Here you can find out what is special about Bitcoin and how you can use Bitcoin in practice. The first part is optional, by the way. So you can also jump directly to the practical part .
Bitcoin is …
… an internet technology that can be used as a currency and payment network.
But there are already enough currencies and payment networks. Purely digital currencies such as the Linden Dollar also existed long before Bitcoin. So what exactly is the big difference between Bitcoin and all other previous monetary systems? To understand exactly that better, let’s stick with the …
Conventional monetary systems
The term “monetary system” here refers to a system that consists of a currency and a payment network . In Germany, for example, banks form a payment network with which bank customers can send and receive EUR money. Payment networks are also used frequently by credit card providers. In addition, there are more and more purely internet-based payment networks such as PayPal. So there have been many different ways of transferring money from A to B using a payment network for a long time.
All previous monetary systems have one thing in common: There is always at least one (central) body that ultimately has (full) control over the monetary system! For example, you have absolutely no influence on how much your assets are devalued over time by the interest rate policy (keyword: inflation). In addition, in a critical situation such as a “bank run” you may no longer be able to dispose of your assets. Ultimately, it is not you but the banks or central banks that have control over their assets. But what exactly is it now …
The special thing about Bitcoin
Unlike conventional monetary systems, with Bitcoin you have complete control over your Bitcoin assets at all times. Bitcoin technology is an open standard and there is no central institution that can “freeze” your bitcoins or reduce the value of the bitcoins. All Bitcoin participants always monitor compliance with or changes to the Bitcoin rules. Each participant ultimately (indirectly) votes on the rules by using a certain Bitcoin software (version). The rules of Bitcoin are thus based on a democratic consensus.
In contrast to all conventional monetary systems, Bitcoin is:
- Open : anyone can participate without permission
- Neutral : Nobody is given preferential treatment
- Decentralized : the Bitcoin rules are defined and controlled by all participants
- Censorship-safe : Transactions cannot be prevented or reversed
- Limitless : available wherever there is internet access
The practice: use bitcoins
The nice thing about Bitcoin is that using (receiving / sending) Bitcoins is very easy. You do not need (as good as) any knowledge of what is going on in the background. In the following I will explain a few basic Bitcoin terms to you. These are completely sufficient to use Bitcoin in practice. Let’s start with the most important practical term:
Wallet
You can manage your bitcoins with a wallet. Ie receive and send bitcoins. Technically, a wallet is software that gives you access to the Bitcoin network. Wallets are available from many different providers. Usually these are free of charge. There are also different types of wallets such as
- Desktop Wallet (a program for normal PCs)
- Mobile wallet (an app for mobile devices such as smartphones)
- Web Wallet (a wallet that is integrated into a website)
Wallets can be very different. The “heart” of every wallet is always the function of sending and receiving bitcoins. And that’s exactly what Bitcoin does with the help of …
Transactions
A Bitcoin transaction is somewhat similar to a bank transfer. Instead of IBANs, there are Bitcoin addresses. Such an address looks like this:
1Db2Hv5ph9562AjTrefgwkf5T1HaZ43s29
Unlike with a bank account, with Bitcoin you can create as many Bitcoin addresses as you want with the help of your wallet. You can send all bitcoins that “arrive” to one of these addresses with the same wallet.
Another difference is that you can set the fees for a transaction yourself (more information can be found on the page about Bitcoin fees )
So for a Bitcoin transaction you need to specify at least three things:
- the recipient’s Bitcoin address
- the number of bitcoins
- the amount of the fees
On the following picture you can see the Electrum wallet (in the Linux version) with the “Send” tab active:
After a click on “Send”, the wallet creates a transaction in the background and sends it to the Bitcoin network, where it is forwarded to all other participants within a few seconds and saved permanently by them. Thus, the bitcoins are available to the recipient after a very short time.
At this early point in time, however, the recipient cannot be 100% sure that this is a legitimate transaction. If this were not legitimate (ie fake), it would be deleted again after a short time. And then the recipient could no longer have the bitcoins sent to him from this transaction. To find out whether it is actually a valid transaction, the recipient needs …
Transaction confirmations
Transactions are checked by special participants in the Bitcoin network called “miners”. The following is important in practice:
The more times a transaction has been confirmed, the more likely it is that it is a valid transaction. As a rule, six confirmations are sufficient to classify a transaction as “secure”. However, fewer confirmations are sufficient for smaller amounts. How many confirmations are enough for a particular transaction is ultimately up to the recipient of the transaction to decide himself.
How long it takes for a transaction to be confirmed (for the first time) depends on the …
Transaction fees
The fees can influence how quickly a transaction is confirmed. The simple rule applies: the higher the fees, the faster the confirmation. Most wallets offer at least two default settings for the fee amount. With the web wallet from blockchain.info you can choose between “Regular” and “Priority”:
And with that we are (almost) at the end. Here everything again in brief …
Summarized
To send and receive bitcoins you need a wallet. With this you can send or receive bitcoins through a transaction. In order to receive Bitcoins you only have to give the sender your own Bitcoin address. In order to send Bitcoins you have to enter the Bitcoin address of the recipient, the number of Bitcoins and the fee. The latter influences how quickly the transaction is confirmed.
On to the next part of the basic series: The basic building blocks of Bitcoins
