The cryptocurrency trend continues to conquer the world and is still led by Bitcoin (BTC). You had probably heard about it, seen it in the news, and encountered many articles that talk about its benefits, flaws, price, and more. However, such texts often skip over the most important part — explaining what Bitcoin actually is, how it works, why it was created, and more.
The cryptocurrency community members often forget that not everyone knows these things as intimately as they do, which can often lead to confusion if you are a novice. Worse than that, it can be discouraging for you to just run into complex texts without understanding the basics of Bitcoin and cryptocurrency.
With that in mind, we will dedicate this text to explaining those basics, and help you understand what is Bitcoin. You will learn about what it is, how and why it came to be, as well as how it works, and what it can be used for. So, without further delays, let’s delve right into it.
What is Bitcoin?
As you have probably gathered by now, Bitcoin is a cryptocurrency. However, it is not just any cryptocurrency — it is the first cryptocurrency ever created. As such, it is the coin that started the crypto revolution, and it has inspired the creation of every other coin that came after it.
In truth, Bitcoin has not been around for long — only for over ten years. It was invented back in 2008, when the concept for a digital currency was first published. This concept — called a white paper — was written by a mysterious entity known only as Satoshi Nakamoto.
Nakamoto is an alias of an unknown individual or group that aimed to provide the people with a new form of money — a digital currency. This decision came after some of the US banks caused an economic crisis back in 2007/2008. The story regarding the financial crisis is complex, but the gist of it is that banks wanted to attract new clients by issuing numerous loans, which eventually led them to bankruptcy. They destabilized the economy of the greater part of the world as a result, and a lot of people lost a lot of money.
Then, on October 31st, 2008, Satoshi Nakamoto published Bitcoin’s white paper, presenting the world with the concept of digital money with no real-world assets backing it up. The money that is not controlled by any government, agency, bank, or group. Money that is decentralized, and immune to problems such as the lack of transparency.
This money was named Bitcoin, which became the first cryptocurrency ever to be created.
Nakamoto then launched the coin on January 3rd, 2009, thus releasing first BTC coins into circulation, which led us to where we are now.
The history of Bitcoin
After those first coins were released into circulation, Bitcoin was pretty much worthless. With no real money, or other assets like gold to back it up and give it value, the price of each of its coins was exactly $0.
However, it came as a new form of money that promised to solve a number of problems, and best of all — it was not controlled by any entity. This is the concept of decentralization, with no centralized authority being able to freeze the money, or print new units indefinitely.
As such, Bitcoin started attracting attention, which is what started giving it value. The situation has not really changed to this day — BTC is still only as worth as people believe it is worth. However, after more than a decade, with new use cases for it emerging, people started giving it more and more attention, which allowed its price to grow to greater heights than anyone had thought possible.
It did not happen overnight, and the BTC price took ten years to get to the place where it is right now. It had ups and downs, and it was marked by extreme volatility. Its price is anything but stable even to this day, and it often grows and drops by hundreds, or even thousands of dollars. Still, as it continues to spread around the world, its price is getting higher and higher, with more and more people being intrigued and attracted by the concept.
At first, it was only used by criminals and tech geeks who were impressed by its features, such as the ability to make payments anonymously, without revealing your identity. However, in 2017 — its price started growing rapidly, and that started attracting thousands upon thousands of new users.
With more people being interested, Bitcoin’s price started growing even more, which once again attracted new users, and the circle continued. Eventually, Bitcoin reached the price of $20,000 per every single coin, which is when people started to sell it in order to make profits. Imagine you bought Bitcoin when its price was $1, and you invested $1,000. That would make you the owner of 1,000 Bitcoins.
With the price of each coin growing to $20,000 over the years, you would have made massive returns. A lot of people started using this opportunity, which eventually crashed the coin’s price. After all, it is only as valuable as people believe it is, and if a lot of people start selling the coins — the rest of the buyers might start thinking that it is not as worth as they originally believed. This causes them to stop buying, which makes BTC less valuable, and its price crashes down.
With BTC being the first and the largest coin, it dictates the behavior of the entire crypto market. This is why BTC price crash of 2018 included the entire crypto market, and every other coin crashed with it, which led to the period known as the crypto winter. However, in the first half of 2019, the prices started recovering, and Bitcoin once again became highly valued, with its price climbing above $10,000.
What problems does it solve?
We mentioned that Bitcoin has the potential to solve a number of problems thanks to its very design. For example, thanks to the fact that it is decentralized and that it does not depend on banks and governments — it cannot succumb to issues like inflation. No one can decide to create more coins on a whim, and the maximum number of BTC coins that can ever exist is 21 million units.
When it comes to traditional money, it is easy for the banks to print more dollar bills, which causes them to become less valuable. Something like that cannot happen to Bitcoin. This was ensured through the process called mining, of which we will talk more later on.
For now, you should know that Bitcoin has two types of supply — a total supply, which is the maximum number of coins that can exist, and a circulating supply, which is the number of coins that is in circulation right now.
New coins are released into circulation through the process of Bitcoin mining, where miners receive rewards for processing transactions. These rewards go through the process of halvening each time when miners mine a certain amount of BTC. The process of halvening basically cuts the mining rewards in half. That way, Bitcoin will never reach its 21 millionth coin, even when the mining rewards fall below 1 BTC. You can read more about it in our article about halvening, which is explaining the process in greater detail.
Another problem that Bitcoin can resolve is the security of transactions. Bitcoin operates on top of the blockchain, which was also developed by Satoshi Nakamoto as the coin’s underlying technology. Blockchain brings greater security thanks to the fact that it is immutable, unhackable, and controlled by the community, where no member has a greater right than anyone else. In a way, it is the ultimate democracy, where the community makes the changes, and no changes can be made until consensus has been reached.
As mentioned, Bitcoin is also not controlled by any centralized authority or institution, meaning that your money is yours alone. No one can take it from you, freeze your account, or cut you off in any other way. There are dangers, of course, such as your money being stolen if someone else gains access to your Bitcoin wallet — an application in which you store your BTC — but as long as you are careful not to share your passwords with anyone, you should be perfectly safe.
Pros and Cons of Bitcoin compared to fiat currencies
- It is decentralized
- It is extremely valuable
- It is more secure
- Bitcoin transactions are much cheaper
- Bitcoin is borderless, meaning that it is available to everyone around the world
- International transactions are processed just as quickly, as local ones, and with the same fees
- Your BTC is YOUR BTC — no one else can manage it
- Bitcoin is the biggest coin which can be exchanged for any other coin, as well as traditional currencies
- Bitcoin is accepted by all crypto exchanges
- BTC is the best-known cryptocurrency
- BTC is one of only a few coins that were approved by the financial regulators
- BTC is accepted by numerous merchants, services, and companies
- Bitcoin transactions are pseudonymous
- Bitcoin’s price is extremely volatile, often growing or dropping by thousands of dollars
- Bitcoin transactions can take a lot of time to be processed due to slow technology and a lot of users
- Bitcoin is not fully anonymous anymore
- You must pay higher fees to have your transaction processed quicker
- Bitcoin still lacks when it comes to real-world use cases aside from being viewed as digital gold
- BTC, as a cryptocurrency, is not regulated apart from a handful of Asian countries
- It is up to you to secure your coins, which could lead to theft if you don’t do it properly
How does Bitcoin work?
Now that we know all of that, it is time to explain how Bitcoin actually works. The process is not overly complicated once you understand the terms and concepts, so we will make sure to go through all the details slowly.
The first thing to note is that Bitcoin, as well as most other cryptocurrencies, uses blockchain technology in order to operate. In order to understand all the details about blockchain, you can check out our blockchain article, which should give you insight into how everything works.
Basically, when you send Bitcoin to someone, you are making a transaction. These transactions are grouped together into units called blocks. In other words, each block is a list of records, which needs to be processed and confirmed as true. This is what Bitcoin miners do.
Miners use their computers to ‘solve’ blocks, and in exchange, they get rewarded with new coins, which were not in circulation before. The process of mining is creating new Bitcoins, which are then sold or used by miners. At the same time, miners verify transactions, and add them to the rest of the chain. In other words, Bitcoin’s blockchain is a timeline of all legitimate Bitcoin transactions that were ever made.
Each of the miners has their own copy of the blockchain stored on their computer, and when a new block is processed and declared true by the community, it is added to each individual copy of the blockchain. This is what gives blockchain its security since changing one blockchain on one computer would not change all of them. With that particular copy of the blockchain being different than the majority of others, it would be considered inaccurate, and the new changes could simply be considered false.
In other words, in order to hack Bitcoin’s blockchain, you would have to hack the majority of computers that are part of the blockchain’s network and make changes simultaneously on all of them. This would mean hacking thousands of computers worldwide, which is an impossible feat. That is what makes Bitcoin transactions safe for everyone involved.
So, making transactions creates blocks, and blocks are then processed and added to the blockchain, which continues to grow over time, and stores all the transactions that were ever made and confirmed as true. This is how Bitcoin truly works, and how you can send it to others without tricks and fake payments. Basically, the miners do with BTC what traditional banks do with traditional payments. The difference is that one bank handles all of your payments, which would be equivalent to one miner doing it all. If one person/entity has all the power, that gives them the authority to do whatever they want. With the entire community having to confirm the decision in order for it to become true, the increased security is guaranteed, and no one can make a mess of things like the banks did in 2008.
Bitcoin has been leading cryptocurrency evolution ever since its own launch, and there is no doubt that this single coin changed the financial industry forever. It brought new ideas and even made many of them a reality, with the most important one being the return of power to a regular person.
If all that you had already learned interested you, we urge you to keep exploring the crypto industry, and learn all that you can before getting more strongly involved with it. And, if you are interested in learning more — you can always check out our guide about the use cases of cryptocurrency, and continue your crypto education further.