What is bitcoin
Anyone can use Bitcoin, not just people who are given permission by the monetary gatekeepers of society. It can be used for payments, yes, but it has other uses too. It can be a store of value; it can be a medium of exchange; it has many of the qualities of money. But it’s independent from centralized institutions. When you own Bitcoin, you keep it in a wallet, which is a virtual vault, and you are solely responsible for it. What you do with it is under your control. You could spend it, you could invest it, you could hold it. You could even lose it, so be careful.
Where did Bitcoin come from?
You may wonder what’s revolutionary about Bitcoin when you can make electronic payments easily these days with dollars. But think about the online payments you make regularly. Whether by credit card, PayPal, Apple Pay, or bank transfer, they all require you to trust the financial service that’s making the transaction for you. You trust that they’ll take the correct amount of money from you and send it where it needs to go. You trust that your dollars will still have value tomorrow. You trust that the bank will give you your money when you ask for it. That’s a lot of trust.
The creator of Bitcoin, Satoshi Nakamoto, aimed to make a digital currency that eliminated the need for all of that trust. He wanted a way for people to transact with each other directly, cutting out banks and merchants and even the governments that issue fiat. If it were possible to create such a currency, people could have complete control over their assets. They could make secure online transactions without putting their money in someone else’s hands. An open-source digital currency could also reduce the amount of fees people must pay to intermediaries. Bitcoin became that currency.
In 2008, an enigmatic person or group calling themselves Satoshi Nakamoto released a white paper describing the idea for Bitcoin and how it would work. To this day, no one is certain exactly who Nakamoto is, but the white paper was shared in an online cryptography community. Nakamoto was hoping the new Bitcoin system would grow and become widely used as more and more people adopted it. In the white paper he said, “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
Nakamoto knew that the more people adopted Bitcoin, the more useful and valuable it would become. That was more than a decade ago. Today, there are nearly 19 million Bitcoins in circulation and the currency’s total market capitalization is $870 billion.
Myths about Bitcoin
People say a lot of things about Bitcoin. Whenever a revolutionary technology comes on the scene, it’s natural for skeptics to voice their concerns about digital currencies before they completely understand it. You could even argue that’s one of the charms of any new innovation—or not. Early adopters of the printing press and the internet also had to explain why the new technology was valuable, but those new technologies changed the world, nevertheless.
No one is going to use it. This was a very common refrain in the early days of Bitcoin. Even some in the core crypto community at the time were skeptical that enough people would adopt Bitcoin to make it useful. Now, there are more than 20 million Bitcoin addresses holding Bitcoin and the number of new addresses created each day continues to surge as adoption is on track to reach a billion users faster than the internet did. Nations like El Salvador are even beginning to adopt Bitcoin as legal tender. So yeah, probably no one will use it...
It’s fake. Because it’s virtual and the value is set by supply and demand instead of being manipulated by a central bank, people are sometimes hesitant to believe Bitcoin has any real value. But the same could be said of fiat currency. What gives those same people trust in the dollar or the euro? Only their trust in the government that issues it and that society will continue to value it. But ask anyone in Venezuela or Turkey how real their fiat currency is. Chances are they’ll take “fake” Bitcoin any day of the week.
Only criminals use it. Conducting transactions away from the prying eyes of gatekeeping institutions on places like the Silk Road may be cited as the main use of Bitcoin, but that’s far from the truth. Bitcoin itself is perfectly legal and has many legitimate uses. Not to mention, fiat cash is used almost universally by criminals because it’s anonymous. Bitcoin, even though it’s a bit harder to trace than other electronic payments, is not completely anonymous and coins can’t be used for illicit purposes without everyone seeing it on the public ledger.
It will change the world. This statement is much more believable. Just as the printing press changed the dissemination of information and the internet changed how we interact on a global scale, Bitcoin most definitely has the potential to change the monetary systems of the world. It’s not even two decades old and 80% of governments in the world are already researching the possibility of creating central bank digital currencies. Bitcoin blazed that trail. Plus, blockchain technology is not only useful for currency, new uses for smart contracts and decentralized databases are being developed every day. The world is changing.
Okay, but what is Bitcoin?
Now that you know the main idea of Bitcoin—a decentralized digital currency that can be used between individuals without the need for a middleman—you might be wondering how it works. What makes it decentralized? How is it different from other forms of digital exchange?
It’s a single-spend digital coin. Bitcoin wasn’t the first digital currency, it was just the first one that solved several big problems. One of those was the double-spend problem. Previous digital currencies weren’t able to track whether someone spent the same coin twice without a trusted middleman. Of course, eliminating custodians was one of the main goals of digital currencies, so solving the double-spend problem was vital. By using something called hashing to timestamp transactions on a public ledger, Bitcoin is able to accept the first transaction a single coin is used for and reject any subsequent attempts to reuse the same coin, but without the need for a trusted third party to verify.
It’s a peer-to-peer network. Another important problem that Bitcoin solved was reversible transactions. The technology Bitcoin is built on is called a blockchain. This uses a decentralized, peer-to-peer network that records all transactions on the balance sheet, which is copied to all nodes. Because no single entity is maintaining the ledger and copies are distributed across the network, it’s extremely difficult to modify, so transactions become irreversible. As long as there are more honest nodes on the network than conspiring hacker nodes, the record cannot be modified, unlike a central bank’s ledger, which can be modified by the bank.
It’s a proof-of-work system. Bitcoins are not released into circulation by a central entity. The system uses proof-of-work, which is a way to show that real-world resources were expended to reward miners with Bitcoins as they maintain the blockchain. Proof-of-work requires computers to use processing power to solve equations before data can be recorded. This places real-world value on the data so it can’t be changed frivolously. It also incentivizes people to keep the distributed network updated. Proof-of-work also disincentivizes attempts to steal because mining is more profitable than undermining the system.
It’s a limited supply currency. One of the ways that central banks affect the economy is by controlling the money supply. Either increasing or decreasing the circulation of currency will inflate or deflate a currency’s value. The way Bitcoin solved the problem of inflation was by capping the supply at 21 million Bitcoins. Miners use computer processing power to solve equations that mine new Bitcoins. The interval at which they’re mined increases over time. Eventually, the last Bitcoins will be mined and the coin supply will be fixed.
What’s next for Bitcoin and other digital currencies?
Bitcoin is a technological innovation that is already making a huge impact on the world. Its decentralized, self-sustaining network cannot be taken over by institutions with lots of power—much to the dismay of governments and financial gatekeepers who currently control the monetary policies of the world. An open-source currency like Bitcoin can give people control over their own finances like never before. From sending money around the world without capital controls or exchange fees, to storing value outside of inflating fiat currencies, to investing in technological innovations that will continue to improve global quality of life, Bitcoin is more than just a meme or a cultural reference. It’s a powerful tool to move civilization forward.
There’s a lot more complexity that can be understood about Bitcoin, blockchain, and all the possibilities this new technology opens up. But you now have a basic understanding of what Bitcoin is and how it works. As adoption continues to grow around the world and people begin harnessing the power of Bitcoin, it can become as familiar as the internet. If you’d like to know more about Bitcoin and how it works, one of the best ways to learn is to begin using it yourself!
