Bitcoin

What is Bitcoin (BTC)?

To its users, traders, and holders (or hodlers!), Bitcoin is a type of electronic money that, unlike almost every previous alternative, exists independently and outside the control of any state or financial institution.

It doesn’t recognize any borders, meaning that it can be transferred between participants on its network without the need for or interference of any middleman or intermediary.

Because of the variety of technical features it integrates and the way it connects participants from all corners of the globe, Bitcoin is often considered far more than a simple financial asset or monetary unit.

However, the fact that its monetary policy is predefined and fully transparent has given it the status of a pristine financial instrument, traded under the ticker BTC on both centralized and decentralized exchanges.

Bitcoin is based on revolutionary blockchain technology, where transactions are recorded on a public distributed ledger and are secured by a decentralized network of computers dedicating their computational power to solving cryptographic tasks.

When Was Bitcoin Launched?

Bitcoin was launched in January 2009, following the release of its whitepaper in late 2008. This whitepaper proposed the workings of a peer-to-peer electronic currency system that would eliminate ‘the need for a trusted third party.’ 

In the traditional financial system, a trusted third party tends to be a large financial institution. Bitcoin’s vision of eliminating them from the settlement system is often considered an immediate reaction to the global financial meltdown of 2008, caused by Wall Street’s handling of financial instruments like mortgage-backed securities.

The first open-source Bitcoin software client was released on the 9th of January, 2009, enabling anyone who installed it to use BTC.

Who is the Founder of Bitcoin?

Bitcoin’s whitepaper, titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, was authored by Satoshi Nakamoto, supposedly a pseudonym for a person or group whose true identity is not yet known. Satoshi, whose profile has only been assembled through forum posts, emails and BTC source code comments, published the whitepaper on a cryptography mailing list. The earliest proponents of the fledgling currency were ‘cypherpunks’ who advocated for sociopolitical change via cryptography and privacy. Around the release of the 0.1 version of the software, Satoshi launched the Bitcoin network with a genesis block with a reward of 50 BTC and the embedded text: ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.’ This was the headline of the UK’s Times newspaper on that date, and is one of many examples of Satoshi’s commentary on banking.

BTC remained a purely peer-to-peer currency until July 2010, when it first began trading at prices ranging between $0.08 and $0.0008. However, the first commercial transaction of Bitcoin came earlier that year, on what is now known as ‘Bitcoin Pizza Day.’

On the 22nd of May, a programmer named Laszlo Hanyecz, paid for two pizzas using Bitcoin. The price? 10,000 BTC.

The first actual recipient of Bitcoin in a non-commercial transaction, however, was the late Hal Finney who was sent 10 BTC from Satoshi’s own wallet on January 12, 2009.

Why Was Bitcoin Created?

Satoshi Nakamoto was a noted critic of banking and the fractional reserve banking system.

In comments on Bitcoin’s code, he pointed out the shortcoming of fiat currencies in that they require trust in the central bank not to debase the currency. According to Satoshi, the history of fiat currencies has, however, entailed many breaches of said trust.

Following the creation of Bitcoin, the US Federal Reserve added $4 trillion to the money supply in just five years, a number that has been dwarfed following the Covid-19 pandemic. According to the European Central Bank, Bitcoin’s philosophy of decentralization of money has its roots in the Austrian School of Economics, while the New York Times has attempted to link the philosophical idea behind Bitcoin to libertarians and anarchists.

How Does Bitcoin Work?

Bitcoin uses cryptography to verify transactions and record them on a blockchain, which is a public distributed ledger.

A ledger isn’t a revolutionary concept, but it is required as a record of transactions within a financial system. The fact that the ledger used by BTC is publicly distributed marks a significant departure from the traditional financial system.

Bitcoin’s public distributed ledger, or blockchain, is made up of many ‘blocks’, each containing an SHA-256 cryptographic hash of the previous block all the way back to the genesis block mined on Jan 03, 2009.

These new blocks are formed by a new group of transactions that are accepted by the nodes of the Bitcoin network, added to the network, and then published to all nodes. Rather than requiring central approval and oversight, a majority of computers on the network instead hold sway. Thus making Bitcoin decentralized.

In order to be accepted by the rest of the network, a new block contains a proof of work (PoW). This proof of work can be boiled down to the computers on the network, or miners, solving cryptographic puzzles to arrive at a solution. This process is assigned a certain level of difficulty and, although time-consuming to generate, it’s easy to verify.

Miners solve these puzzles and are allowed to create the next block of the blockchain. These new blocks are mined every ten minutes, and miners who create them are rewarded with a certain amount of Bitcoin. The genesis block had a reward of 50 BTC, however, that reward has halved several times since.

What Makes Bitcoin Unique?

Being the trailblazer and the first to appear on the market, Bitcoin is the ‘OG’ cryptocurrency that created a truly global community capable of making transactions without needing to trust the legacy financial system.

While subsequent years have seen entire generations of cryptocurrencies come into being and eclipse the technological advantages of Bitcoin, it remains the largest cryptocurrency by market capitalization to date and remains the most trusted of the bunch.

Network effect is often quoted as one of Bitcoin’s main advantages. As of early 2022, Bitcoin has seen considerable institutional interest. It is increasingly used in commercial endeavors and has been recognized as legal tender in several countries.

The cryptocurrency market as a whole is not only based on Bitcoin’s fundamental idea of peer-to-peer transactions without the involvement of a trusted intermediary, but also remains very correlated to the price of BTC as a monetary unit.

What Is a Satoshi?

While BTC prices may put off newer or first-time investors who tend to think of investments in whole numbers, Bitcoin is in fact highly divisible. Purchasing 1 whole BTC may be difficult for most investors, which is why most trades at current Bitcoin prices are done with far smaller units.

The Satoshi, named after Bitcoin’s eponymous founder, is the smallest unit to which Bitcoin is divisible and is what a lot of advice, such as ‘Stacking Sats’, refers to. One Satoshi equals 0.00000001 BTC.

There are also less used denominations of BTC, such as mBTC (amounting to a thousandth or 0.001 BTC) and uBTC (a millionth or 0.000001 BTC).

The Algorithmic Max is also theoretically a denomination of Bitcoin, amounting to 20,999,999.9769 BTC. Practical uses for this denomination, however, are challenging to find!

How Much Bitcoin Is In Circulation?

Bitcoin’s protocol limits its supply, effectively creating a predefined monetary policy, and sets this limit at a total of 21,000,000 BTC. This is an amount that is yet to be reached, because Bitcoins are still being created as a reward for miners.

The original reward of 50 BTC per mined block as of the genesis block has been halved several times to 25, 12.5, and, as of 11 May 2020, to 6.25 BTC. The Bitcoin protocol dictates that these Halvings take place every 210,000 blocks. Once the limit of 21 million BTC is reached, miners will no longer receive block rewards, but they will still receive transaction fees.

How Do You Buy Bitcoin?

Bitcoin is the easiest cryptocurrency to purchase. Ever since the pizza delivery guy who effectively bought 10,000 BTC for the price of two pizzas, Bitcoin has been an effective peer-to-peer currency - and it can still be purchased in a peer-to-peer fashion.

However, there are many other ways to go about it. Bitcoin ATMs exist in many countries, where enthusiasts can purchase BTC with the same level of convenience as making a bank transaction.

Every exchange of note, centralized or decentralized, will also offer BTC. You can not only purchase Bitcoin with fiat currency, but also use it as a trading pair with all other currencies on the exchange. This means that you can use most, if not all, cryptocurrencies to buy Bitcoin.

To purchase Bitcoin, all you need is a wallet and some alternate currency or goods to trade for Bitcoin.

Is It Possible to Buy Bitcoin Instantly?

It may be possible to buy Bitcoin instantly on centralized exchanges, because an exchange account isn’t really a wallet. Instead, it is an electronic reflection of fund balances that an exchange will display, even though the actual funds have not moved - the user is simply entitled to a small amount of the BTC held by the exchange.

However, ways of purchasing, or on-ramps, that involve the BTC being sent directly to the user’s wallet are not instant. New Bitcoin blocks are mined every ten minutes, so it takes ten minutes for any transaction to be verified and settled. This means, simply, that it takes no more than ten minutes for the individual wallet to reflect the transaction.

In reality, this is a lot faster than the traditional financial system. While financial service providers, especially credit card companies, advertise instant transactions, these transactions are only reflected instantly, although they take days to actually settle. Bitcoin, meanwhile, settles in just ten minutes.

That said, some service providers that accept fiat and send BTC to user wallets may take longer than ten minutes to facilitate transactions. This may be due to waiting for fiat payments to settle, batch processing, or AML (Anti Money Laundering) regulations, among other reasons.

How Do You Store Bitcoin?

As mentioned above, you need a wallet to store Bitcoin.

This is not strictly true, however, being that Bitcoins are stored on the blockchain and wallet addresses only identify them. But, to all intents and purposes, having a wallet and keeping its private key safe is similar to being in possession of and not losing a physical wallet containing cash.

Bitcoin uses public-key cryptography, meaning that a wallet consists of two keys, one public and one private. Public keys identify wallets on the blockchain and are shared with other parties in order to receive BTC, while private keys enable you to access and send BTC from the wallet.

Wallets themselves come in several forms:

• Cold Wallet: Referring to ‘cold storage’, these wallets keep private keys offline and thus safely out of the reach of hackers. These can come in several forms, from devices not connected to the internet to a paper copy of the private key.
• Hot Wallet: Unlike cold wallets, these are connected to the internet. They can come in the form of full clients that download a copy of the blockchain, light clients that interact with full nodes, or online/web wallets that store credentials with the online wallet provider rather than the user’s hardware.
• Exchange Wallet: These are forms of online or web wallets, but may differ slightly in that a user’s exchange account isn’t necessarily a wallet in and of itself. As such, when sending cryptocurrency to an exchange account, there may be some form of identification system or memo in place to ensure that the funds reach the correct user.

How Secure is Bitcoin?

Bitcoin is based on extremely safe SHA-256 cryptography created by the National Security Agency of the U.S., and the bitcoin protocol includes many features protecting it against various vectors of attack, including:

• Double Spending. This type of attack involves the user trying to send the same Bitcoin to two different addresses in succession. It is mitigated by the very nature of the public distributed ledger, where the complete history of all transactions is visible to all.
• Race Attack. A race attack refers to the user trying to send the same Bitcoin to two different addresses concurrently, creating a race to see which transaction is accepted first.
• History Modification. This happens when an attacker attempts to reverse the transaction in a blockchain, which is impossible to do if participants wait for more blocks to be created (called confirmations). To succeed, an attacker would need to control more than half of the total computational power of the network in what is called a 51% attack.

Bitcoin Energy Consumption

As awareness about Energy Consumption and the need to be Green has swept over consumers, critics of Bitcoin have used its consumption of energy as a vector of attack.

Reports have claimed Bitcoin’s transactions take ‘as much electricity as an American household does in six weeks’, and that Bitcoin’s annual energy requirement amounts to more than the annual energy usage of Finland, a country of 5.5 million.

However, other reports suggest that Bitcoin miners are heavily dependent on renewable energy sources, with anywhere between 40-75% of BTC’s energy usage being powered by renewables.

Defenders of Bitcoin also point to the carbon footprint of gold, which is considered by some to be a similar asset class to BTC, being double that of Bitcoin’s. The global banking sector is estimated to have a similarly large carbon footprint, and quantifying that of the financial services industry as a whole has not yet been managed.

Nevertheless, not every media report remains entirely grounded in reality. Newsweek’s infamous 2017 article titled ‘Bitcoin Mining on Track to Consume All of the World’s Energy by 2020’, for example, did not come to pass.

Private sector crypto initiatives, such as the Crypto Climate Accord and the Bitcoin Mining Council, remain dedicated to solving environmental issues, yet not everything that consumes energy is necessarily bad.

Regardless of its energy consumption, Bitcoin has the potential to aid the reported 1.7 billion unbanked people in the world, to address the UN’s Sustainable Development Goal 10 of reducing exorbitant International Remittance fees, and to generally be a force for positive change, innovation, and development across the globe.

What Is Bitcoin Halving?

Bitcoin halving refers to the reduction of the Bitcoin block reward paid out to miners upon the successful creation of a new block.

As set out in the Bitcoin Protocol, this reward began at 50 BTC with the genesis block in January 2009. It has since halved every 210,000 blocks to 25, 12.5 and most recently to 6.25 BTC.

These halvings and the predefined nature of Bitcoin’s supply make Bitcoin’s monetary supply almost perfectly transparent. This stands in stark comparison to fiat currency which is simply printed, and increasingly so in recent years, by central bankers across the world.

Is Bitcoin a Good Investment?

The fixed monetary value and software-defined scarcity of Bitcoin are commonly used as arguments why Bitcoin is a valuable investment.

With a fixed maximum supply of 21 million BTC and a slowing supply toward that number as halvings take place, its value is evident as the network effect takes hold when compared to fiat currencies that have no supply limit and are controlled by the banks.

This has given rise to the argument that Bitcoin is a store of value or ‘digital gold’, and has seen investors take a buy-and-hold approach rather than use BTC as the electronic ‘cash’ it was designed to be.

However, Bitcoin is a relatively young asset, and its volatility often counts against it as a store of value. For risk-averse investors, the massive volatility that Bitcoin has historically exhibited can be a severe drawback.

On the other hand, it is also the best-performing asset class since its creation, providing an annualized 230% return over that time, and many analysts still believe the best is yet to come.

How Is Bitcoin Upgraded?

Developers upgrade Bitcoin by conducting a fork in the network. These forks are essentially changes in the protocol of the Bitcoin network and can be implemented for several reasons.

The most common reason to fork Bitcoin is to upgrade it, and a fork causes a split in the transaction chain. This creates a development structure and an opportunity to experiment without compromising the ‘main’ Bitcoin blockchain.

Hard Fork vs Soft Fork

Hard forks are permanent changes that happen when a new version of Bitcoin splits from the original, creating two distinct chains that are entirely separate from each other. After splitting, these two chains no longer communicate.

Hard forks have given rise to several other cryptocurrencies, including Bitcoin Cash, Bitcoin Gold, and Bitcoin SV.

Soft forks, meanwhile, are a change to the protocol that is backward compatible, meaning that the new protocol will be recognized by the old nodes of the system. This doesn’t launch a new cryptocurrency like a hard fork does.

What Is Taproot?

The Taproot upgrade is a soft fork that was implemented in November 2021. It is widely considered the most important recent upgrade to Bitcoin.

One of Taproot’s main aims is to batch multiple signatures and transactions, making it faster and easier to verify transactions on the network.

It also makes it harder to distinguish transaction participants on the public distributed ledger by combining single-signature and multi-signature transactions into a single verification process, thereby enhancing privacy.

Transaction scaling has also been considered a weakness of Bitcoin. However, Taproot enhances Bitcoin’s capability in that regard, opening the door to smart contracts and potential DeFi (decentralized finance) applications.

What Is The Bitcoin Lightning Network?

Lightning Network is a layer-2 solution built atop Bitcoin, aimed at making transactions even faster and reducing fees paid by the users.

The Lightning Network uses smart contracts to set up connections between users off the main Bitcoin blockchain, and makes transactions between them using these channels. Users can then close these channels at any time and settle their final balances on the main BTC chain.

Since Bitcoin blockchain records just the opening and closing of these channels, it reduces network usage. There is also additional privacy in these Lightning Network transactions as they don’t individually appear on the blockchain.

Lightning Network was proposed in 2016 in response to Bitcoin making less than 10 transactions per second compared to traditional payment processors handling several thousand.

Furthermore, for Bitcoin’s vision of being an electronic cash alternative and therefore needing to handle microtransactions, the existing fee structure had to improve. After all, while users would be happy to pay a few dollars as a fee to move millions from one account to another, the same fee would be unacceptable when buying a cup of coffee.