How does Bitcoin work?

Imagine a bank vault where you have a safety deposit box. The key opens one of the boxes where you can securely store physical valuables like gold coins in Bitcoin. There are digital keys. Think of them as very long passwords.

Your private key gives you access to a wallet which unlocks billions of unique Bitcoin addresses, each one is a virtual safety deposit box that only you can open with your key. There are more addresses in this virtual vault than atoms in the universe. The doors to these boxes are transparent. You can see inside them. Sending them from one box to another is what's called a Bitcoin transaction. These digital coins can only exist inside these transparent address boxes, can't be copied and can't ever leave the vault. And this vault is owned by no single entity. You don't need permission from a government, a bank or a corporation to use it.

Why do they have value at all? Let's go back to where bitcoins are stored in transparent digital deposit boxes protected by strong cryptography. They can never be copied or leave the vault because any transaction of any bitcoin down to a 100 millionth fraction is recorded in the block chain for eternity. This synchronised global ledger is shared among thousands of computers worldwide. That's why it can't be compromised or altered. Think about that.

We can make an infinite number of perfect digital copies of a movie, a song, any file. But for the first time in history, this distributed record keeping allows us to have a truly unique and fungible digital object that is also scarce. If you could count all of these virtual coins, you find about 18 million of them today. The mining reward is the only way new coins are created. In the first years of Bitcoin, miners competed for 50 bitcoins every 10 minutes, then their reward for processing transactions dropped to twenty five bitcoins, then twelve point five and then half again and again every four years.

It's supply and demand. If investors or users of Bitcoin create a higher demand than this increasing supply, the price will go up. When the cap of 21 million is reached, the protocol stops the network from creating any more. It's the opposite of our traditional money supply, which keeps growing and growing. An unlimited amount of dollars versus a very limited supply of bitcoins.

We now have billions of dollars worth of data secured in digital banks deep inside secret military bunkers (in Switzerland). If you don't think Bitcoin is already changing the worlds concept of money, you haven't been paying attention.

Source: Cryotopia 2020