How Bitcoin works – episode 2: divisibility

In the first episode we have introduced “bitcoin” – a unit of measure of land area on the Bitcoin island. You can think about bitcoin the same way you think about acres or square meters in the real world. We have also said that 1 bitcoin is equal exactly to one 21 millionth of the area of the entire Bitcoin island. 21 million bitcoins thus cover the Bitcoin island perfectly.

You can notice that in the pictures from episode 1 we drew all squares with identical sizes. This was only for illustrative purposes though, as the Bitcoin island is able to keep ownership records for any area of land. Just like in the real world a land owner can have 1 acre of land, 2 acres of land, 3.5 acres or 0.1 (one tenth) of an acre, owners of land on the Bitcoin island can have their names attached to any size of land:

base-fractions

In the picture above Peter owns 4 bitcoins, Joe has 0.5 (half a bitcoin) and Alice 1.25 (one and a quarter bitcoin).

The Bitcoin network is able to keep records even about tiny pieces of land, the smallest size it currently works with is a called a satoshi and represents a 100 millionth of a bitcoin. That means 100 million satoshis make up a bitcoin.

satoshis

1 bitcoin (green area) is made up of 100 million satoshis (blue areas). Each individual satoshi can have a label with the name of its owner attached to it. Satoshi is currently the smallest area Bitcoin network recognizes and is able to record ownership for.

Since the demand for land on the Bitcoin island is relatively high compared to its size, many owners end up owning only a fraction of the area called bitcoin. Some of them only have a quarter (0.25) bitcoin or a tenth (0.1) of a bitcoin – or any other fraction you can imagine. This means in the Bitcoin world you very often see numbers with decimal points. People exchange goods and services for 0.0024 or 0.000837 bitcoin because even these tiny fractions of land are quite valuable.

fractions

In this picture each owner only has possession of  a fraction of a bitcoin (the entire square)

In order to avoid quoting prices in bitcoin and working with decimal numbers, many owners on the island prefer to use different units of measure than bitcoin. The most popular one is called a “bit“. Bits are fractions of a bitcoin, specifically one bit is equal to a millionth of a bitcoin (or 100 satoshis) – 100 million bits make up a bitcoin. That means that instead of quoting land area (price) as 0.00037 bitcoin, people would say 370 bits (one bitcoin has a million bits, and a million has 6 zeroes. In order to convert size from bitcoin to bits just move the decimal point 6 digits to the right and remove the leading zeros).

The following examples are equivalent land areas expressed both as bitcoin and bits, you can choose your favorite unit of measure to work with:

  • 1 bitcoin = 1,000,000 bits (1 million bits)
  • 25 bitcoin = 25,000,000 bits
  • 0.1 bitcoin = 100,000 bits
  • 0.024 bitcoin = 24,000 bits
  • 0.0036 bitcoin = 3,600 bits
  • 0.0008 bitcoin = 800 bits
  • 0.000001 bitcoin = 1 bit
  • 0.00000001 bitcoin = 0.01 bit = 1 satoshi

 

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s