks are the same as all the other blocks linked to it in the chain, there must be a verification process.

There in lies the problem.  Remember, Bitcoin is a decentralized system.  Therefore, you cannot have a central authority responsible for verifying each transaction and the new blocks that are created.  The solution is mining.

Here is a quote taken from Wikipedia:


"Mining is a record-keeping service.  Miners keep the Blockchain consistent, complete and unalterable by repeatedly verifying and collecting newly broadcast transactions into a new group of transactions called a block.  In order to be accepted by the rest of the network, a new block must contain a so called proof-of-work".

OK, so think of this proof-of-work as solving a complex mathematical equation.  In order to solve these equations, the miner must have a vast amount of computing power.  There are costs involved like computer hardware and electricity. 

To reward the miner for their effort and compensate them for the cost involved in keeping the Blockchain up to date and validated, the miners are rewarded a certain amount of newly created Bitcoin and transaction fees.

This is how  Bitcoin is created without a central authority.  When the miner creates a new block in the chain and verifies the block is the correct with proof-of-work… new Bitcoin is created and some is given to the miner as compensation for their efforts and expenses.

Becoming a Bitcoin miner is not within the scope of this course.  And quite frankly, I would not recommend it.  It is too late, in my opinion, to get in on mining by buying your own mining hardware.  This means you would have to join a group of other miners through a service or a mining pool.

If you do go this route, make sure you are dealing with a reputable company and do your due diligence before deciding to give you money to anyone for a percentage of their mining operation.

Just keep in mind that Bitcoin is created through the mining process and new Bitcoin is rewarded to miners in compensation for their efforts and expenses in keeping the Blockchain up to date and validated.

Question 3: How much Bitcoin will be created?

OK, so if Bitcoin is mined, how much of it can be mined?  Well, the Bitcoin protocol stipulates there will me a maximum of 21 Million Bitcoins in circulation.  That's it.  Once the 21 million Bitcoin level has been reached… no more Bitcoins will be created.

It has been projected that this maximum level of Bitcoins will not be reached until 2140.  So, it will not happen in my lifetime.  After the max level has been reached, the record keeping that keeps the Blockchain validated and up to date through mining will be rewarded through transaction fees alone (and not by the creation of any new Bitcoin).

So, there is plenty of Bitcoin that has not come into existence yet.  But the total number of Bitcoin is limited and finite.

Question 4: Can Bitcoin be divided?

When we talk about Bitcoin, you might think you have to buy them in increments of one.  For example, you could buy 1 Bitcoin, 2 Bitcoin, etc.  However, you'll be happy to know, Bitcoin can be broken down and divided into smaller units.  This is an essential characteristic of Bitcoin and crucial for users.

Just think about it, at the time of writing this course, 1 Bitcoin is worth around $4000.  If you could not divide the Bitcoin into smaller units, you would only be able to use Bitcoin as a means of exchange for goods and services with the value of $4000, $8000, etc..  Since the goal of Bitcoin is to become an everyday currency alternative, it is essential it can be broken down to cover all the different price ranges.

I'm not even going to go over the names of each of the units Bitcoin can be broken down into, as I don't really think it is that important at this point.  What is important is that no matter what monetary amount of Bitcoin you want to buy, sell or use as trade… there is a corresponding amount of Bitcoin.  That means Bitcoin can be used as a means of exchange for any value good or service.

OK, I think we have covered all the preliminary information you need to understand Bitcoin at this point.  It is almost time to get into some practical teaching of things you can actually put into action.  But before we do, I just want to touch on why you might hear some negative things about Bitcoin… and we will go over that in the next lecture.

Go to Lecture 6: Why You Might Hear Negative Things About Bitcoin