What if you could build an entire new economy. Something that is designed in the digital realm? A currency where no government controls the supply of it, nor the distribution of it. A currency that is entirely dependent on the communities that exist in the economy.
Welcome to Bitcoin and cryptocurrency.
So, What is Bitcoin?
Bitcoin is a cryptocurrency that uses an electronic cash system, one that is made up of peer-to-peer technology along with digital signatures (via cryptography). It is unlike traditional currency (fiat currency) in which you have central banks issuing currency, setting the interest rate and printing cash on demand.
Like cash though Bitcoin is highly liquid, even more than cash, and like cash it can be used for paying for goods and services.
Money that you use today once was backed by precious metals (e.g. gold and silver). Bitcoin on the other hand is based on ‘proof of work’- the effort and processing power taken to validate transactions on the network.
So without a central authority printing the currency, how is it generated?
Well the process of generating Bitcoin is called mining. This includes generating and verifying the validity of transactions that are placed on the network. The transactions are recorded in an immutable public distributed ledger system referred to as a blockchain (a ledger which once created, cannot be altered) . Through the process of mining, when a block is generated and successfully solved, the miner is rewarded Bitcoin. This entire process has an ever increasing difficulty, with time it gets harder and more difficult to solve a block.
It’s quite easy to imagine fiat currency as it is tangible; you can see it and hold it. With Bitcoin, you never actually hold the coins. Even in digital form. You only hold the rights to it and can verify your rights to the coins you hold through the use of private and public keys. This is extremely important to know– if you don’t hold the private keys, you technically don’t own the coins.
Conventional currency has been based on gold or silver. Theoretically, you knew that if you handed over a dollar at the bank, you could get some gold back (although this didn’t actually work in practice). But Bitcoin isn’t based on gold; it’s based on mathematics.
Although exchanges now you to easily exchange cash for Bitcoin, as well as easily transmit Bitcoin to others, it’s just as easy to transfer Bitcoin without any intermediary at all. You just need a Bitcoin client and the public address of the person/wallet you want to transfer the Bitcoin to.
Virtual currencies were by no means new when Bitcoin was introduced. However the major issue holding virtual currencies back was double spending. Bitcoin managed to resolve this issue, through the use of its blockchain. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.
More over, it acted as a deflationary currency -rather than an inflationary one- where the value of it keeps going up and up. One of the key attributes of Bitcoin is it’s limited capacity on the quantity that can ever be produced i.e. 21 million Bitcoin.
Although it is common to hear the term Bitcoin. Each Bitcoin is made up of 99,999,999 satoshis or (sats). So the smallest portion of BTC is equal to 0.00000001 BTC. Referring to Bitcoin for fractions in sats is quite common now, especially as the value of Bitcoin is well into the thousands of dollars. For example if another coin is worth 567 sats or 567 points, people usually mean it to be equal to .00000567 BTC
It is estimated that anywhere around 14% of Bitcoin that can ever be mined has already been lost- most of this is through human error. Many, have been victim of a forgetful mind.
For example it is common to read stories of lost hard drives that contained Bitcoin, or forgotten passwords/seeds to Bitcoin clients (software). In other words, people have lost their private keys- the only proof that the Bitcoin they once held was in fact theirs.
Remember, to spend or use Bitcoin, the owner must hold the corresponding private key and digitally sign the transaction. The network verifies the signature using the public key. If the private key is lost, the Bitcoin network will not recognize any other evidence of ownership; the coins are then unusable, and effectively lost.
What makes BTC stand out?
So if there are other cryptocurrencies out there, then what makes Bitcoin stand out?
Well first of all, Bitcoin with it’s extensive history has the first mover advantage. With that, comes adoption of it and therefore the largest network. In crypto, the most successful currency is the one with the largest network. The network gets bigger as the community mining and using the coin gets bigger.
As this happens, the hashing power given to the network increases.
It is now also used as the most common pair of exchange with any other coin. E.g. when trading cryptocurrency, most coins can be traded directly for Bitcoin and vice versa, as that is what users demand. Also Bitcoin was primarily the first coin that could be traded directly for fiat currency. It is only recently that we see exchanges offering fiat-to-crypto exchange with other coins.
Pseudonymous: Bitcoin is partially anonymous. This is because i is not linked directly to your identity. It’s not completely anonymous as the blockchain holds every transaction ever created. Therefore every transaction can be traced to the amount and wallet address. Without knowing who the wallet belongs to, the person’s identity remains unknown.
Non-repudiable: Once a Bitcoin transfer is complete, it cannot be undone. So if you send Bitcoin to another wallet or address, then it is gone forever. Unless the holder of the other wallet voluntarily transfers the Bitcoin back to you, consider it gone otherwise- forever.
Decentralised: Bitcoin works through a peer-to-peer system. Relying on a network of nodes, it works by removing central control over it. Unlike typical currency which is printed by reserve banks in every country, Bitcoin is mined by users. There is a limit on how much Bitcoin can ever be produced.
SO that’s the rundown on Bitcoin. If you’re still confused, shout out in the comments and we’ll try to answer your questions.
Bitcoin hasn’t solved world hunger yet. It’s actually far from it. But, Bitcoin has come a long way since inception – the first block ever have been mind was in late 2008. During this time it has now grown to a value in the thousands of dollars. Who knows where it will go from here. But so far, Bitcoin is doing exactly what it was designed to do.