What is Bitcoin?
Bitcoin is a type of cryptocurrency that uses blockchain technology as its foundation. It uses a peer-to-peer (P2P) network, meaning it doesn’t rely on any central authority, such as a bank or government, to function and cannot be interfered with.
Bitcoin first entered the public consciousness in November 2008, with the publication of a whitepaper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System“. Its author was the mysterious Satoshi Nakamoto, who has never been identified.
The document described a decentralized monetary system, capable of executing peer-to-peer transactions securely, and without any middleman. Bitcoin is built on blockchain, which acts as a digital ledger keeping track of value as it moves around between different network addresses.
History of Bitcoin: An alternative to banks
The Bitcoin white paper emerged in the midst of the catastrophic 2008 financial crisis.
It offered an alternative to trusting banks, by offering a peer-to-peer system for managing sending and receiving value. Instead of using a bank as the middleman, the Bitcoin network enabled you to transact directly – and securely – with the other party.
The first Bitcoin block was mined in January 2009. It set in motion the $1.4 trillion crypto industry we know today.
How does Bitcoin work?
Stated in the most simple terms, Bitcoin is an autonomous, digital ledger. This ledger provides a secure, peer-to-peer system for managing value. The network is decentralized,running autonomously and with no controlling entity.
Value hosted on the Bitcoin network is denominated in BTC, its native coin.
Bitcoin network elements
It’s important to understand that Bitcoin comprises different components that are essential to its functioning. These are
- The blockchain
- The network nodes
- BTC, the network’s native coin
Let’s take a deep dive into each of these in turn.
The Bitcoin blockchain
Transactions on the Bitcoin network (and the majority of other cryptocurrencies) are facilitated by blockchain. Blockchain is an immutable ledger; once a transaction has taken place, it cannot be reversed.
So how do you send crypto to a specific individual? The blockchain is capable of generating a nearly infinite number of digital addresses. Any time a transaction takes place, BTC is sent from one of these addresses to another.
The moment you create a Bitcoin wallet, you have an address on the Bitcoin blockchain. From that moment, any BTC you store at that address is “owned” by you, because only you can control the address.
Each blockchain address has both a public key and a private key. The private key is controlled by you, the owner. It gives you access to the contents of the address, and must be kept secure to protect your BTC. Meanwhile, the public key is sort of like your address on the Bitcoin blockchain – other users use this piece of information to send you BTC. It will not, however, give access to the address.
You might be wondering how to interact with your Bitcoin address and how to manage your private key. We’ll cover that below.
As a decentralized network, Bitcoin has no single controlling authority. Instead, it is run by its community of nodes.
There are regular nodes and miner nodes. All nodes maintain the network’s transaction history, ensuring it remains accurate. Anyone can do this; all it takes is enough disk space to host the blockchain history, and the energy to keep the host device running. There are millions of nodes in the network, and having so many copies of the transaction history dispersed across the planet means it is effectively impossible to tamper with that data.
Miner nodes process new blocks of transactions. Doing this requires miners to solve the hash function of the transaction block (a mathematical equation) before the competition. This gives them the right to add the latest block of transactions to the blockchain. In return for carrying out this process (and securing the network as they do so) this “winning” node will receive BTC as a reward.
Native coin BTC
Bitcoin (BTC) is the native coin of the network described above. It carries real value, and you can use it for crypto trading and investing, aswell as to buy real-world goods and services.
Famously, a Florida man used his 10,000 BTC to purchase two pizzas from a local restaurant in 2010. Incidentally, the same amount of BTC would now be worth in excess of $400 million.
How to own Bitcoin
Owning BTC means creating and controlling an address on the blockchain, and possessing the private key for that address. Here’s how that works.
After you buy your crypto on an exchange, you will need to move it into a crypto wallet. This means creating a Bitcoin wallet, either on a hardware or software crypto wallet. When you create your wallet, you will simultaneously create an address on the Bitcoin blockchain.
Your wallet (be it an app or a hardware device) will protect the private key. Meanwhile, you will be shown your public key for the address, which you can now use to receive funds.
What’s Proof-of-work? How Bitcoin remains secure
Decentralized networks have no controlling entity, they’re operated by their community of nodes instead. This means they need a built-in mechanism to ensure they can’t be attacked or manipulated by those nodes. This is known as a consensus mechanism.
Proof-of-work is the consensus mechanism used by the Bitcoin network. In simple terms, it keeps the blockchain secure by making it icredibly difficult and expensive to manipulate transactions.
Mining requires all of the miner nodes to reach “consensus”, or agree about the validity of new transactions. They demonstrate their consensus by competing to solve the hash function of the new block. This requires them to dedicate their resources – namely computing power – to the process.
For an entity or group to subvert this process and confirm a fake transaction, they would need to accumulate more than 50% of the computing power of the entire network. This threshold makes it more or less impossible for the network to be manipulated.
How is Bitcoin created?
Beyond the hype, headlines and jargon, Bitcoin is basically a (very complicated) computer program.
From inception, it was programmed with a limited supply of 21 million BTC. Each time a new block of transactions is validated, the blockchain is programmed to issue some native coins as a reward. Once the limit of 21 million has been reached (predicted to happen in 2140), the protocol will stop minting new coins. At this point, miners will be rewarded with transaction feed only.
Limited supply is one of the major “selling points” of Bitcoin as it seeks to distinguish itself from Fiat money. It means the value of BTC cannot be debased by increasing the supply, as is so often the case with central bank money. The Bitcoin halving strategy ensures that this cap will not be exceeded.
Who created Bitcoin?
Bitcoin was developed by Satoshi Nakamoto, a person or group of people who has never been identified.
According to Official Bitcoin FAQ Satoshi Nakamoto left the project in late 2010 without revealing any identifying information. The true identity (or identities) behind the Nakamoto pseudonym has never been revealed.