Key Takeaways
- Bitcoin is a decentralized digital currency not controlled by any government or central bank.
- Bitcoin uses blockchain technology, a distributed ledger that records all transactions securely, making it resistant to censorship and manipulation.
- Bitcoin can be bought, sold, or held as an investment. Its value fluctuates significantly, making it a high-risk, high-reward asset.
Bitcoin is a digital currency that aims to solve all our problems when paying for things online. You may think that our system is pretty good, but everything we buy today has to go through a bank or credit card company, which takes a cut of the transaction and relies on our trust that they will do everything right.
Many people have tried to devise a payment system without the middleman, but then there’s another problem: how do you prove that you have paid for something or even that you have that money at all without someone vouching for you? This problem is so serious that it has a name for it, called the “double spending problem.”
What Is Bitcoin?
In 2008, an anonymous programmer (or group of programmers) known as Satoshi Nakamoto offered a solution. Nakamoto left a paper on a popular cryptography blog proposing a system of currency that solved all of these fiddly problems. His proposal was that instead of a bank or credit card company recording every transaction in one central ledger, all users would record all of the transactions at the same time. As a result, any attempt to fool the community would be noticed, and the payment would be rejected.
No user, government, or bank can force a fee on a payment or control its flow. The result is a cheaper, quicker, and easier way to spend money, even across national borders. This was the birth of Bitcoin.
How Does Bitcoin Work?
Bitcoin was made possible all because of blockchain technology, which puts all the transactions on a decentralized ledger. A ledger is pretty much an accounting book, but with blockchain, it turns into a decentralized accounting book. This is important because you can have an accounting book that cannot be tampered with or changed by any other party.
The blockchain is basically a distributed database, meaning the database is stored in multiple physical locations, and the processing is distributed between the different computers running the nodes. All new transactions are recorded on a block, which is then linked to the blockchain.
When a new block with transactions is added to the blockchain, nothing can change it. This is what makes Bitcoin and blockchain important. Any Bitcoin transaction is accurate and cannot be changed by any central authority.
Satoshi Nakamoto
Bitcoin was invented by one or many individuals under the pseudonym Satoshi Nakamoto. Bitcoin’s creator was well known within cryptography circles long before it was launched, having participated in many cryptography discussions online. He published the whitepaper “Bitcoin: A Peer-to-Peer Electronic Cash System” in October 2008. The paper described a peer-to-peer system that allowed two parties to transact electronically without the need for intermediaries.
Bitcoin would then serve as the foundation of other cryptographically backed currencies and systems based on a distributed ledger.
If you are wondering how old Bitcoin is, it is over 15 years old. The first genesis block was mined on January 3rd, 2009. Understanding all aspects of Bitcoin is important, so learning about Bitcoin mining is important to understanding a “genesis block” is.
How Is Bitcoin Created?
Bitcoin is created through Bitcoin proof-of-work mining. Satoshi was the first to mine Bitcoin through the genesis block, thus launching the blockchain. Despite his identity remaining a mystery over the years, his intention with the cryptocurrency was crystal clear.
He aimed to decentralize the financial system and give power back to the people. Bitcoin was the result of the great financial crisis of 2008, which showed that even the largest banks could fail. Nakamoto is believed to have been one of those affected by the crisis. Being the cryptography genius he was, he published the Bitcoin whitepaper on October 31st, 2008. The following year, on January 3rd, 2009, Bitcoin mining began.
When a new transaction comes in, nodes or miners compete to validate whether it is valid and correct. This process involves solving complex mathematical puzzles requiring much computing power. The node that gets its correct first is rewarded with Bitcoins. This is how new Bitcoins enter the system.
Also Read: What Is Bitcoin Mining? All You Need To Know
What Gives Bitcoin Its Value?
Bitcoin is not backed by anything, but it is currently the world’s best digital store of value. No other form of currency is as impenetrable (because of blockchain and the proof-of-work consensus) and has a limited, unchangeable supply.
Transactions cannot be reversed by a payment processor or a central authority like a bank, as opposed to fiat currencies like the US dollar.
In a way, Bitcoin is a better version of gold. Gold is the world’s oldest store of value because regardless of inflation or devaluation of a fiat currency, it maintains its value. Bitcoin, on the other hand, is volatile because of its infancy, but it has the same characteristics of storing value amidst currency inflation or unstable governments. Venezuela is a good example of people turning to Bitcoin to maintain their wealth instead of letting inflation destroy the value of their assets.
Moreover, Bitcoin’s value is primarily determined by supply and demand. Unlike traditional currencies backed by governments, Bitcoin’s value is not tied to a physical asset or a central authority. Instead, its worth is driven by factors such as:
- Utility – Bitcoin is used as a store of value and payment method. You can argue that it is used more as a store of value and a hedge against the fiat currency system.
- Trust – Bitcoin is built and protected through the proof-of-work consensus on a decentralized ledger. It operates without the need for a third-party payment processor, central bank, or any other financial institution.
- Limited Supply – The maximum supply of Bitcoin is only 21,000,000 BTC. There will never be more than that in circulation. A limited supply with high demand means that the value will increase.
- Speculation – As with any asset class, speculation influences its pricing. Bitcoin is no different, and investors see it as a hedge against the current monetary system.
Is Bitcoin A Good Investment?
Bitcoin is a good investment if you believe in the intent of its creation. Institutional investors have invested already believing it is a worthy digital asset. Satoshi Nakamoto wrote in a forum post on February 11th, 2009, that the purpose of Bitcoin is that it is entirely decentralized without the need for a central server or trusted parties. Everything is based on cryptographic proof instead of the reliance on trusting a central bank.
Criticisms Against Central Banks
Bitcoin has often been a counterpoint to traditional financial systems, particularly central banks. The main criticism against the central bank system is that it requires trust to work and has multiple potential failure points.
Here are some common criticisms levied against central banks from the Bitcoin community:
- Currency Debasement – Central banks, like the Federal Reserve, have a history of debasing currency, such as when the US abandoned the gold standard in 1933. More recently, central banks have been blamed for causing significant inflation through their monetary policies.
- Trust in Money Management – There’s a concern about central banks’ ability to manage money responsibly. Critics point out that central banks often operate with minimal reserves and can lend money irresponsibly, leading to financial bubbles and instability.
- Privacy Concerns – Central banks and traditional financial systems are seen as lacking privacy protection. They often require extensive personal information, raising surveillance and data security concerns.
- High Overhead Costs – Traditional financial systems’ administrative overhead can make micropayments impractical. Critics argue that Bitcoin’s lower transaction fees offer a more efficient alternative for small transactions.
The Bitcoin Network
Bitcoin was meant to serve as a peer-to-peer mode of transacting. However, its network can process only 7 transactions per second, a disadvantage compared to popular payment modes such as Visa and Mastercard. Much has to be done for the network to achieve mass adoption as a payment system. That is why a Layer-2 network called the Lightning Network was developed to process Bitcoin transactions off-chain.
Also Read: What Is The Lightning Network? How Does It Work?
Furthermore, One area that is pushing Bitcoin adoption for payments is online shopping. Here, transactions can be done quickly, especially using QR codes on your mobile phone wallet.
So far, the Bitcoin network has been used countless of times to make payments in online stores worldwide!
Also Read: How To Accept Bitcoin As Payment To Website
In addition to payments, Bitcoin serves as a store of value. Thanks to its limited supply, it’s dubbed “digital gold.” However, its detractors will point to the high volatility within the crypto market as one reason this use case does not hold weight.
Final Thoughts
That concludes our introduction to Bitcoin! If you are interested in learning more about the cryptocurrency, its technology, or how to invest in it, we encourage you to explore the following resources:
