Bitcoin is a digital currency which operates without any oversight of banks or governments and allows for secure peer-to-peer transactions over the internet. It relies on peer-to-peer software and cryptography, and completely eliminates the need for a middle-man or intermediary, such as a bank, to facilitate the transaction. Bitcoin was created by Satoshi Nakomoto, a pseudonym person or organization that outlined the technology in its 2008 whitepaper.
Unlike common services such as Venmo or PayPal, which rely on the traditional financial systems for permission to transfer money between accounts, Bitcoin is decentralized and permissionless - any two people, anywhere in the world, can send bitcoin to each other directly without the involvement of a bank, government, or any other institution. This technology is especially valuable to countries where not everyone has access to a bank account; yet almost everyone has access to a smartphone and an internet connection - which is all that is needed in order to send/receive Bitcoin. Similarly, countries such as Zimbabwe and Venezuela that experience hyperinflation, can benefit vastly from Bitcoin as well. People from those countries have the option to either hold their native currency and watch as it consistently loses value and buying power, or invest in Bitcoin with the speculation that it is a superior store of value.
How Does Bitcoin Work?
Every transaction on the Bitcoin network is tracked and stored on the blockchain permanently. This makes it possible to trace the history of Bitcoin to stop people from double-spending coins that they do not own, making copies, or altering confirmed transactions. Bitcoin’s blockchain ledger is very similar to a traditional financial ledger in the sense that it records every transaction ever made using Bitcoin. Unlike a bank ledger, the Bitcoin ledger is distributed across the entire network of participants. No single entity is in control of the Bitcoin blockchain and it is available to the public to join.
In order to send or receive Bitcoin, one must have a supported BTC wallet downloaded to either their computer or mobile device. The sender of BTC needs to specify a specific Bitcoin address, which is a unique identifier that serves as a virtual location where the Bitcoin will be sent to. A “block” is a file containing 1MB of Bitcoin transaction data. When someone makes a Bitcoin transaction, it first goes into a pool of unconfirmed transactions. Then, Bitcoin miners select your transaction and place it into a block of transactions. The miner solves a multitude of mathematical puzzles which is called proof-of-work. This is the consensus algorithm for the Bitcoin network. After the miner successfully solves the proof-of-work puzzle, the Bitcoin network confirms your block and adds it to the blockchain. The miner that confirmed your transaction receives a mining fee as a reward for verifying and adding your block to the blockchain.
Due to the fact that these mathematical puzzles require an immense amount of computing power, they are very difficult to undo and alter. Each puzzle builds upon the previous block so to get the proof-of-work for block #2, you would need to also re-do the proof-of-work for blocks #7, #6, #5, #4, and #3. Mathematically, this would take an almost impossible amount of computing power, so a bitcoin transaction is as secure as possible after 6 confirmations.
“Tokenomics” of Bitcoin
The total supply of Bitcoin will never exceed 21 million Bitcoin - this is digital money that cannot be inflated or manipulated in any way. It is not necessary to buy one full Bitcoin as you can buy a fraction of one. New Bitcoins are created as miners continue to verify transactions, and are rewarded with fractions of Bitcoin at a time. Over time, the mining difficulty for Bitcoin goes up to prevent too much Bitcoin being flooded into the market at any one given timeframe. The mining difficulty is how much computing power is needed by miners in order to solve the complex mathematical puzzles in order to verify transactions. As the mining difficulty goes up, miners need more and more computing power (better hardware) to keep up with the rise in Bitcoin mining difficulty.
Why Do People Want Bitcoin?
The main reason that people want to own Bitcoin is because it is not controlled by central governments or banks - making it much less prone to political manipulation. Bitcoin transactions are fairly anonymous in the sense that the sender and receiver only show up as a string of letters and numbers. Although transactions are recorded and stored on the network, nobody would initially know which “account number” was yours unless that information was shared. Additionally, many people view Bitcoin as a superior store of value against debasing currencies. Many Bitcoin maximalists believe that Bitcoin will be the global reserve currency of the future due to its decentralized nature, utility, and its principles of sound money.
How Do People Get Bitcoin?
Anyone can buy Bitcoin with traditional fiat money such as USD, through an exchange that offers buying and selling of Bitcoin such as Coinbase or Kraken. Bitcoin can be traded like any other asset in the sense that there is a market for both buyers and sellers of Bitcoin.
The other way to acquire Bitcoin is to mine it. As mentioned earlier, mining requires very powerful computing hardware and can be very costly in terms of energy use, as powering these mining rigs can use a great amount of electricity. It is mindful to first calculate how much electricity a mining rig will use and see if it is worth the investment to continue mining Bitcoin.
The Bitcoin halving is when the rate of new Bitcoin creation is cut in half, which occurs every 210,000 blocks mined or roughly every four years until all 21 million Bitcoin are mined. The Bitcoin halving is notable as it represents an even further reduction in Bitcoin’s already limited supply. According to economics - as supply goes down, demand goes up. This is one of the main reasons that traders and investors pay close attention to the halving event as its scarcity directly correlates with a price increase per Bitcoin over the longer term timeframe. Essentially, as the Bitcoin halving occurs, the value of Bitcoin yet to be mined rises, due to its increased scarcity. As you can see from the image below, price tends to rise dramatically following the halving events.
This halving system will continue until around the year 2140 - when there will be no more Bitcoin left to be mined. At this point, miners will be rewarded with fees for processing transactions, which users of the network will have to pay. These fees ensure that miners still have the incentive to mine and keep the network running. As of October 21, 2021, There are currently 18.85 million Bitcoin in circulation.