What is Bitcoin?

This is the first Part of our Bitcoin Guide. Make sure to read all the articles.

Bitcoin is the first peer-to-peer payment system that is not governed by a central authority. As a result, Bitcoin is immune to the kinds of government manipulation that have devalued many national currencies since a government or a reserve bank neither controls it.

Because no single administrator is in charge of maintaining or backing Bitcoin, all transactions are backed up and recorded in the Blockchain, a public distributed ledger.

This means that every computer on the planet has a copy of the public ledger, and all transactions on the Bitcoin network are public. Users can buy and send bitcoins directly to one another or use a centralized exchange to purchase bitcoins using traditional currencies.

Although all Bitcoin users can observe verified transactions in the Blockchain, the identities of the parties involved in the transactions are unknown. Therefore, instead of recording the names of transacting parties as a series of alphanumeric characters, the Bitcoin blockchain does so indifferently as a sequence of alphanumeric characters.

What is the format for listing Bitcoin transactions?

Mining is a process that verifies transactions recorded in the Blockchain.

The job of validating transactions in the Blockchain and introducing new bitcoins into the globe falls to computer users worldwide, dubbed Miners.

Bitcoin miners compete to solve difficult mathematical problems by running open-source bitcoin clients on purpose-built machines. When these difficulties are solved, they verify pending transactions, and Miners are rewarded with an allotted bitcoin amount when a ‘Block’ is completed.

There would be 21 million bitcoins maximum in circulation, which means that after all bitcoins have been awarded or “Mined,” no entity will be allowed to “print” or “produce” more.

How did Bitcoin trading start?

Bitcoin could have its roots in the ‘cypherpunk’ movement, an online community of enthusiasts who convened in the early 1990s to debate issues such as mathematics, cryptography, computer programming, politics, and philosophy.

The libertarian philosophy of the cypherpunks shaped their belief that the world would run better with little to no government and that strong online privacy and cryptography would shape how people interact in the future.

As such, Bitcoin is not the first attempt to create a digital currency; over thirty prior attempts have been undertaken under CyberCash, E-Gold, NetCash, and others. On the other hand, all of these systems reinforced centralized authority and arguably provided little benefit to users, with many dismissing these notions as scams.

Who is the inventor of Bitcoin?

Bitcoin and the Blockchain were first described as decentralized digital money in a white paper written under the pseudonym ‘Satoshi Nakamoto.’ Thousands of media outlets and pundits have speculated on who or what Satoshi Nakamoto might be, but no definitive explanation has yet been given.

By combining encryption and mathematical proof to establish a decentralized monetary system with no central authority, Bitcoin improves on many of the ideas previously articulated by the cypherpunks.

When the first open-source Bitcoin software was launched, Satoshi Nakamoto proceeded to mine the first block of bitcoins (known as the ‘genesis’ block) for a reward of 50 bitcoins; the Bitcoin network was born.

The real motivation behind the creation of the Bitcoin system

Bitcoin was created as a replacement for the current financial system. As planned by Satoshi Nakamoto, Bitcoin would be an electronic payment system based on mathematical proof that could operate without the need for a central authority and be transferred with extremely cheap transaction fees.

Fundamentally, Bitcoin attempts to solve an age-old problem: parties have used currency to authenticate and secure confidence when dealing with things throughout human history.

A currency must traditionally be able to serve as a Store of Value (keeping value for a long time), a Mechanism of Exchange (allowing traders to move value from one object to another), and finally as a Unit of Account (which people can use to price goods in a market).

What is the best way to use Bitcoin?

This can be seen in a variety of scenarios. For example, people used to pay one other in gold and silver before paper money was invented. Although neither element is easy to transport or divide into smaller bits, the rarity of these precious metals gave them a sense of value and significance (both essential features of good money).

To make things easier, paper money was invented to “claim” gold in a bank vault. This made transporting paper money easier for dealers when facilitating trades. Thus, central banks became the mechanism for issuing currency and storing gold and silver over time.

However, the link between paper money and gold (or silver) has weakened over time. This practically meant that a bank’s ability to produce paper money would be unrestricted.

Instead, paper money (and eventually, digitally stored funds) would be accepted as payment. When a bank creates a loan, it usually makes money, distributes it to a borrower, and expects the funds to be repaid-with interest. To survive, a bank generally holds a reserve of this credit-based money.

A reserve bank may often print money as the economy requires it with government-issued paper money. This can result in inflation, in which the purchasing value of paper money drops while the price of things rises.

In the worst scenario, this might lead to a financial crisis, with a bank needing a bailout or the monetary system collapsing.

Banks are increasingly looking for ways to transact digitally as technology advances. In broad terms, this would mean that monetary values would be exchanged over the internet, making it extremely difficult for two human beings to trade without the assistance of a bank in the future.

What makes Bitcoin so intriguing?

Bitcoin is highly intriguing because it has the potential to be a superior international monetary system to paper money because it more closely resembles the attributes of money than traditional currencies. For example, it is:

  • long-lasting (it lasts over time)
  • Transportable (it can be easily moved from one location to another)
  • Acceptable (it can be traded for goods and services)
  • Fungible (each unit is equal to the next)
  • Scarce (in that it has a restricted supply and is difficult to fake)
  • Divisible (it can be easily broken down into smaller parts)

Bitcoin is backed by the fact that it is based on mathematical evidence that bitcoins will never be more than 21 million during circulation. Creating bitcoins will get increasingly difficult over time. In this respect, Bitcoin is referred to as a deflationary currency.

Bitcoin is a fantastic alternative to the traditional banking system because it is based on unchangeable mathematical proof. It is a decentralized currency in which two parties’ trust may be scaled to the point where everyone in the world has equal access to an entirely digitized global financial system.

We will go over the process of how Bitcoin works in detail in Part 2 of our Bitcoin Basics series.

 

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