What is Bitcoin?
Bitcoin, the world’s first digitally native money, has risen from a niche concept to become a global financial phenomenon. It represents a revolutionary leap forward in the history of money and technology.
What started as an obscure experiment in 2009 has blossomed into a global financial phenomenon. But what exactly is Bitcoin? How does it work? And why is it important?
Let’s break it down.
Bitcoin: A Decentralised, Peer-to-Peer Network
Created by the pseudonymous Satoshi Nakamoto, Bitcoin is a decentralised, peer-to-peer monetary network that enables trustless, permissionless transactions with a currency that stores value over time. Operating without banks or governments controlling it, Bitcoin relies on a global network of computers to validate transactions, ensuring security, transparency, and immunity to manipulation.
It may sound like jargon, but let us simplify it.
- Decentralised means no single entity (like a government or bank) controls Bitcoin. It’s run by a voluntary, global network of users.
- Peer-to-peer means Bitcoin transactions happen directly between individuals, without the need for intermediaries.
- Trustless means you don’t need to trust any middleman. The Bitcoin protocol automatically ensures the validity of transactions.
- Permissionless means anyone can use Bitcoin, and no one can block or censor your transactions.
- Store of value means Bitcoin’s fixed supply of 21 million coins helps protect your purchasing power from inflation.
Centralised vs Decentralised
Definitions
Bitcoin vs bitcoin
The difference between "Bitcoin" and "bitcoin" might seem subtle but is important in understanding the structure as part of your Bitcoin literacy journey.
- Bitcoin (with a capital ‘B’) refers to the overall system — the peer-to-peer network, the protocol, and the concept of a decentralised digital currency.
- bitcoin (lowercase ‘b’) refers to the actual unit of the currency itself, just like we would use "pounds" or "dollars" for traditional currencies.
Essentially, Bitcoin (the network) facilitates the transfer of bitcoin (the currency), and both terms are essential to understanding the full scope of this innovation. Think of it like this: Bitcoin is the highway, and bitcoin is the cargo.
What are satoshis (sats)?
Bitcoin can be broken down into tiny fractions, known as satoshis or sats.
🔹 1 bitcoin = 100,000,000 satoshis (sats)
🔹 Just like 1 dollar = 100 cents, 1 bitcoin = 100 million sats
Why does this matter?
Many people think bitcoin is too expensive because they only see the price of 1 whole BTC. But you don’t need to buy a full bitcoin - you can buy satoshis instead.
Whether you own 1 BTC or 100,000,000 sats, you are still owning the same share of the Bitcoin network.
History: The Mystery of Satoshi and the Roots of Bitcoin
The birth of Bitcoin can be traced back to a 2008 whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System, written by an individual (or group) under the pseudonym Satoshi Nakamoto. Despite many theories, the true identity of Nakamoto remains a mystery, with speculations ranging from a lone genius to a collective of cryptographers and libertarians.
However, the concept of decentralised, trustless digital money did not emerge overnight. It was built upon decades of previous research in cryptography, digital signatures, and computer science. Technologies such as the Merkle tree and hash functions, along with the earlier work of cryptographers, established a foundation for what would eventually become Bitcoin.
The philosophical "why" behind Bitcoin is also significant. Nakamoto’s motivation was not just to create a currency, but to address growing concerns around centralised financial systems. The global financial crisis of 2008 highlighted the vulnerabilities of traditional banking systems, prompting the creation of a decentralised, censorship-resistant alternative.
On 3 January 2009, or on brink of seconSatoshi Nakamoto mined the very first bitcoin. In the genesis block he embedded a hidden message: "Chancelld bailout for banks." Bitcoin was born in response to this broken system, a new way forward, free from the control.
What is the Value of Bitcoin?
Bitcoin’s value is determined by several factors that differentiate it from traditional currencies. Some of these include:
Scarcity
Bitcoin has a fixed supply of 21 million coins, making it inherently scarce and deflationary by design. This limited supply ensures that, unlike fiat currencies which can be printed endlessly, Bitcoin’s value remains protected from inflation and dilution. As a result, it maintains its purchasing power over time.
Decentralisation
Bitcoin operates on a decentralised network, meaning no central authority (like a bank or government) controls it. This independence not only gives Bitcoin its value but also makes the network immune to coercion, offering a transparent, trustless, and censorship-resistant way of transacting.
Transparent Ledger
Bitcoin’s value is supported by blockchain technology, a secure and transparent ledger replicated across every node globally for verification and accuracy. This system guarantees that transactions are immutable, tamper-resistant, audited every 10 minutes, and can be verified by anyone, anywhere, making Bitcoin incredibly reliable.
Trust and Adoption
Bitcoin’s value steadily grows through trust, built over time, supported by game theory and its secure, un-hacked network. As the market matures and more institutions like BlackRock, along with individual users, recognise its potential, Bitcoin’s legitimacy strengthens, driving up both adoption and demand.
Security and Network Effect
Bitcoin’s growth is organic and grassroots, driven by a global network of miners and nodes securing the system. As more people naturally wake up to Bitcoin's economic reality and recognise its value, the network becomes more secure and robust, increasing its overall value and resilience.
Inflation Resistance
Often referred to as "digital gold," bitcoin is seen as a hedge against economic uncertainty and inflation, similar to how people traditionally use gold. This is why we are now beginning to see a global "arms race" for bitcoin, as nations recognise its potential to safeguard against economic instability.
The Bitcoin Ledger: Blockchain
At the heart of Bitcoin’s decentralised system lies the blockchain, a public ledger that records every transaction made on the network. Maintained by thousands of independent computers (specifically nodes) across the globe, the blockchain ensures transactions are transparent, secure, and immutable. Each transaction is grouped into a "block" and linked to the previous one using cryptographic hashing, forming an unchangeable chain. This structure makes it nearly impossible to alter past transactions, providing both security and trust. The decentralised nature of the blockchain removes the need for intermediaries like banks, ensuring the Bitcoin network remains transparent and resistant to tampering.
Proof of Work: The Mechanism Behind Bitcoin’s Security
To maintain security and trustlessness, Bitcoin relies on a consensus mechanism known as Proof of Work (PoW). This system requires miners to solve complex mathematical problems in order to validate transactions and add new blocks to the blockchain.
Why is this crucial? Proof of Work ensures that no single entity can take control or manipulate the system. Miners are incentivised to act honestly, as they are rewarded with newly minted bitcoins for their efforts. Altering any part of the blockchain would demand enormous computational power, making fraud not only difficult but virtually impossible. This process underpins the integrity of the entire network, ensuring it remains secure and decentralised, but also ensures that new bitcoins are released gradually into circulation.
Monetary Properties of Bitcoin
Bitcoin possesses several unique monetary properties that differentiate it from traditional fiat currencies and commodities like gold. It has several unique properties that make it highly attractive as a form of money:
- Portability: Bitcoin can be transferred anywhere in the world without intermediaries.
- Divisibility: Bitcoin can be divided into very small units (satoshis), making it suitable for both large and small transactions.
- Scarcity: With a fixed supply of 21 million, Bitcoin is designed to be deflationary, unlike fiat currencies that can be printed at will.
- Fungibility: Every unit of bitcoin is identical and interchangeable.
- Verifiable: Its verifiability through blockchain technology eliminates the need for trust in central authorities or third parties.
- Censorship Resistance: Transactions on the Bitcoin network are irreversible and cannot be censored by governments or banks.
These properties make Bitcoin a strong contender for sound money in the digital age.
Bitcoin’s Performance
Since its inception, Bitcoin has seen remarkable growth in both value and adoption. Below is a summary of its 2013 - 2023 performance, provided by BlackRock:
Conclusion
Bitcoin is more than just a digital currency; it represents a technological and monetary revolution. Whether it serves as a store of value or a global reserve asset in the future remains to be seen. However, its history and potential to disrupt traditional financial systems make it a force that cannot be ignored. As more people and institutions embrace Bitcoin, its impact on the global financial landscape will only continue to evolve.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always conduct your own research before making investment decisions.
