What is Bitcoin (BTC) ?
Bitcoin is the first cryptocurrency ever created.
It is a decentralized digital currency which can be used to send and receive payments on a global scale without the need of any 3rd parties, like governments or financial institutions.
Bitcoin is digital, there are no physical coins or bills – paper money, it lives on the internet, and that means it can not be shutdown – since 2009 when it was first created the Bitcoin network has never been down and has never been hacked.
Bitcoin can be transferred person to person via internet, it is a faster and cheaper way to transfer money anywhere in the world, and there are no limits on how much you can transfer.
Compared to the traditional form of money, Bitcoin has a clear predefined monetary policy that can not be changed.
This monetary policy is mathematically programmed and it looks like this:
- 21 million BTC will be ever created
- A known number of Bitcoins are released every 10 minutes
- Every 4 years the number of Bitcoins released every 10minutes splits in half, a process called Halving
Who created Bitcoin
Bitcoin was created in 2009 by an anonymous group or person called Satoshi Nakamoto, that is actually a nickname used to hide the true identity of the creator.
The fact that thru this day we do not know his true identity plays a crucial part in Bitcoin’s stability and adoption.
If we ever find out who created Bitcoin that will likely affect its trust and adoption.
There are still hundreds of early created wallets linked to Satoshi Nakamoto, containing Bitcoin worth billions of dollars, which have not been touched since 2009.
Without a leader, the bitcoin community makes decisions through a process called consensus. Miners, investors and developers, get together to discuss changes that need to be implemented. This is a process that ensures the network stability, security and keeps away any bad actors, because it is almost impossible to corrupt a variety of that many entities across the globe, and very expensive to perform any attacks on the network.
Bitcoin was designed to be decentralized, to not be owned by any specific person, entity or country.
It is peoples money, can be owned by me, by your or whoever has the knowledge to interact with the Bitcoin network.
How does it work
Bitcoin is built on a distributed digital ledger called the blockchain.
The blockchain is essentially, a database which records bits of information about each transaction in blocks of data which are linked-to-each-other, hence the name block-chain.
This ledger is distributed across the globe on thousands of computers run by whoever wants to support the Bitcoin network.
Every transaction contains the sender and the receiver represented by the public key- not a specific name, date and time, value of the transaction, and a transaction ID represented by an unique identifying code.
All these transactions are registered in the blockchain in chronological order, and they can not be altered once they have been registered on the blockchain.
In order for a transaction to be included in a block of data, it has to be verified by all these network participants – a process called mining done by miners.
Bitcoin mining
Bitcoin uses a Proof of Work algorithm and it is an essential part on how Bitcoin works. This is known as mining and it’s the process where new bitcoins are created and transactions are registered to the blockchain.
For a transaction to be registered to the blockchain, it must be verified by several miners across the globe.
For creation of new bitcoins, miners have to solve a mathematical algorithm in order to break a block of data.
First miner to do that, will receive the reward in that block. This happens roughly at every 10 minutes.
This reward actually started at 50 BTC per block, meaning every 10 minutes, when Bitcoin was first launched in 2009, but rewards are splitted in half every 4 years, currently being 6.25 BTC per block, and that will continue to be splitted in half every 4 years till all 21 mil bitcoins will be mined.This spliting in half every 4 years is called Halving and it is one of the characteristics that makes Bitcoin deflationary.
The halving
Halving is the process where the number of bitcoins issued in every block are splitted in half.
The halving is a process written in the bitcoins algorithm, it happens automatically every 210,000 blocks, or roughly every 4 years.
This is a deflationary effect which makes bitcoin valuable and it’s a concept which supports price increase.
This is a crucial property of bitcoin and its success – because the demand for bitcoin increases with adoption, but the creation of new bitcoins is decreasing with every halving.
This is one of the criterias that makes Bitcoin different from fiat money.
This is a very basic fact of economics, supply and demand. If the demand rises or even stagnates and the supply is going down, it will make the price increase.
What is Bitcoin backed by?
Bitcoin is backed by math and electricity.
The price of Bitcoin is influenced by the cost of mining 1 Bitcoin.
How much do you need to spend in electricity in order to create, to mine 1 Bitcoin ? Add the cost of the hardware, the maintenance and others, and you will get the price you need to spend in order to create 1 Bitcoin.
This price is influenced by many factors, such as the location of the miners.Electricity cost is different from country to to country.
Probably you have heard or saw news or documentaries that many Bitcoin mining facilities use renewable energy and they place those mining facilities either near dams where they use water to get cheap electricity, or near some form of cheap clean electricity.
As a bottom of line you can say that Bitcoin is a modern form of storing electricity, that is one of the reasons it has value.
Bitcoin is also compared to Gold, and often called Gold 2.0.
That is a fair comparison because it has some similarities in the creation of bitcoin vs creation of gold and also in the similar proprieties between Bitcoin and gold.
Let’s take the creation process first.
Much like you mine gold, you mine Bitcoin as well
In order to produce new Bitcoins you need expensive computers created specifically for that
you need electricity to power those computers
When in comes to gold, you need machinery to extract and process the gold.
You need electricity, gas, manpower, a proper location for extraction, etc.
The one main difference in the creations of these two is that BTC is 100% transparent, we can know how much it created, how much it was created, and how much will be created, we can see everything on the blockchain and when it comes to gold we do not really know with accuracy how much gold is in the world or how much gold is available to be mined.
When it comes to the proprieties of Gold and Bitcoin
Compared to Gold Bitcoin has even more unique proprieties that makes it highly better than Gold.
- It is easily transferable – it exists on the internet it is not located in a certain place, you can just put it on a usb stick, or even memorize it and travel everywhere, it is in your pocket, compared to gold which is heavy, you can not really take it with you, and if you want to exchange it for cash it is a fairly complex process which can take some time, specially if you have large quantities.
- It can be used as a store of value,
- a hedge against inflation because of its fixed and known monetary policy
- but also as a form of payment, even for small payments, because of its divisibility
The divisibility of Bitcoin
Bitcoin is divisible up to 8 decimal points, with the smallest unit of a bitcoin named a satoshi, abbreviated SAT.
There are 100 milion Satoshis in one Bitcoin.
This divisibility is making Bitcoin suitable as a currency for any kind of payment, even for making smaller transactions.
If you can not afford to buy a whole Bitcoin, you can purchase fractions of Bitcoin, so you need to start collecting some SATS.
