Bitcoin is the world’s first and oldest cryptocurrency. Since its creation in 2008 it has made headlines all around the world for a whole host of reasons, but many people don’t understand exactly how Bitcoin works and why it’s so special. This piece will attempt to explain just what Bitcoin is and why it is so revolutionary.
Bitcoin’s principles
Bitcoin was designed to be an alternative form of money not controlled by any bank or government. It was launched in the aftermath of the 2008 global financial crisis in response to the actions taken by big banks, whose greed devastated the world economy and plunged it into a recession. Its total supply would be capped to prevent inflation and its release would follow strict mathematical principles to avoid dilution, forming the basis for an entirely new financial network that could exist outside the traditional means.
Bitcoin is a purely virtual currency, meaning that there are no physical representations of it - you can’t withdraw it like you can cash from an ATM. It lives on something called the blockchain, which is the network through which transactions are carried out, and can be traded on exchanges, held in special wallets, or exchanged for goods and services just like regular money. All it needs is a willingness for someone to accept Bitcoin and you can use it for anything.
The key to Bitcoin’s ideology is the concept of decentralization, which is the basis upon which it was created. Bitcoin isn’t controlled by the government or any third party, meaning that you can conduct your business in private, without a bank watching on and telling you what you can and can’t spend your money on, or reporting your activities to a government.
However, this doesn’t mean that Bitcoin transactions are anonymous as many falsely believe. All Bitcoin transactions are recorded on the blockchain in the form of a publicly viewable ledger that anybody in the world can inspect, and if a Bitcoin address (a string of 26-35 alphanumeric characters) is linked to you, then your entire transaction history can be investigated. It is for this reason that Bitcoin is referred to as pseudonymous rather than anonymous.
Who created Bitcoin?
Bitcoin was created in 2008 by a person or persons unknown, but who went by the name of Satoshi Nakamoto. Satoshi worked with a group of computer programmers known as ‘cypher-punks’, some of whom had attempted their own forms of electronic cash, to create Bitcoin, eventually publishing the Bitcoin whitepaper on October 31, 2008.
Satoshi Nakamoto relinquished control of Bitcoin’s development in early 2010, just over a year after it launched, and has not been heard of since sending a final email to his successor on April 23, 2011. There are hundreds of Bitcoin addresses belonging to Satoshi Nakamoto containing a total of some one million bitcoins, but not a single coin has ever been moved from those original addresses, leading some to suggest that he/they has since passed away.
Several people have claimed to be Satoshi Nakamoto over the years, and there have been some cases of mistaken identity, but no one has come forward with convincing enough evidence to back up their claim.
What can I do with Bitcoin?
For many years Bitcoin was an underground movement, with criminals typically using it to evade the authorities. However, as time has passed and Bitcoin has gained wider adoption (not to mention blockchain analytics have made it ever harder to conduct illicit activities and get away with it), it has started to be accepted by recognizable outlets, both online and physical.
One benefit of both Visa and Mastercard jumping aboard the digital asset train is that they have both teamed up with several Bitcoin exchanges to allow you to spend your bitcoin wherever Visa and Mastercard are accepted…which is just about anywhere.
If you don’t want to spend your bitcoin you can always keep it in a wallet until you want to sell it and send the money to your bank account, or you can send it to a friend or family member as a gift. In short, you can do anything with it that you do with regular money.
Don’t forget, one bitcoin can be split into 100 million pieces (individually called ‘satoshis’ or ‘sats’ for short) so you don’t have to buy, store, or use whole bitcoins.
How Does Bitcoin Work?
This is a topic that can get very technical very quickly, so we’ll stick to the basics. As we’ve already explained, Bitcoin transactions are stored on a blockchain, which is a public ledger that shows just how transparent the Bitcoin blockchain is. But how do transactions get there in the first place?
When you send some bitcoin to someone, you essentially submit an order to the Bitcoin blockchain and wait for it to be processed. Every 10 minutes, all such orders from all over the world are bundled up and sent to be processed by ‘miners’. As part of the transaction you pay a fee, which goes to the miners as payment for their services - the higher you set the amount, the more likely you are to have your transaction processed sooner.
Miners are not like the kind with pickaxes and coal-covered faces. Instead, they are companies that own hundreds and sometimes thousands of specialist computers that have one job - to compete with each other to solve a mathematical puzzle. Every 10 minutes, one of these computers solves the puzzle and is awarded the job of processing the transactions. Not only does the owner of the winning computer collect the transaction fees, it is also awarded some freshly created bitcoin. This helps the miners pay their bills, and is the only way that new bitcoin enters the system.
Once the miner has processed your transaction, which can take up to an hour depending how busy the network is, it is up to a system of tens of thousands of nodes across the world (run by everyday people on computers of all shapes and sizes), to validate the transaction and confirm it is genuine. This consensus is important to avoid someone gaming the system - if one of the nodes reports an error, the transaction is not verified.
This is how Bitcoin is able to operate a completely decentralized yet trustworthy financial system.
Why is Bitcoin so Special?
Bitcoin’s core asset is the fact that no single person controls it - it is simply code run and maintained by volunteers who have no control over its issuance or transactions. The number of bitcoin there will ever be was capped at the outset at 21 million, and no one can increase this amount or suddenly add more into the mix. This is in direct contrast to central banks that can print money whenever they like, which results in devaluation of currencies.
It is also not possible to simply dip into the blockchain and steal bitcoin, nor is it possible for the Bitcoin blockchain to be ‘rewound’ and have transactions undone. No computer in the world is powerful enough to hack the Bitcoin blockchain, and it would cost tens of billions of dollars to even try.
Bitcoin is a borderless, self-sustainable, and openly viewable financial ecosystem that has grown to be worth a trillion dollars. It proves that there is an alternative to the traditional financial system for those who need it, with its use cases expanding and becoming more defined over time. It isn’t an accident that the phrase ‘Bitcoin is freedom’ is a very popular one within the community.
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