What is bitcoin?
Bitcoin is the first, and original, completely digital, decentralised currency, otherwise known as a crypto currency. You might call it the Big Daddy of Crytpo. Each coin has a value as determined by market rates when it is traded and exchanged in the same way other currencies are traded and exchanged. The main difference is that traditional currencies are backed by a centralized system run by the government who try to control inflation and can print new money at will. Bitcoin on the other hand is decentralised, open source and is owned and controlled by no body. The system that runs and maintains Bitcoin is set up in such a way as to be completely secure, and it insists that everyone participating in the network plays by a common set of rules.
Only a certain amount of Bitcoin is released (mined) on a pre-determined schedule and it costs a huge amount of money in electricity spent speculatively by miners hoping to mine coins. In this way Bitcoin is becoming more scarce as time goes by because the number of coins it is possible to mine halves each four years.
Bitcoin is, in my opinion, the single biggest breakthrough for man kind since the invention of the Internet as it will revolutionize the way in which we perceive and use money. In much the same way the internet and email was difficult to understand when it first arrived, Bitcoin and crypto currencies (of which there are now more than a thousand) are somewhat difficult to understand to the uninitiated. So lets unpack what Bitcoin is, where it came from, how it works, and what it might mean for the world.
“Bitcoin is a cryptocurrency and worldwide payment system. It is the first decentralized digital currency, as the system works without a central repository or single administrator. The network is peer-to-peer and transactions take place between users directly through the use of cryptography, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called a blockchain. Bitcoin was invented by an unknown person or group of people under the name Satoshi Nakamoto and released as open-source software in 2009”
There are a number of terms in that description that will seem foreign to most crypto beginners so lets start there.
Cryptocurrency: This is the term we use to describe a coin or a token that is completely digital. Crypto refers to cryptography, which is the science that makes information, or in this case digital currency, secure.
Decentralized digital currency: this simply means that no single entity controls the currency. There is no single HQ, person, computer system or company in charge of Bitcoin. There is just a set of rules to the system that keep everyone honest.
Network Nodes: There are hundreds of thousands of “nodes” in the bitcoin network. They do the work of validating transactions and are rewarded for that by being given Bitcoin. This reward system is known as mining.
Peer-to-Peer transactions: this simply means that you own your Bitcoin and if you want to give it to me you can do that without needing permission, access or approval from anyone else, such as a bank or card issuer.
Blockchain: This is the underlying database technology that allows Bitcoin to be secure. Effectively it is a database that is immutable (cannot be changed once written to). With Bitcoin original as it is today, approx every 10 minutes a new block is added to the chain of blocks when the information in that chain is validated by a consensus from the network nodes. The chain cannot ever get shorter so blocks cannot be removed or altered.
Distributed public ledger: In the traditional financial world, your bank maintains a ledger. You have X amount of USD or EUR and when you spend some of it, the bank reduced the amount in your balance column by the amount you spent. This is a centralized ledger because one central authority keeps a main ledger that tracks all of that banks transactions. In a distributed ledger each node keeps a complete copy of the ledger.
When Did Bitcoin Start?
Bitcoin was created by an ellusive figure called Satoshi Nakomura who has remained anonymous despite owning a reported 1 million Bitcoins that he mined in the early days of the network. The code was released open source in 2009 and Satoshi left the project in 2010 with just this whitepaper by way of guidance.
By modern valuations cashing in these bitcoin would make Satoshi a multi billionaire.
Bitcoin remained niche for most of the time between 2009 and 2013 but although slow to gain traction has experience exponential growth over it’s lifetime, and especially in 2017. Coinmarketcap
report that at that time the value of a single Bitcoin fluctuated around $100. Between 2013 and 2016 the price grew from those levels to a price of just under $1,000 USD on 1st Jan 2017. However in 2017 Bitcoin really came into it’s own with explosive main stream appeal and major FOMO fulling a meteoric rise in value to almost $20,000 USD per coin in December 2017.
It’s important to note here that you do not need to buy a full coin. It is possible to buy a very small fraction of a bitcoin, as each coin is broken into Satoshi’s, in a similar way to the way in which a Dollar consists of cents. With one key difference: Bitcoin is highly divisible. 1 US Dollar is made up of 100 cents. Whereas 1 Bitcoin is made up of 1,000,000 Bits, which is the smallest transactional value, or 100,000,000 Satoshi which is the smallest unit value of the currency. This is possible because of the digital nature of the currency.
How Bitcoin Works
For most people knowing how Bitcoin works is only necessary to the same degree to which we know how our cars work. We know if we put the key in the ignition and turn it, the car should start and we can drive because we know how the pedals and steering wheel work. However, under the hood of your car there is a complex machine.
Bitcoin wallets are like that too. At the most fundamental level, if you want to participate by buying Bitcoin, you will need an exchange account and a Bitcoin wallet. Or to put it another way, a market place where you can buy bitcoin and a wallet where you can store it. There are lots of exchanges and a full list can be found here
Once you’ve put some of your FIAT money into an exchange you will be able to buy Bitcoin with it. Each exchange will offer you a wallet as part of their service, however you should not store your BTC on a wallet run by an exchange as they are centralized systems and are constantly under attack from hackers trying to compromise their systems. As soon as you own your bitcoin I recommend transfering it to a wallet immediately.
Wallets come in different types. Some are online and are less secure as a result. Others are offline, cold wallets, which are usually a USB key such as Trezor
which is infinitely more secure but not as easy to access as the online version. My personal favourite at the moment is Xapo, which offers an online hot wallet with a mobile app, AND a BTC vault where you can store your Bitcoin securely offline on an air gapped secure area inside a mountain in Switzerland! You can find out more about that here
The next thing that it’s important to understand is that there is a limited supply of Bitcoin. New Bitcoins are found each day but how many are released in a particular window of time is limited. Every four years the number of coins that can be found halves. It’s important to note that “mining” coins in 2018 is an extraordinarily expensive endeavor, with a substantial amount of expensive computer hardware and electricity required to mine each new coin, however it is possible for anyone to buy the hardware and begin mining due to the open source nature of the project and the wide availability of mining pools. For many bitcoin (and other crypto currency) mining is a full time professional.
These special computers “mine” for bitcoin which is essentially a process of trial and error guessing by the computer at what the answer to a mathematical problem might be. They “guess” millions of solutions per second and eventually solve the problem and are rewarded for that with Bitcoin. When this happens a new block is added to the chain with a proof of work consensus algorithm.
Once released these Bitcoin can be traded on crypto currency exchanges for other crypto currencies or for FIAT currencies like USD or EUR.
How Many Bitcoins Are There?
There are a limited number of bitcoin in existence and this will always be the case. This number is constantly changing so it’s not possible for me to say exactly how many are in existence as you read this piece, however this is tracked by websites such as CoinMarketCap here and other sites in a live update. Simply divide the market cap by the current price and you will find out how many coins are in existence.
I can also tell you that the way in which Bitcoin is set up is that the absolute total number of coins in Bitcoin cannot exceed 20,999,999.9769 coins. However this number of coins will not be achieved until approximately 2140. At that time it is expected that the transaction fee’s and sheer volume of coins will make mining still a valuable proposition and miners will continue to add blocks to the chain so that people can continue to trade.
However, that is so far in the future in the context of technological evolution of mankind, that it’s impossible to say if this will be an issue or not.
What Is Bitcoin Used For?
Bitcoin can be used to transfer monetary value from you to another person, very quickly and easily without a third party needing to be involved. It is also a more private way of storing value.
You can back up your entire wealth in Bitcoin on a special USB flash drive, or even a piece of paper. Or in multiple locations at once (which is definitely something you should do – just make sure that none of those places are online).
Right now with the explosive growth of the price of Bitcoin, and Bitcoin starting to be offered as an investment vehicle with a number of futures markets opening up, it is also being used as a speculative investment vehicle.
The main benefit to holding Bitcoin, in my view however, is that you actually own your bitcoin. When you keep your money in a bank or in a Paypal account you are trusting that they will honor the unspoken agreement you have with them that your money is your money and that they will give it to you when you want it. This is not always the case, or what happens.
In the case of Paypal, for example, they regularly just take money that isn’t even in your account back out if there’s a dispute over a product/service that was delivered previously, leaving your account in a negative balance that has the potential to affect your credit rating with very little recourse at your end.
And with the banks, they are so poorly managed (as proven by the global financial crisis), that if they go out of business or fail in some way you can lose your all of your money if a government doesn’t step in to honor their debt.
This is not the case with Bitcoin, unless you’ve left it on a centralized system (like an exchange). If your Bitcoin is in your wallet, then its the same as having cash in your actual wallet. Except that with Bitcoin, because it’s digital, you can have a million dollars all on one little USB stick or on a piece of paper. Something not practical with cash.
So that wraps up my explanation of the main points of Bitcoin. If you have any questions fire them over in the comments below and I will update the article to address anything I’ve missed over time.
If you haven’t already dipped your toe into the world of digital currency, why not give it a try. The price may seem high today by standards of the past, but supply and demand economics alone dictate the price will increase, so why not just buy a couple hundred bucks worth, and keep it for 5 years?