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 If this is your first time paying attention to cryptocurrencies, there are so many obscure terms in this world - blockchain, halving, mining. In this article, we explain how bitcoin works, in simple terms


What bitcoin is in simple terms

If you're just starting to learn about cryptocurrencies, the abundance of terms can make you dizzy. All those blockchains, decentralisation, whales, miners, cold wallets or even dumps - it feels like you're at a party of either programmers or crazies. Due to technical complexity and unfamiliar terminology, the threshold for entering the world of crypto investing is unnecessarily high. We don't agree with this state of affairs, and in this piece we will explain the basic principles of bitcoin in simple language spoken by ordinary people, not Satoshi Nakamoto or Vitalik Buterin.


What Bitcoin is

To begin with, let's explain what bitcoin is in simple terms at all. It is the first and flagship cryptocurrency - that is, digital money that operates without a regulator (such as a central bank) and basically without government involvement. There is no person or organisation at the helm of bitcoin that is responsible for the currency.


To find the answer to why this is the case, let's try to get inside the head of bitcoin's creator, known by the pseudonym Satoshi Nakamoto. There may well have been a group of people hiding under him as well, but that's not so important now. In 2008, when the economic crisis hit, an article under the name of Nakamoto was published that was more like a manifesto. The document described a world of the future in which everyone could transfer money to someone else over the internet. No banks, no PayPal or other payment systems - digital money is simply debited from one person and received by another without intermediaries.


Nakamoto's article points out that bitcoin will benefit from low fees when making payments compared to the traditional system. Banks are not a cheap business, with their managers spending huge sums of money on security and office maintenance. And these costs are often borne by the banks' customers. Satoshi, however, in creating bitcoin, saw a future without a third party that offers intermediation in exchange for a portion of the money.


In essence, that is the answer to the question of what bitcoin is. In simple terms, it is an alternative to a flawed financial system, which at the time of the digital asset's emergence was experiencing the effects of an economic crisis.


Now that the ideological part of bitcoin is taken care of, let's talk about the technical part. The creators had to write about 30 thousand lines of code to create the first cryptocurrency. Bitcoin is based on another unique development - blockchain. Roughly speaking, it is such an open database that contains information about all bitcoin transactions between different users. 


Multiple records of money transfers are combined into a block and attached to others, hence the name blockchain, which can be translated as 'blockchain'. It traces its origins back to the very first transaction made on the network. New blocks are added to the blockchain after solving a complex cryptographic problem, which requires enormous computing power. The first machine to submit the correct solution is rewarded with bitcoins. This process is called mining.


How many bitcoins are in the world right now

The maximum number of bitcoins that can exist online is limited to 21 million. The cryptocurrency first went live in January 2009 and since then 18.8 million bitcoins have already been mined. Thus, only about 3 million bitcoins can be mined. It should not be forgotten that the complexity of block creation increases with time, and even with the increasing power of processors, experts suggest that the last bitcoin will only be mined by 2140. 


Limited issuance is considered a progressive measure among bitcoin proponents. In their view, it will partly protect the system from inflation - you can't print more money at any time, as central banks do when they move to quantitative easing policies. At the same time, bitcoin could eventually reach a deficit, causing each coin to rise in value. One recent example of such an increase is the cost of hand sanitizer and protective masks skyrocketed during the coronavirus pandemic. This happened because demand went up and supply stayed the same.


Back to the 18.8 million bitcoins that have already been released into circulation. Although they are all mined and technically online, not all of them are available and active. About 10% of the total stockpile (1.8 million bitcoins) has not been moved in over a decade, according to analyst firm Glassnode. Some of the existing bitcoins have been stolen and the irrecoverable loss of the cryptocurrency in 2017 was estimated to be between 2.7 million and 3.7 million.


Read more: How many total bitcoins can be mined and what happens after the issue ends


Missing bitcoins

The fact that bitcoins have disappeared is perplexing: how can coins simply disappear, and in such huge quantities?


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