What is Bitcoin?
Bitcoin is a digital currency; a digital form of money. The concept may be simple, but the details surrounding it are a bit more complex.
Let’s slow down and unpack the concepts. First, let’s compare the similarities and differences between digital and physical currency.
Like physical currencies, Bitcoin is a medium of exchange; an “object” that can be used to buy goods and services. It can be converted into other currencies, used as a store of value, and used to measure the value of various goods and services.
But unlike physical currencies, Bitcoin exists as a digital object in digital space (i.e. the internet), giving it unique properties that radically differentiate it from traditional forms of money.
Let’s explore these properties.
Bitcoin has no physical shape or form
Unlike physical cash or coins, bitcoins are intangible. This immediately brings up two important questions: in what form do Bitcoins exist, and how are they transferred during the course of a transaction? The answers to these questions are not only key to understanding Bitcoin, but far more importantly, the key to understanding the innovative technology whose applications far exceed and perhaps even dwarf Bitcoin itself: blockchain technology.
Blockchains – a peer-to-peer network
A blockchain is essentially a digital ledger. This ledger permanently records all activities and transactions that take place with a given bitcoin. And In the bitcoin space, there are massive networks (also called nodes) of these peer-to-peer ledgers operating synchronously, meaning that they must constantly be in agreement with the state of every existing bitcoin. Blockchain networks operate like a 24/7 notary public, perpetually maintaining the credibility of all bitcoins, assuring that each coin is informationally accurate and up-to-date.
Bitcoin transactions and the blockchain ledger
Think of blockchain as a digitally-evolved version of the “tally stick.” Here’s a basic description of how it works: suppose you own 10 bitcoins and want to buy an item for 3 bitcoins. Upon making the purchase, the blockchain network records the transaction in detail–subtracting 3 bitcoins from your “tally” while adding 3 bitcoins to the vendor’s tally; and noting the time and sales of the transaction. Both ledgers must agree to the transaction, after which the entire blockchain network acknowledges this new state of agreement.
All transactions are permanently recorded, hence no transaction can ever be erased or modified once it has been made. And since all transactions take place via blockchain (ledger), no actual “transport” of coins take place.
Bitcoins are encrypted, hence the term “cryptocurrency”
Bitcoins are publicly accessible. But they are highly encrypted so that transactions cannot be modified nor can their ownership or transaction details be revealed. That’s why Bitcoin and other digital currencies are typically referred to as “cryptocurrencies.”
The public won’t be able to know the who the owners are beyond the owner’s self-created username nor would they be able to have access to the historical information of the blockchain (past transactions and owners). But the public will have adequate access to bitcoins for the purpose of exchange. Thus, Bitcoin, as with all cryptocurrencies using blockchain technology, has an cryptographically enhanced level of a security.
Bitcoins are mined, and the total quantity of bitcoins is finite
Individuals and companies facilitating and participating in the bitcoin network are considered “miners.” Their incentive for participation is the creation of new bitcoins at a fixed yet decreasing rate. Bitcoin creation occurs via a mathematical process, one that gets increasingly difficult every time a bitcoin is created in the network. Hence, bitcoin production gets increasingly slower over time until finally it slows to a halt. The total number of bitcoins is set to 21 million; its limit projected to be reached by around 2140.
Bitcoins have no central hierarchy or authority
As explained above, bitcoins operate across peer-to-peer networks–the networks themselves sustained by individual entities. These individual participants are what collectively make up the decentralized authorities that facilitate and maintain the credibility of the bitcoin network. And unlike governments or central banks, bitcoins cannot be “artificially” created (beyond the mining process), nor can they (as of yet) be monitored, seized, or controlled.
Who created Bitcoin?
Bitcoin was invented in 2009 by an unknown programmer or programmers using the pseudonym Satoshi Nakamoto. In a white paper shared among fellow technologists, Nakamoto published the schematics for an open-source software: a peer-to-peer system where transactions can be made directly between users without the need for an intermediary, and whose transactions can be recorded and verified by network nodes accessing a public distributed ledger which came to be known as blockchain.
As its popularity grew, Bitcoin quickly shifted from a proof-of-concept schematic to an actual means of facilitating transactions. Having acquired monetary value, Bitcoin became a means of exchanging goods and services beyond government-regulated monetary systems. Without the burden of financial institutions acting as intermediaries, bitcoin transactions were much faster and cheaper. And with the algorithmic encryption that was part and parcel of the entire network, bitcoin was soon viewed as one of the most private and most secure means of holding and transacting financial assets.
Bitcoin’s current market capitalization is at $92.4 billion worldwide, making it larger, in terms of cap, than most countries in the world.
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