Bitcoin was the first cryptocurrency. It kickstarted cryptocurrency mania, which has grown into a multi billion-dollar industry. But what is Bitcoin? Canstar guides you through what you need to know.
What is Bitcoin?
Bitcoin is a decentralised digital currency. A digital code to store, send or spend as you would regular currency. If you hold the key to a Bitcoin’s code, you own it.
Just like a dollar can be divided into 100 cents, one Bitcoin is divisible into 100 million parts, called satoshis, after the currency’s alleged creator.
If you trade or spend your Bitcoin, the code will pass to somebody else, just like traditional currency. But the process is monitored by a public network, as opposed to a traditional centralised third party, like a bank.
Bitcoin’s background
Bitcoin was designed to solve what its anonymous founder Satoshi Nakamoto saw as the biggest problem with a fiat currency: that it is regulated by a central authority, such as a government or central bank – a relationship based on trust, not transparency.
This can lead to several issues:
- Central authorities and governments control the supply of fiat currency, impacting inflation or deflation and the value of your assets
- Fiat transfers are controlled by central authorities, giving them the power to deny transactions, charge fees, freeze your accounts, or they can make errors resulting in the loss of your funds
- Security of your assets is in the hands of a central authority
- Information about fiat currencies is protected on centralised ledgers. Without access to the information, we have to trust that the information is correct.
Satoshi created Bitcoin with the aim of removing the need for a central authority. As a result, Bitcoin is decentralised. All transactions are kept on an open, public ledger available to view in real time.
How does Bitcoin work?
The process of sending and receiving Bitcoin highlights how Bitcoin’s open and decentralised system works.
To own Bitcoin and other cryptocurrencies you need to use digital wallets.
Wallets have unique numerical codes, that act like email addresses. Wallets addresses and the transactions between them are stored on the blockchain, but individual wallets and their contents can only be accessed by their owners, using private key codes.
Wallet addresses and private key codes can be kept online, in off-line cold wallet devices, or even just recorded on paper. If you lose your private key code, you lose access to your wallet.
Transferring Bitcoin
Transferring Bitcoin isn’t instantaneous, and can take hours at times of high network volume.
First, your request is sent out to computers spread across the globe. These are called nodes, and technically, anyone can host a node. The nodes can all see the same request. For example, you want to send your friend 1 Bitcoin.
First, the nodes check their records of the blockchain to ensure the request is legitimate. The blockchain is a public ledger that is a record of all the Bitcoin transfers ever made, and every node has an identical copy of it. By looking back over the blockchain, the nodes can check if you’re the owner of the Bitcoin you want to send.
If you have the Bitcoin needed to complete the transaction in your wallet, your request will be validated by the node network and sent on to the mempool. This is when Bitcoin miners come in.
Adding the transaction to the blockchain
Miners collect these validated transactions, and put them into a block. This is like a filing cabinet that holds a record of all the transactions made at a particular time.
To add the block to the blockchain (the long list of filing cabinets stuffed full of transactions), miners compete to solve complex cryptographic puzzles. Whichever miner solves the puzzle first, gets to add their block to the chain.
Once added, this new and updated version of the blockchain is broadcast back to the network of nodes, and they update their ledgers accordingly. Once your Bitcoin transfer request is included in a block, and added to the updated blockchain, the deal is done.
Because the entire process is handled by a public network on a public ledger, there’s no central authority overseeing the process. Even the miners, who receive Bitcoin as payment for the computing power and electricity they use for their calculations, change all the time.
This is because crunching the numbers required to solve the cryptographic puzzles is a random process, there are lots of miners, and solving the puzzle is akin to winning the lottery.
How does this compare to a bank transfer?
A bank transfer is entirely handled by a bank, using its own private ledger as a record. The ledger will check you have the money required to make the transfer, and that the recipient has the ability to receive it. If everything is deemed okay, your bank will take the funds from your account and send them to the recipients’ bank.
Because one central authority is in charge, and because the ledger is private, the process relies on trust. Any information surrounding the transfer (or the status of the accounts) is controlled by the banks. On the Bitcoin blockchain, all information about transfers between wallets is open.
But while wallet addresses are completely anonymous – no records of wallet owners are kept on the blockchain – if you want to buy and trade Bitcoin through any legal cryptocurrency exchange, you’ll have to provide proof of ID, as you would if you opened an online share-trading account or used an international currency transfer platform. Such digital trails can then be used to link users to their wallets.
Where to buy crypto in NZ
There are a few exchanges that accept Kiwi dollars, although FX and various handling fees still apply:
| Provider | Cryptocurrencies |
| Easy Crypto/Swyftx | 400+ |
| Independent Reserve | 35+ |
| Lightning Pay | Bitcoin only |
| Revolut | 175+ |
| Sharesies | 4 |
This information is not an endorsement by Canstar of cryptocurrency or any specific provider. Canstar is providing factual information supplied by providers. Cryptocurrencies are speculative, complex and involve significant risks. Canstar is not providing a recommendation for your individual circumstances or in relation to any particular product or provider.
What are nodes and miners?
For Bitcoin to operate, nodes and miners are an essential part of the process.
Node operators
Nodes are operated on a volunteer basis by crypto enthusiasts and investors. It’s pretty inexpensive in terms of computing power and energy to operate a node, which can be run on a regular home computer with a couple of terabytes of storage.
Bitcoin miners
Mining is a different story. In the early days of Bitcoin, anybody with the technical know-how could mine Bitcoin at home. But as the currency has grown, so too has the complexity of the cryptography that supports the blockchain.
Now mining requires significant computing power and uses huge amounts of energy. As a result, Bitcoin miners now run networks of supercomputers designed for the sole purpose of mining Bitcoin.
In return for their efforts, they receive payment in Bitcoin. At time of writing, the reward was 3.125 Bitcoin per block, worth around NZ$335,387.
The reality of Bitcoin
Bitcoin was designed to become a decentralised currency. However, most people don’t use Bitcoin as a regular currency, rather they buy it as a speculative investment.
However, as Bitcoin’s price is hugely volatile, it remains a very risky investment – one based on lines of computer code, rather than a tangible physical asset.
About the author of this page
Bruce Pitchers is Canstar NZ’s Content Manager. An experienced finance reporter, he has three decades’ experience as a journalist and has worked for major media companies in Australia, the UK and NZ, including ACP, Are Media, Bauer Media Group, Fairfax, Pacific Magazines, News Corp and TVNZ. As a freelancer, he has worked for The Australian Financial Review, the NZ Financial Markets Authority and major banks and investment companies on both sides of the Tasman.
In his role at Canstar, he has been a regular commentator in the NZ media, including on the Driven, Stuff and One Roof websites, the NZ Herald, Radio NZ, and Newstalk ZB.
Away from Canstar, Bruce creates puzzles for magazines and newspapers, including Woman’s Day and New Idea. He is also the co-author of the murder-mystery puzzle book 5 Minute Murder.
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