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What Is Bitcoin?

August 23, 2021

4m

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Bitcoin is the world’s oldest cryptocurrency. It was originally conceived in 2008 by Satoshi Nakamoto, who wrote, published, and shared the project’s whitepaper to a small circle of cryptography enthusiasts. A year later, Bitcoin was launched, and after 12 years, the asset reached a market cap of $1 trillion, nearly 10% the size of gold.

As Satoshi Nakamoto explained, Bitcoin is a P2P electronic cash system. The description might sound strange, but it is easy to understand what Satoshi meant once we understand each element individually:

  • P2P. Short for peer-to-peer, P2P is a type of networking system that directly connects users with each other. All peers have the same privileges, tools, as well as a partitioned workload distribution. It is commonly used in file-sharing networks, but in crypto, P2P refers to Bitcoin’s decentralization.
  • Electronic. There is nothing to explain here. Electronic simply means that Bitcoin is a digital platform hosted and operated by computers and similar devices. It is completely virtual.
  • Cash system. Bitcoin is a cash system in the sense that it provides the same services as a bank does. Ultimately, the project is a financial network used to facilitate transactions and issue payments.

Now that we understand the basics, it is time to figure out the details of how Bitcoin works and what it does.

What is Bitcoin and How Does it Work?

As mentioned previously, Bitcoin is a cryptocurrency designed in 2008 and launched in 2009. It is a virtual currency that can be used to transfer money to other users and pay for products and services. Since Bitcoin is a relatively novel asset and it needs to be mined, much like gold, Bitcoin is used for speculative reasons as well.

We recommend reading our “Proof of Work” lesson for a more advanced explanation of how Bitcoin works.

Bitcoin: A Cash System

In simple terms, Bitcoin is an online system of computers powered by blockchain technology that stores and processes financial data. All connected devices (called nodes) host a digital ledger with Bitcoin’s complete history of transactions.

The history dates back to the network’s first issued transaction in 2009, and all transactions are connected to the original one with the help of Merkle Trees. This makes Bitcoin a digital ledger whose transaction data is immutable, meaning that any recorded transaction cannot be changed or removed.

How is Bitcoin Acquired?

Bitcoin is a virtual coin that is a necessary part of the blockchain network, as it is the sole currency used to facilitate transactions. There are a total of three ways to acquire Bitcoin:

  • Buy Bitcoin by using fiat currency (dollars, euros, yen, etc.)
  • Sell physical or digital products and services in return for Bitcoin
  • Create Bitcoin on your computer by mining it

The coins themselves are created by mining Bitcoin. Mining involves the process of solving complex mathematical problems in order to confirm transactions and reap so-called block rewards. Each block confirmed and recorded into the Bitcoin network rewards the miner in question with a fixed set of coins, which is halved every four years through the halving event.

Mining Bitcoin requires high energy consumption and advanced enough computer hardware to mine at a fast rate. While users initially mined Bitcoin using processors, miners have later on decided to use graphics cards instead.

Why is Bitcoin Valuable?

Bitcoin’s core value proposition is blockchain technology. The defining blockchain features are decentralization, security, and anonymity. However, Bitcoin also has an interesting feature developed in the core of its nature that makes it an attractive investment option.

Satoshi Nakamoto hardcoded Bitcoin’s maximum supply at 21 million coins. It is impossible to mine more coins beyond that number. Moreover, Bitcoin has a self-adjustable difficulty rate that changes how much power and time it takes to mine depending on the supply and number of active miners. It is worth mentioning that Bitcoin’s halving event leads to periodical supply shocks that make mining more difficult approximately every four years.

Bitcoin uses peer-to-peer technology to operate with no central authority or banks. Managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public. Nobody owns or controls Bitcoin and everyone can take part. Through many of its unique properties, Bitcoin allows exciting uses that could not be covered by any previous payment system.

Is Bitcoin secure?

There is no doubt about it. Bitcoin is the most secure currency that you will ever encounter. With cryptographic encryption, embedded privacy features, and a mechanism of recording transactions that allow them to be immutable, Satoshi’s creation is undoubtedly lightyears away compared to the financial structures of today.

In fact, Bitcoin is so secure that you have to spend extra time on due diligence. Once you create a transaction, it cannot be reverted, and if you ever lose your private keys, you can say goodbye to your coins.

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Bitcoin Fundamentals