A Visual Guide to Bitcoin

Bitcoin is a new kind of money.

This is a non-technical guide that unravels Bitcoin’s core concepts by using real-time data and interactive visualisations. If you want to get into the technical aspects, start with the white paper, Bitcoin: A Peer-to-Peer Electronic Cash System, that was written in 2009 by an unknown person or group of people using the pseudonym Satoshi Nakamoto.

Let’s begin by explaining what "new kind of money" means; you can use Bitcoin to buy goods and services just like any other kind of money, what’s different, is the underlining ecosystem. Bitcoin is entirely decentralised (unlike traditional currencies like the Dollar, Euro or Yen). This means that people can send money to each other without an intermediary (like a bank, Mastercard or PayPal). This is possible because Bitcoin is powered by a global network of peer-to-peer computers running an open source program that uses cryptography (hence the term cryptocurrency).

Anyone with an internet connection can use Bitcoin. To send and receive coins you need a Bitcoin address, this can be created for free using a Wallet (more on this in section 10). To buy Bitcoin, you can use a Bitcoin ATM or an online exchange (more on this in section 11).

To understand how this works let’s take a look at the 4 transactions visualised in the animation. These are real transactions that recently occurred (the names however are just placeholders because users are identified by their addresses, that look like this: 12c6DSiU4Rq3P4ZxziKxzrL5LmMBrzjrJX, and not by their real names - this doesn’t necessarily mean that Bitcoin is anonymous). We are able to see recent transactions (in fact all the transactions) because they are publicly stored on the Blockchain (this is the groundbreaking innovation at the heart of Bitcoin).

The Blockchain is a public ledger, i.e. a database or record of all the transactions that have occurred. This means that we can look at all the past transactions and determine who owns what. The Blockchain is a series of Blocks (a group of transactions) maintained by a global network of computers that make sure all the transactions are valid (for a small fee). To do this in a decentralised way is incredibly difficult because someone might try to spend more money than they have (learn more about the Double Spend Problem) or someone in the network might be out of sync or malicious (learn more about the Byzantine Generals Problem). Bitcoin manages to solve these problems with the Blockchain (we’ll see how in the next sections) and creates a system that is free from government interference, free from censorship, open to anyone and secure to use.

Let’s take a closer look at a Block, to learn how the Blockchain works. Roughly every 10 minutes a new Block is generated. So far there have been 869195 Blocks created. Let’s look at the last one; it contains 3924 transactions and some important metadata (informational data about this block). Among this metadata is a timestamp, the ID of the previous block (thus chaining the blocks together) and the proof-of-work (POW) solution, which is a cryptographic puzzle that needs to be solved for the Block to be made (more on this in the next section).

Blocks are created by Mining nodes, which are specialised computers on the Bitcoin network. Their job is to validate recent transactions on the network (around 2 - 3 thousand) and store them on the Blockchain. To prevent malicious nodes from creating false transactions (and thereby stealing coins), Bitcoin uses the proof-of-work protocol. The technical details are explored in the subsection below, but generally speaking, it’s a cryptographic puzzle. Solving this cryptographic puzzle is much harder than validating transactions, therefore nodes are required to spend a large amount of computation (that’s why the Bitcoin network requires so much energy to run) in order to find the solution.

All the Mining nodes compete with each other until the first one finds the solution. Once found, the winning node broadcasts the solution to the rest of the network and if it’s valid, they start competing for the next Block.

What is the point of spending so much energy solving the cryptographic puzzle? Newly minted Bitcoin (BTC). The reward for creating Block 869195 was 3.125 BTC (plus -3.125 BTC in transaction fees) worth $0.

At the start of the Blockchain, solving the puzzle was easy, meaning your personal computer was fast enough to become a mining node. Over time the difficulty has increased exponentially, as a result nodes are using specialised computer hardware and are often merging their processing power together to form Mining pools.

Bitcoin is an incredibly well-designed and resilient system, but just like any computer system, it’s not impervious to hacking. Currently, there hasn't been a successful hack on Bitcoin itself, but the surrounding ecosystem has been attacked (like the infamous Mt. Gox exchange hack).

The most well-known attack vector in Bitcoin is called the 51% attack. This attack requires the hackers to control more than 51% of the computing power of the network, which would enable them to add fake transactions to the Blockchain (and therefore steal coins). The probability of this event is very low because it would require billions of dollars to execute, and if executed the value of Bitcoin would plummet. Bitcoin has a number of mechanisms which defend against this attack, but the primary one is the chained nature of the Blockchain. Every block is chained together using a cryptographic hash function (explained in 'What is Proof of Work'), meaning a block altered in the past would require changing all the subsequent blocks, and resolving the cryptographic puzzle for every single one.

The Blockchain is running on a massive global network of interconnected computers called Nodes. There are many types of nodes that perform a range of functions (like the mining nodes from section 5). This distributed architecture secures the network from localised power outages, natural disasters and government censorship. Anyone can download the Bitcoin Core and join the network.

Currently, there are 19.8 million Bitcoin in circulation. New coins will be created until the 21 million hard cap is reached - that's it.

Therefore, Bitcoin is considered to be a deflationary currency, meaning that the supply will always be limited and not subject to quantitative easing. This why some people refer to Bitcoin as “digital gold”.

It's important to note that a Bitcoin can be subdivided into many smaller units. The smallest a Bitcoin can be split into is a Satoshi, which is equivalent to 100 millionth of a Bitcoin. $1 is currently worth 1318 Satoshis.

You can access your Bitcoin through a Bitcoin Wallet. This is a software program that uses Public-key cryptography which allows you to securely execute transactions and manage your coins. Wallets work by generating a private key or seed (this your password - enabling you to authorise transactions) and a public key (this is your Bitcoin address - where people can send you coins).

Note that technically speaking, your coins aren’t “stored” on your wallet - they are on the Blockchain. Instead, your wallet lets you interact with the Blockchain, and keep track of how much you own. There are many types of Wallets - you can learn more about them here: The Most Comprehensive Cryptocurrency Wallet Guide.

The easiest way to purchase Bitcoin and other cryptocurrencies is on an online exchange like Kraken or Coinbase. There are hundreds of exchanges to choose from, but Kraken and Coinbase are consistently top ranked in terms of security, trustworthiness and quality. Remember that you don't need to buy a full Bitcoin (currently valued at $75,884.06) to get started, you can buy any fraction you want. It's important to note that Bitcoin is a volatile currency so never invest more than you are willing to lose.