Bitcoin is the world’s first and oldest cryptocurrency. Since its creation in 2008 it has made headlines all around the world, for both good and bad reasons, but many people don’t understand exactly how it works and why it’s so special. Our essentials guide to Bitcoin will attempt to explain what it is and why it is so revolutionary.
What is Bitcoin?
Bitcoin is a purely virtual currency. It can be traded on exchanges and traded for goods and services with other people just like regular money. The only difference between Bitcoin and regular money – fiat currencies – is that you can hold regular money in your hand or store it in a bank. Bitcoin, however, is stored in a digital ‘wallet’, either online or on a USB device, and as such the owner always has full control over it. This creates something called decentralization, which is vital to the performance and presence of Bitcoin, along with other cryptocurrencies. Bitcoin isn’t controlled by the government or any third party, so nobody can say “no, you can’t have your money”. Bitcoin transfers are conducted without the need for banks, being verified by a pool of computers independent from each other.
Who Created Bitcoin?
Bitcoin was created in 2008 by person or persons unknown, but who went by the name of Satoshi Nakamoto. He/they worked with a group of computer programmers known as ‘cypher-punks’ to create a decentralized electronic cash, eventually publishing the Bitcoin whitepaper on October 31, 2008. Several people have claimed to be Satoshi Nakamoto, and there have been some cases of mistaken identity, but no one has come forward with convincing enough evidence to back up their claim.
How Does Bitcoin Operate?
Bitcoin operates on something called a blockchain, which is a constantly updated ledger that reflects all the transactions going through the network. A blockchain records any transaction that has ever gone through the network, and Bitcoin’s blockchain is available for anyone to see at any time. Blockchains are updated by a collection of independent computers (‘miners’ or ‘nodes’) that act together to verify each transaction that takes place on the chain, with rewards offered for each transaction verified.
Each Bitcoin transaction is publicly available on the Bitcoin blockchain, allowing anyone to check any transaction that has ever taken place, eliminating the need to trust a third-party – you can see what happens to your Bitcoin every step of the way, so your money can never get ‘lost’. If every computer bar one helping to run the blockchain somehow went down, that one computer could resurrect the blockchain and no records would be lost.
Is Bitcoin Anonymous?
Not entirely. The Bitcoin blockchain records every transaction made, and while it only reveals the 26-35 digit addresses involved (think email addresses replaced by very long sequences of letters and numbers), it is possible to trace funds through the chain of addresses. Identities can, and have, been worked out from Bitcoin addresses, helping to catch thieves, and blockchain analysis is becoming better and better.
How is Bitcoin Created?
Bitcoin is ‘mined’ using a ‘Proof-of-Work’ algorithm, which is operated by pools of computers whose sole purpose is to solve increasingly difficult calculations and keep the blockchain moving. If Person A wants to send 1 BTC to Person B, the request is sent to the pool of miners and is allocated at random (the more computers you have in your pool, the higher your ‘hash rate’ and the more likely you are to be awarded the job). Every ten minutes, all the transactions awarded to that mining pool are bundled together and added to the blockchain as the latest ‘block’.
The computers in the pool conduct a series of mathematical calculations so complicated that other computers can’t guess the answer and take the reward. When the solution is found, the block is processed and the mining pool is rewarded with some freshly minted Bitcoin for their work. The transactions are then verified by other computers (six in Bitcoin’s case) as being correct, and Person B can now use their 1 BTC.
Why is Bitcoin so Special?
Bitcoin is special for a number of reasons, mainly because it is a form of money that no one but the holder has control of. Currently, no bank, government, or other authority can touch it. This means that no one can seize your Bitcoin or stop you from using it, and holders are at no risk of their bank going under and their money being lost.
Unlike fiat currency, Bitcoin is also a deflationary currency. Fiat currency is being printed all the time, which gradually reduces its value, whereas there will only ever be 21 million Bitcoin minted, with the last slated to be mined around the year 2140, a cap that will act in its favor in terms of price as time passes. Bitcoin is also more secure, not having central servers that can be hacked. While someone can hack a bank’s database, or even break into their vault, no one can hack the Bitcoin blockchain.
The fact that within ten years a borderless, self-sustainable, and openly viewable financial ecosystem has been created and has grown to be valued at many billions of dollars is incredible. It proves that we don’t need banks or governments to have a well-functioning financial system.
The Tip of the Iceberg
We hope you have found this introduction to Bitcoin useful. There is so much more to learn about Bitcoin, and the ecosystem is changing all the time. So, it pays to keep up with the Bitcoin News section of our site in order to find out more about this incredible creation and what could be around the corner for the world’s first, oldest, and biggest cryptocurrency.