As the original crypto asset becomes increasingly prominent, many are asking, “what is Bitcoin?”. Moreover, a significant number of individuals have either had Bitcoin explained in an overly complicated manner or received a factually incorrect explanation with internet myths. Therefore, if you’ve been searching for a fact-based Bitcoin guide explained for beginners, then look no further!
How many times have you had Bitcoin explained to you in a way that you didn’t understand? This article aims to offer a blend of industry terminology surrounding the fundamentals of blockchain and a tech-friendly approach of Bitcoin explained in simple terms.
Throughout the article, we will discuss the history of money, the differences between money and currency, and their value propositions. If you want to dive deeper with industry-expert video tuition, check out the Bitcoin Monetary Revolution course from Moralis Academy today!
Bitcoin Explained – The Cryptocurrency That Started Everything
Let’s go back to 2008, during the global financial crisis with governments bailing out banks for lending out unaffordable loans. Governments themselves were at a deficit, so the only option was to print more money. An anonymous cryptographer and programmer understood the consequences of the economic decisions that had been taken. On October 31st of 2008, they released a whitepaper of the first peer-to-peer electronic cash payment system.
Then, on January 3rd of 2009, the pseudonymous developer(s) “Satoshi Nakamoto” launched the world’s first blockchain, Bitcoin. Within the code of the genesis block in the coinbase (the first-ever block in a chain) was a message. The message is available for anyone to view, and it read; “The Times, Jan 3, 2009: “Chancellor on brink of second bailout for banks.’”. The message referred to a British newspaper reporting on further money printing. Resultantly, with excessive printing of fiat currency, in addition to low velocity (movement of money between people) and no increase in demand, this spells a recipe for hyperinflation.
Traditional financial infrastructures operate with a small team governing decisions affecting millions. Moreover, the legacy institution technically has ownership of users’ funds. In turn, banks lend out their customers’ hard-earned cash to make a profit and pay their customers a small fee in return. This is what banks call the “interest rate”. Typically, large corporations keep most of the profits and give their customers a small cut. Operations within the financial industry are repeatedly covert, erroneous, and kept secret from the public. In our “Bitcoin explained” article, we’ll explore how this innovative technology is here to change all of this.
Who Created Bitcoin?
The identity of the original developer of the Bitcoin blockchain is still to this day unknown. The only thing for sure is the pseudonymous name “Satoshi Nakamoto”. However, it is still a mystery as to whether this is referring to an individual or a group of developers.
The search to discover the identity of one of the most successful developers is strong. Every few years, different media outlets will claim that they have worked out who it is. Over the past decade, blogs, forums, and media outlets have suggested “Dorian Nakamoto” is the founder. This is mainly due to his name and background in computer science and engineering. However, he has firmly stated he has had no part in the Bitcoin development many times over the years.
Another candidate is Australian computer scientist “Craig Wright”. Although initially denying being Satoshi Nakamoto on a public front, there are leaked transcripts of Wright talking with his attorney, explicitly stating that Wright has worked with Bitcoin since 2009. He says, “I did my best to try and hide the fact that I’ve been running Bitcoin since 2009. By the end of this, I think half the world is going to bloody know”. Moreover, before the launch of Bitcoin, Wright’s blog featured posts discussing a “P2P distributed ledger.”
Cryptography expert Nick Szabo is also a suspect of being the creator of Bitcoin. Throughout the 1990s, Szabo was working with Digicash, a payments service trying to implement online transactions. Then, in 1996, Szabo released a paper introducing the concept of smart contracts. However, it wasn’t until 2015, when Vitalik Buterin launched the Ethereum blockchain, that smart contracts became viable and operational. Nevertheless, during the late 90s, Szabo launched “Bit Gold” as the first decentralized digital payments system, which some see as the precursor for Bitcoin.
How Does Bitcoin Work?
Bitcoin operates using a novel peer-to-peer technology called “blockchain”. This involves participants from around the world collectively using computer power to confirm, verify, and transact payments from across the world. Moreover, instead of needing third-party intermediaries such as banks, people can make payments straight from A to B. Additionally, the verification process of transactions occurs using mathematics, computer science, and cryptography. As the motto goes – don’t trust, verify!
Blockchain technology offers full transparency, immutability, and security for anyone to make payments and offer to store their wealth. As the first-ever blockchain to launch, the pioneering cryptocurrency operates with more than 13,768 nodes (computers) as of November of 2021, according to Investopedia.
The Bitcoin blockchain’s native coin is known as Bitcoin (BTC). Furthermore, there can only ever be 21 million BTC as the maximum supply is cryptographically encoded in the chain. As such, offering transparent, borderless, permissionless, and scarce qualities, Bitcoin (BTC) has outperformed every single asset class in terms of value increase since its launch. Moreover, people can store BTC in various cryptographic wallets. This could be as a physical “cold storage” device. Alternatively, users can store their BTC on a desktop wallet or Web3 browser wallet.
Bitcoin (BTC) is an unusual asset as it works as a currency offering digital online payments and has deflationary aspects. Moreover, people often refer to Bitcoin as “digital gold” for its potential as a store of wealth and possessing similar value propositions to the hard asset.
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What is Bitcoin Mining?
One of the propositions an asset must hold to be of use as monetary or currency value is proof-of-work. For instance, seashells were once used as a currency. The requirement for transport into the mainlands offered proof-of-work. However, as shells are readily available on the coastline, fur then became a popular choice of currency. In addition to warmth and portability, fur offered proof-of-work through catching and skinning an animal. This being said, the divisibility of fur was challenging. Further, other preceding currencies such as salt and gold offer proof-of-work through hard labor and mining.
Fast forward to the 21st century, and the leading cryptocurrency also uses a “proof-of-work” (PoW) consensus algorithm for the process of mining Bitcoin (BTC). A consensus algorithm is what allows all the computers (nodes) in the network to agree that a transaction is valid. However, instead of humans doing laborious physical work, computers use immense amounts of energy to compete to solve the humanly-impossible mathematical equation that verifies a transaction. These particular computers in the network are called Bitcoin mining nodes.
Upon completion of validation, the transaction moves into a figurative block. Miners from across the globe compete to solve equations to place into a block until the block is full. Each transaction goes through cryptographic “hashing” with the previous and following transactions. When the block is full, the miner appends the block to the Bitcoin blockchain. As such, each transaction within each block becomes immutable, meaning that no one can change or remove any data. With each successful block appended to the chain, miners receive freshly minted Bitcoin (BTC) as a reward for their contribution to the network. Consequently, the economic design means malicious actors will lose money, and it is more profitable to be an honest participant.
What is Bitcoin Backed By?
Until 1971, traditional fiat paper currency was representative of an amount of gold, technically redeemable at a bank. However, President Nixon removed the gold-backing of the US Dollar in the early 1970s. Since then, most fiat currency has been backed by nothing more than government trust. Conversely, Bitcoin itself is a revolutionary asset with deflationary aspects with the supply and demand of the community of holders determining its value.
The supply and demand of an asset is arguably the most fundamental baseline for valuing anything. When governments increase the supply of a nation’s currency by printing more money (known as quantitative easing or “QE”) while the demand remains the same (a nation’s population), this debases the currency. As such, the value of the currency itself decreases, meaning it requires more to pay for everyday things (inflation). This is why people hedge against inflation by investing in deflationary assets such as real estate or physical gold. Similarly, the introduction of Bitcoin offers the world a new way to hedge against inflation.
Bitcoin has no backing of any underlying asset. Rather, the value it generates is through its distribution network with PoW mining. Plus, its global demand’s increase with a capped supply means that theoretically, the price of Bitcoin (BTC) will fluctuate until a stable equilibrium of supply and demand is met. According to Investopedia, as of November of 2021, there are nearly 19 million BTC mined, with just over two million left to enter circulation. Moreover, a recent study shows that about 20% (4.2 million) of BTCs are lost forever. With cryptocurrency, users are like their own bank, responsible for the security and location of their funds. Unfortunately, BTC holders who have lost their private keys to their crypto wallets have lost their assets forever.
Does Bitcoin Have a Future?
Since Bitcoin is a permissionless and borderless asset that offers true decentralization within a free market, its value could theoretically go down to zero tomorrow. This could happen if everyone holding BTC decided that it was worthless and chose to sell it. The reality is quite the opposite. A continuously increasing number of individuals, governments, and enterprises are discovering the value propositions of Bitcoin. Since its launch in 2009, worth less than $0.0001, the number one asset has seen over a 10,000,000% increase in the last 12 years. On November 10th of 2021, Bitcoin (BTC) hit an all-time high of $69,044, according to CoinGecko.
While returns on investment for many investors have been substantial, Bitcoin itself was not designed for the tech-savvy western society to make a profit. Rather, Bitcoin offers a safe haven for two-thirds of the world who don’t have access to banking. However, more than half of these people do have access to a smartphone. As such, anyone anywhere with access to an internet connection can invest and store Bitcoin (BTC) using a crypto exchange. For residents living in failing economies and dictatorships, Bitcoin offers them an online space to hedge against hyperinflation and debasement of local currencies.
Moreover, since the introduction of Bitcoin and blockchain, many developments have emerged. Namely, the second-largest blockchain, Ethereum, introduced smart contracts as underlying components of decentralized applications (dApps). In turn, this coined the term “DeFi” for decentralized financial applications. DeFi means that farmers in Africa with no documents to open a bank account can take out a loan for their business online through their smartphones. While predictions for the future of Bitcoin cannot be said with any certainty, the revolutionary underlying technology by its nature will exist as long as the internet lives.
Bitcoin Explained – Summary
Bitcoin is the world’s first cryptocurrency and introduces cutting-edge blockchain technology, launched by pseudonymous developer “Satoshi Nakamoto”. Offering similar properties to gold with the addition of decentralization and a hard cap supply, the value of Bitcoin (BTC) has outperformed every other asset or stock over the last ten years. Also, the leading cryptocurrency uses a novel proof-of-work (PoW) mining algorithm to introduce fresh BTC into circulation.
You may see Bitcoin explained across many different media outlets, with the definition of Bitcoin varying in levels of clarity and understanding. We hope our “what is Bitcoin?” article offers you a clearer insight into the history of cryptocurrency and blockchain technology. If you enjoyed this article and reading about Bitcoin explained for beginners, make sure to check out Moralis Academy! Our Ethereum 101 course is a fantastic follow-up to learn more about the foundations of decentralized finance (DeFi). This includes smart contracts, Ethereum Virtual Machine (EVM), ERC-20 tokens, and more!
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