Bitcoin is like digital gold

Kanish Chugh

Global X ETFs Australia

Bitcoin is by far the largest and most popular crypto asset.

When talking about the Blockchain, we mentioned that its main function is to allow a group of people that may or may not know or trust each other to reach a distributed consensus on what the truth is. This solves the famous Byzantine Generals Problem, specifically what happens if a traitor General sends two conflicting messages – one to “attack” and another to “retreat” – to two different parties.

In order to accomplish this, the Blockchain – this public ledger of all transactions – has to be synced accurately. The way we accomplish that, to put it very simply, is by making it prohibitively expensive to cheat. It doesn’t pay to cheat. In fact, the system will financially reward you (you’ll make money!) That’s where bitcoin comes in.

For that, we have to talk about the mechanics of the Blockchain, specifically how new transactions are added to the ledger, in a process called “mining.” But to keep things simple let’s just think of these “miners” as bookkeepers.

Bitcoin simplified

The following is an oversimplification but should explain at a basic level how the Blockchain syncs all these transactions. In a simple bitcoin transaction, Adam sends Sarah 1 bitcoin, which should decrease the number of bitcoins in his wallet by 1 and increase the number of bitcoins in hers by 1. As soon as he starts the transfer, the transaction will be broadcast across the network but not be validated yet.

What the bookkeepers (or “miners”) do is collect a bunch of un-validated transactions and group them into a “block”. They then check whether the sender of the funds has the correct amount and is able to send this transaction to the receiver. The miner that is able to announce this to the network Is the first to solve a really long math puzzle; only after finding the solution are they allowed to post this to the network. After that, other miners confirm that the solution is correct and double-check that the sender has enough money. That confirms the transactions in the block and the entire block is added to the ledger while miners move on to the next block, hence the name Blockchain.

In order to incentivise these miners, who have to use a lot of computer power (which uses a lot of electricity, which costs a lot of money) to solve the mathematical problem before announcing the solution to the network, the first miner who solves it gets rewarded. They specifically make 12.5 bitcoin, which are created from scratch and added to their wallet.

Because of the large amount of computing power required, miners are de-incentivised from cheating or forging records. Quite the opposite happens. They are incentivised – by being rewarded financially – to keep the system true and synced. The network needed a native currency to pay these miners with. That currency is bitcoin.

Bitcoin is simply the network’s currency used to pay miners who sync and validate the network.

Learn more about Blockchain and Crypto

In part 3 of this series of wires, we will be talking about Ethereum. Make sure to hit the 'FOLLOW' button below to be notified as soon as the wires is out.

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Kanish Chugh
ETF Specialist & Head of Distribution
Global X ETFs Australia

Kanish Chugh is responsible for distribution covering sales and marketing strategy for institutional, intermediary and retail clients. He joined Global X ETFs Australia in 2015 and has previous experience with Fidelity International, BlackRock and...

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