What is Bitcoin?
Bitcoin is a cryptocurrency. These are assets that can be used as digital money to make purchases or as a store of value. It can also be represented by its ticker symbol “BTC”.
The Long Definition
Bitcoin, or “BTC” is a type of digital money. Like regular money, you can use it to buy things online and even in person.
However, instead of being controlled by a bank or government, like normal money, it’s bought, sold, and traded within a network of computers around the world known as a blockchain. This network allows people to use the coin without needing banks or gatekeepers.
The History of Bitcoin
Bitcoin is the first cryptocurrency. It was launched in 2009 by Satoshi Nakamoto, a mysterious figure or group whose identity is yet to be revealed. He did it to give everyday people a way to buy, sell, or trade directly with each other, anonymously, and without the need for a gatekeeper like a bank.
Satoshi understood that records of these transactions have to be kept and be trusted as true and correct. These records also have to be secure so no one can go back and change them. And they have to be fully transparent so everyone could see every deal that happened BUT would never know the details of the people or companies involved.
So Satoshi created the Bitcoin blockchain, an online payment and ledger system that uses cryptography to keep information secret.
Satoshi also understood that this record-keeping system – blockchain – has to be kept up to date. Since that requires time and effort, people have to be paid.
Lots of people want to do this work to earn Bitcoin. So they decided to have people compete. This ‘competition’ involves computers trying to solve very complex math problems. The first to do so gets to do the work on the blockchain and gets paid in Bitcoin for their efforts.
This process is called cryptocurrency mining.
Over the years, Bitcoin has exploded in popularity as more people want to own it. And even though it was originally launched in 2009, the blockchain continues to be worked on and improved by volunteer developers from the Bitcoin community.
How Bitcoin is ‘Mined’
New Bitcoins come from mining. This term can be confusing because it is not Bitcoin that is mined. Instead, there are “blocks” on the blockchain that are ‘mined’. These blocks are like special rooms where data about transactions are permanently recorded.
This happens when miners validate and verify transaction data. After that, the block (room) is closed, and the miner is rewarded with new bitcoins, which they can sell or hold.
Making sure records of transactions are true and correct
For Bitcoin to work effectively as a payment system, it needs a way to make sure that its records of transactions are true and correct. This process is called the consensus mechanism (the ‘mechanics’ of reaching an agreement that all the data is true and correct).
Bitcoin uses the proof-of-work (PoW) consensus mechanism.
PoW involves solving complex cryptographic equations to validate new blocks. This takes a lot of computing power. Miners have to use powerful mining machines known as Application Specific Integrated Circuits (ASICs) to verify blocks.
It wasn’t always this way. Back in 2009, you could mine blocks with a personal computer. But the system is designed to be more complex with each new block. As more data is added to the blockchain, encryptions become harder to solve and thus require more computing power and energy to solve.
Cryptography is also used to keep data private. This is why Bitcoin and other digital currencies are known as cryptocurrencies.
Halving and Block Rewards
Satoshi wanted Bitcoin to have real value. Demand and supply are what give assets value. If demand is greater than supply the price of the asset will rise.
So Satoshi said there will only be a total supply of 21 million bitcoins that can be mined. After that, there will be no more mining.
Since 2009 the number of mining rewards has been halved after every 210,000 blocks. In 2009, the block reward stood at 50 new bitcoins. This then dropped to 25 BTC, 12.5 BTC, and in May 2020, 6.25 BTC.
Yes, but will there be enough Bitcoin?
Bitcoin’s goal is to become a global currency. Yet its supply has a cap of 21 million coins. While this might seem low, BTC can be split up into much smaller pieces, allowing you to send fractions of one such as 0.01 BTC.
The value of Bitcoin is so high that you don’t really need an entire coin for 99.9% of transactions. Instead, a fraction of a coin can be used to pay for just about whatever you want. So if you want to make a five-dollar purchase, you only need five dollars worth of bitcoin, which you can buy at a crypto exchange.
In fact, it’s possible to buy portions of BTC down to a satoshi. A satoshi is the smallest bitcoin denomination. It represents 100 millionth of one bitcoin.
How do I use Bitcoin?
There are several ways you can use Bitcoin.
- Investment: Many people buy Bitcoin and hold on to it with the hope that its value will appreciate over a long period of time.
- Speculation: The price of Bitcoin has been quite volatile. Traders try to time the market and profit by buying at a lower price and selling at a higher price.
- Transactions: Bitcoin can be used to pay for goods and services at a supported vendor. This was what the currency was created for.
The easiest way to get started with Bitcoin is to buy it from a cryptocurrency exchange such as Binance, Kraken, or Gemini. Then you can sell it or trade it for another cryptocurrency if you want to.
Alternatively, you could also “mine” Bitcoin yourself. However, this is a pretty technical process and requires the constant use of a computer, server, or ASIC miner.