What is Bitcoin?

Bitcoin (BTC) is a cryptocurrency – a digital form of currency – designed to act as money and a form of payment without the need for a third party or central authority, such as banks. It instead uses cryptography and blockchain technology to support peer-to-peer (P2P) transactions between users on a decentralized network.

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Bitcoin was the first decentralized cryptocurrency and remains the most valuable and well-known. Its popularity also gave birth to the development of many other cryptocurrencies.

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Users who are interested in owning Bitcoin can either buy it on several exchanges or become a Bitcoin blockchain miner, who earn Bitcoin as a reward for verifying and validating transactions through Bitcoin's proof-of-work consensus mechanism.

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How Did Bitcoin Begin?

Often referred to as 'digital gold', Bitcoin has witnessed an astonishing surge in popularity over the last decade. However, even though it has received extensive coverage in the media, most of the people are not actually aware of how this revolutionary asset class and the world's most famous blockchain began.

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The year was 2008 when Satoshi Nakomoto, a mysterious developer or a group of developers, published a whitepaper about “a purely peer-to-peer version of electric cash”. To this day, nobody knows about the actual identity of Nakomoto as the name is a pseudonym.

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While the name is Japanese in origin, Satoshi's proficiency in English seems to suggest that they may have originated from an English-speaking nation. Nakomoto published both the Bitcoin whitepaper and the software, and his ideas presented in the whitepaper have exploded into an entirely new form of technology.

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However, in 2010, the mysterious Satoshi Nakomoto vanished.

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A whitepaper is a technical document that explains what a project is and how it works.

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So, How Does Bitcoin Work?

In January 2009, Satoshi Nakomoto turned Bitcoin from simple an idea in progress to a reality by launching a network that – unlike virtually every other network in existence at the time – wasn’t stored in a central server.

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Let's look at the ever popular internet as an example of a centralized network. When a user is attempting to extract information from a website, their computer sends a request to a central server, which then responds directly with an answer.

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Nakamoto’s idea for the Bitcoin was revolutionary, because it used a decentralized network that could be used to create a digital form of money securely. The blockchain's invention gave way to a version of digital currency that could be trusted. With multiple transactions being recorded across a decentralized network, it is near impossible to modify the data.

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After more and more people began understanding the potential of Bitcoin and the importance of this innovation, the value of this digital currency began increasing exponentially.

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And How Do Blockchains Work?

Blockchain is a digital and distributed ledger of data, such as code and transactions. As there is no centralized server to record this ledger, blockchains are often referred to as Distributed Ledger Technology (DLT).

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Every computer that helps operate a blockchain network, such as Bitcoin, has a log containing every single transaction that has ever occurred on the network. This is in stark difference to traditional finance where just one party, such as a bank, holds custody of the ledger.

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While a bad actor could theoretically hack into a bank's central computer and modify transaction history logs, the case is different on a blockchain, as a blockchain has records on thousands of different computers. As such, changing records on one computer dishonestly would not impact the logs on other computers.

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Each computer that helps to run a blockchain network is randomly selected to add new information to the books. This ensures that various bad actors cannot work together to add false information. Since every participant in the Bitcoin network is verifying that the information is indeed correct, if the majority agrees that something is correct, then that is the consensus.

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What About Crypto Tokens?

If information is added correctly and honestly to a blockchain network, which other computers can verify as well, then the user that added the information is rewarded with something called crypto tokens. Crypto tokens are a piece of computer code created each time information is added to a blockchain.

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The computers operating the Bitcoin network that add information to a blockchain are randomly picked, and this is performed by solving complex mathematical equations. The equations are complex to the point that it drains a large amount of electricity from computers to find the solution. Therefore, the person or organization who owns that computer has to pay a hefty energy bill to participate in the network.

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Now, if someone adds false information to the blockchain, then their contribution is rejected. At the same time, they won’t receive any tokens as a reward either, but will still have to settle the bill of all the computing energy required to solve the equations. This incentives good behavior.

No co-operation = No tokens.

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The whole purpose of a blockchain, like Bitcoin, is to keep a reliable record of who owns tokens. And it is so efficient at keeping track of ownership that the network allows people to securely send tokens to each other. In essence, the entire Bitcoin network is designed to create, distribute, and account for little pieces of code.

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Why is Bitcoin Valuable?

When Bitcoin launched, BTC was essentially worthless. It was just a project launched by a small group of tech-savvy users who interacted with each other over the internet. In fact, it was even the subject of many jokes on forums, such as Reddit.

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Interestingly, the first time BTC was used as payment was to pay for a pizza delivery. A man in Florida offered anyone 10,000 BTC to order him a pizza, and someone online accepted his offer. Today, that pizza would be worth around 200 million dollars.

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Over time, people began sending BTC to each other for different transactions. Other blockchains began copying the Bitcoin network, and soon there were more tokens than just BTC that could be sent via blockchain networks.

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People began understanding that BTC was rare because there were only so many tokens that could ever exist. As people began to notice there was a digital asset that could not be copied and was in limited supply, more people began looking at BTC in the same way we look at gold.

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There can only be 21 million bitcoins ('bitcoin' is generally spelled in lowercase when talking about the asset) ever “mined” into existence by the computers solving problems on its vast network. Add to that, every four years, the reward for mining Bitcoin is cut in half.

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This ensures that BTC remains rare, and this “halving” combined with the growing complexity of the equations that need to be solved means that all 21 million BTC will not be mined until around 200 years from now.

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Think of how much money is spent on mining gold and other precious metals and what gives these metals their value. Once these same principles were started to be applied to BTC, financially minded individuals began paying attention to Bitcoin. And it was no longer a joke.

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How Is Bitcoin Today?

Bitcoin accounts for about half a trillion dollars in value today. Other blockchains that were developed after Bitcoin have introduced their own crypto tokens to the market, and BTC’s market dominance is slowly decreasing as a plethora of competing tokens have emerged for trade.

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Even with the intense competition, Bitcoin still accounts for almost half of the entire crypto market – a market that tends to rise and fall with the price of BTC at the lead.

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The rise of blockchain technology has led to the creation of a whole new financial sector, now known as Decentralized Finance (DeFi).