Bitcoin is a decentralized payment network and digital cryptocurrency. In October of 2008, a document referred to as ‘the whitepaper’ titled “Bitcoin: A Peer to Peer Electronic Cash System” was published online by an individual who referred to him or herself as Satoshi Nakamoto. At the time, Satoshi’s whitepaper suggested a revolutionary way for creating a decentralized payment system with a digital currency called Bitcoin. In theory, this system would create digital currency (Bitcoin) without the need for a centralized authority such as a government and/or bank. On January 3, 2009, the first Bitcoin block was mined.1
How does Bitcoin work?
Bitcoin operates on a technology called blockchain. The blockchain is a decentralized ledger that records all Bitcoin transactions in a transparent and immutable manner. When someone initiates a Bitcoin transaction, it is broadcasted to the network, where miners verify and validate the transaction. Once confirmed, the transaction is added to a block, which is then added to the blockchain. And unlike traditional fiat currency, there is no ‘physical’ Bitcoin. Bitcoin facilitates peer-to-peer transactions without the need for any intermediaries such as banks or payment processors.2
Bitcoin depends on cryptography
Much of what makes Bitcoin such a secure form of currency is the underlying cryptography that powers its design. Cryptography is simply the process of writing codes and in this case with Bitcoin, cryptography is applied to both the mining process of Bitcoin in addition to the addresses and private keys associated with Bitcoin wallets. The Bitcoin transactions that are processed on the blockchain are seemingly un-hackable with today’s technology due to their encrypted nature.3
Bitcoin is a blockchain
The distributed ledger technology (DLT) of modern-day cryptocurrencies is the source code used to lay the foundation of what’s called blockchain. The world’s digital currencies all have different functions and capabilities, but for most of them, they each depend on the core processes of a blockchain algorithm.4
Blockchains use “blocks” of data to represent the purchases made by a digital currency. A ledger’s confirmed transactions result in an encrypted string of code that gives way for other blocks of data to be executed. The groups of blocks in a DLT ledger are named for the chain of linked transactions they create. Nodes, which consist of a network of computers, are also needed to make cryptocurrencies autonomous. Every block in a DLT system must be confirmed by a majority of nodes in a network before an exchange between buyers and sellers can be fully accepted.4
Bitcoin is decentralized
There is no single authority that manages or guides the transactions of bitcoins.5 The only way to infiltrate Bitcoin’s blockchain would be to control over 50% of all of its nodes. Centralizing Bitcoin, however, is highly unlikely due to the ability for network nodes to grow in number as the network becomes more popular and grows over time.
Bitcoin is in limited supply
The amount of Bitcoin in existence is in limited supply of about 21 million, and the smallest divisibility of Bitcoin is 100 millionths of a coin, which, in being a spendable unit, is called a satoshi. Many speculate that its limited supply is one of the primary reasons Bitcoin has become so valuable in recent years. Mining is the process in which bitcoins are extracted and released to the public. If they choose, anyone can mine Bitcoin by creating computer nodes that verify the transactions achieved by people using the network.
Bitcoin is anonymous
Cryptocurrency users describe the rise of Bitcoin and other digital currencies as a major reaction to the rise of centralized governments and banks looking to control or centralize monetary policy. Core to Bitcoin’s function and code are its features of anonymity and privacy. Bitcoin provides the ability to spend, send, or receive money without having your identity or balances revealed. The only way to determine buyers and sellers within the transactions of cryptocurrencies is when each party willfully identifies themselves through KYC (know your customer). Many services today that deal in Bitcoin are required by law to enforce KYC practices though there are some decentralized exchanges that due exists allowing traders to exchange Bitcoin to another crypto anonymously.
Bitcoin is cash convertible
Bitcoin and other cryptos are now offered by online vendors who sell these currencies in exchange for common fiat. Cash can be used to acquire a vast number of virtual currencies. Cryptocurrencies are typically priced based on the “home currency” you use to buy them with or you may also see them pegged to the Bitcoin (satoshi) value. Cryptocurrency exchanges, though consisting of simple tools to acquire electronic coins with, are used to invest in digital currencies in the same manner that people invest in stocks. Live exchanges that publish cryptocurrency prices enable investors to get in and out of the ownership of Bitcoin at will.
Bitcoin can be stored
Trading any electronic currency starts with acquiring a “wallet“. Cryptocurrency wallets are online accounts that hold a variety of different blockchain based currencies you wish to hold. Investors need to be cautious when using online (web) wallets, however, for these have a history of being hacked. A “hot wallet” is one that’s connected to the web. You can, instead, safely store your coins by using what’s called a “cold wallet” or also known as “cold storage”. Whether you rely on a computer that doesn’t connect to the web or a sheet of paper with your account data on it, a cold wallet must fall is one of the safest ways to store your Bitcoin today.
Frequently Asked Questions
Yes. We very much think Bitcoin is "still a thing" and here to stay along with the rest of the cryptocurrency market. If you're not sure, we would recommend keeping an eye on Bitcoin's price and activity in search or social media in order for you to draw your own conclusions. We think Bitcoins still exist and will continue to exist for a very long time.
Some equate Bitcoin to stocks or the stock market. While they are similar when evaluating fundamental technical analysis, they are different in many aspects. Bitcoin trading involves the exchange of one currency for another. Most commonly is the exchange of fiat USD currency for BTC (Bitcoin). On many exchange platforms like Coinbase or Binance you will find BTC pegged to USD, though you will also find other cryptocurrencies pegged to BTC as well. When you trade or exchange a currency for Bitcoin, you are inherently purchasing Bitcoin. Today there tends to be two camps of Bitcoin enthusiasts: traders and hodlers. If you are in this space to try and make a quick buck, you likely will try to swing trade Bitcoin for quick profit. But if you are a long-term hodler, you're likely buying because you believe in the technology, and believe more profit is to be made by hodling for the long-term versus risking it all in the short-term.
"Bitcoin is the hardest money ever invented". This is a quote by Austrian economist Saifedean Ammous. While Bitcoin is one of the first inventions in our modern age to help address the issue of trust with respect to transactions, 'trust' is not the only thing it is backed by. Bitcoin is backed by the security of it's immutable network. The Bitcoin network is unbreakable and unchangeable because of its inherent design. Coded into Bitcoin is it's supply which is 21 million Bitcoin. There will never any more created after all 21 million have been mined. This helps to contribute to the fact that is a deflationary, self-enclosed system and many speculate that it rivals gold as being a store of value. Bitcoin transactions are backed by cryptographic proof which has so far not been gamed by bad actors or third parties.
In our opinion, Bitcoin is likely the safest way to store your money today, but it depends on what your definition of safe is within the context of Bitcoin. If you're thinking about Bitcoin as a technology or software, it's important to note that the network has only gone down twice in its entire existence. This means that the Bitcoin networks has a 99.985% uptime. If Bitcoin does not go down again in the next 5 years, it will reach a 99.99% uptime which not many companies today can say of themselves. Now, if we're talking about transactions, it's very important to note that while addresses are not tied to your personal identity out of the box, when purchasing Bitcoin these days you're likely required to provide proof of id. It's important to take precautions when buying cryptocurrency and storing it. We and many in the cryptocurrency community would recommend storing your Bitcoin in cold storage. Lastly, similar to how Bitcoin has a 99.985% uptime, Bitcoin has also never been hacked despite misinterpretations some might have from reading the news. Third parties such as exchanges like Mt.Gox that deal in Bitcoin have been hacked before. The most important aspect of owning Bitcoin is knowing that if you do not have the private keys to your wallet, you do not really own your Bitcoin. Not your keys, not your coins. Go buy yourself a cold wallet and save yourself the headache.
No one controls Bitcoin. Unlike fiat currency, Bitcoin is decentralized and relies on it's participants including Bitcoin miners, holders, traders and those who believe in the currency to keep it afloat.