Bitcoin and blockchain simply explained
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After remaining relatively stable for two years, the Bitcoin currency has seen rapid growth again since the end of 2020. A Bitcoin is now worth more than 40,000 euros – and there is no end in sight to the soaring.
In December 2017, the Bitcoin currency crashed from the then high of more than 16,000 euros to under 6,000 euros. Many were already predicting the end of the boom. After that, it became quiet about the digital currency. Three years later, in late 2020, Bitcoin suddenly shot up again. In February 2021, the currency reached its record value of more than 47,000 euros – almost three times as much as in 2017. Reason enough to take another close look at Bitcoin.
Bitcoin is a so-called cryptocurrency, i.e. a virtual currency that uses cryptography (encryption) to secure transactions. It is supposed to eliminate the problems that arise from today’s banking systems: If we use money to pay on the Internet today, we need a middleman like a bank who guarantees that the money is actually available and also with the Recipient arrives.
This assumes that we trust the bank and the result is that all transactions are bundled at this point. However, there is also the weak point: the bank is the only one that can ensure that payments are made and that no double bookings occur. If the bank falls victim to a hack, the entire system is at risk.
With a decentralized cryptocurrency, on the other hand, you no longer need a bank. Each individual participant in the Bitcoin network receives an encrypted copy of a complete transaction history, i.e. a file with the information about the amount transferred from A to B. Concrete names or other sensitive details are of course not available to everyone. Since every user automatically monitors the system, any attempt to manipulate the network is quickly discovered and prevented. Another advantage is that no individual, bank or government can take control of the flow of money. This makes it easier, faster and cheaper to transfer money, even across national borders.
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Contents
The interaction of Bitcoin and blockchain
The blockchain is the basic building block that guarantees the security of the bitcoin currency. In principle, it is a complete and chronological list of all transactions that have been made in Bitcoin. New transfers are always added to the list in blocks, with each transaction block containing a log of previous blocks. As a result, the blocks form a chain, hence the term blockchain . Since there are always references to earlier blocks in the chain in each block, it is extremely difficult for fraudsters to inject a false block into the network that contains little or no references to previous transactions.
The references are bundled in a block until the block reaches the intended size of 1 megabyte. However, the new block is not simply added to the chain; the network must first “authenticate” it. To check it, the network members have to solve a kind of guessing game that can only be solved with a lot of computing power.
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The hash value
The guessing game is that each block has a so-called hash value that the network must guess. The hash value of the block is basically a longer code made up of letters and numbers and is made up of the details of the transfers it contains and the hash value of the previous block. So it’s unique for each block and looks something like this:
e3b0c44298fc1c149afbf4c8996fb92427ae41e4649b934ca495991b7852b855
The computers of the members in the Bitcoin network now have to randomly generate hashes until one of them finds a value that is equal to or lower than the hash value of the block to be added. The solution takes an average of 10 minutes. This period of time has been set to guarantee that a large part of the network can actually get the block. Because the network is distributed all over the world, information reaches the members at different speeds. However, the security of a transfer can only be guaranteed if as many members as possible vote on its authenticity. The 10 minutes are adhered to by the system automatically controlling the level of difficulty of the hashes. Push more members into the network with stronger computer hardware who can guess hashes faster, the level of difficulty increases automatically. Conversely, the difficulty is reduced if there is suddenly less power in the network.
Bitcoin mining requires a lot of computing power
But what is all this good for and how do I get Bitcoins as a result? Currently, members of the Bitcoin network receive a small fee as a reward for guessing the correct hash first. The fee is derived from a Bitcoin transfer and therefore does not change the total value of the Bitcoins in circulation. In addition, there is a second reward: new bitcoins that are generated from practically nothing. These new bitcoins are not only intended to provide an incentive to become part of the network, but also to ensure that there are no shortages. The reward was 50 Bitcoin at the start in 2009 and has since been halved every 210,000 blocks of transactions. In 2012 the reward dropped to 25, in 2016 to 12.5 and most recently in 2020 to 6.25. The next halving is likely to take place in 2024,
What exactly is mining?
This whole process – earning bitcoins by using your own computer to guess hashes – is called mining and requires enormous computing power. Originally, simple PCs were sufficient for mining by using the power of the processor and graphics card to generate hashes. With the increased difficulty of the hashes, however, you need more and more power to be the first to guess a target hash. Modern graphics cards in particular have proven to be very effective because they have a significantly higher hash performance than processors.
In view of the comparatively high electricity prices in Europe and the scarcity of graphics cards, it is now hardly profitable to mine on your own with your own PC. Only PCs with several graphics cards that work around the clock or hardware (ASIC) specially developed for mining can still make a profit.
Altcoins, Faucets, Cloud: Alternatives to Bitcoin Mining
Instead of trying to mine Bitcoin on your own, it can be profitable to become part of what is known as a mining pool. In a mining pool, all participants contribute the performance of their computers, which is then used collectively to resolve blocks of transactions. If the pool solves a block, the income is distributed to the participants according to the performance share that you yourself contributed to the solution. Due to the bundled performance, it can even be profitable in certain cases to mine with your own PC.
Faucets
A very harmless, but not very productive method of getting Bitcoin are so-called faucets. These are websites on which you only have to enter your own Bitcoin address and receive a small amount for it.
Cloud mining
If you are ready to invest money in bitcoins, you can try your luck with cloud mining. Here you pay for a certain computing power, the yield of which then benefits your own account. There are sites like CryptoCompare that can be used to calculate exactly how much Bitcoin you can get with a certain hash power.
Altcoins
It is also possible to trade with other cryptocurrencies. There are numerous alternative coin currencies – called altcoins – that can sometimes rise in value quickly. The altcoins Ethereum and Litecoin are widespread , but there are countless others, including the satirical currency Dogecoin . If you invest in these currencies at the right time, you can possibly achieve a decent profit margin and then invest in Bitcoin.
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