What is Bitcoin?

by Klaus on March 21, 2018

in Cryptocurrency

It’s hard not to hear about Bitcoin – the cryptocurrency has been grabbing international headlines for the past six months. Price surges have seen early investors reap serious rewards, causing a flood of money into the market. But many people still have one question: What is Bitcoin?

In essence, Bitcoin is an exchangeable digital currency that uses blockchain to validate and verify transactions. It provides users with immutability – transactions cannot be reversed, and all exchanges of Bitcoin are recorded on a decentralized ledger.

This article is going to take a deeper look at what Bitcoin is and why it’s important. It will explore the basic principles behind the cryptocurrency and related topics. This is meant to be a beginner’s guide to the world’s most popular cryptocurrency.

Where it All Started

We’ll start with some background information. Bitcoin was first conceived in 2009 – a software developer, anonymously using the name Satoshi Nakamoto, first introduced Bitcoin using a white paper describing a decentralized digital payment system. The system would be built around a mathematical proof.

The identity of Satoshi Nakamoto is still contentious – there have been various claims, but no one has been able to definitively prove who initiated the cryptocurrency. The confusion around the originator of Bitcoin adds to the allure of the coin.

What is a Cryptocurrency?

A cryptocurrency is effectively a decentralized, digital currency that uses cryptography methods to perform and record transactions. Most cryptocurrencies are peer-to-peer – meaning there is no central authority governing the cryptocurrency. Cryptocurrencies use a technology called blockchain to track transactions and ownership of coins. Bitcoin is the world’s first cryptocurrency.

What is Blockchain?

If you’re heard about Bitcoin, you’ve most likely heard about blockchain – it’s the technology that differentiates this digital currency from its predecessors. Blockchain is a revolutionary peer-to-peer ledger that records transactional information on ‘blocks.’ In the case of bitcoin, it is managed by a peer-to-peer network that recognizes and validates all previous transactions on the chain. Every time a transaction occurs, a new block is created – the network stores the data universally.

Key Features of Bitcoin

One of the easiest ways to better understand Bitcoin is to take a look at the key benefits it offers its users. By analyzing these key benefits, you’ll be able to better understand certain components of Bitcoin that make it such an attractive cryptocurrency.

Decentralized

One of the key benefits of Bitcoin is that it is completely decentralized. There is no single authority that governs the currency. Transactions are stored by the blockchain in a completely objective way. No additional Bitcoin can be released into the system, and no single user has the power to make meaningful change. It is a true peer-to-peer network.

Mining

In order for transactions to be validated and recorded, Bitcoin relies on ‘miners.’ These miners own specialized computers that can solve complex mathematical equations. When Bitcoin transactions need to be validated, mining computers are given a puzzle to solve – whichever computer solves the puzzle is rewarded with a Bitcoin reward from the total sum of the coins that are not yet released. This creates an economic incentive for users to help transact and record exchanges on the Bitcoin network.

Irreversible

Once a transaction is recorded, it is irreversible. What is stored on the Bitcoin blockchain cannot be altered once it is accepted by the network. This has solved a huge problem that has been present in the financial industry in recent times – double transactions cannot occur.

Secure

There have been several high-profile cryptocurrency hacks in recent years, but this does not mean the currencies themselves are insecure. By keeping cryptocurrencies on online exchanges, you’re risking that your tokens may be taken by hackers. If you secure them yourself, your chances of having your Bitcoins stolen are very small.

The reason behind this is that you need secure keys to access Bitcoins stored in wallets. If you have Bitcoin stored on a hard drive, a thief will not be able to access them unless they have your secure key as well.

Deflationary

From an investment standpoint, Bitcoin is beneficial because it is deflationary. Unlike many currencies, more Bitcoin will not be created. In recent years, governments around the world have printed fiat currency to pump money into the economy. This has destabilized the value of many of the world’s leading currencies. With Bitcoin, the protocol dictates that the maximum amount of Bitcoin released will be about 21 million.

The current amount of Bitcoin in circulation is just under 17 million. The maximum supply is scheduled to be reached in 2140. Outside forces or governments cannot influence the supply of Bitcoin. For this reason, the value of Bitcoin is deflationary, unlike fiat currencies.

Who Controls Bitcoin?

It’s sometimes hard to get your head around the concept of a decentralized currency. The Bitcoin code is maintained by a group of core developers with a keen interest in the project. These developers do not make any direct money for their work as there is no central authority. In fact, anyone can develop Bitcoin – the code is open-source.
Anyone can ‘fork’ Bitcoin – meaning change the code to create an updated coin. But if other individuals in the network don’t run the fork on their nodes, that individual will be the only one with the updated currency – it will effectively be worthless. For a meaningful update in Bitcoin to occur, the rest of the network must accept it.

Verdict

Only time will tell if Bitcoin gains true notoriety as a successful digital currency. Many analysts believe that the current price levels are a result of the hype surrounding the currency. While this may be partly true, if more users begin to utilize Bitcoin as a store of value or transactional currency, the demand will continue to exceed supply.

New cryptocurrencies (altcoins) have emerged to try and combat some of the common problems Bitcoin experiences. For example, Bitcoin can sometimes cost excessive amounts to transact – meaning it is better used as a store of value than a typical exchangeable currency. The developers that maintain the Bitcoin protocol will continue to aim at improving certain components of Bitcoin – the hope is that it can continue its dominance in the cryptocurrency market.

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Marko April 25, 2018 at 10:54

Great article. The title should be Bitcoin oversimplified. And thank you for the link about cryptocurrency investing

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