What is Bitcoin?

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5 min read

Let’s explore what Bitcoin is and why this form of digital currency has become such a driving force and forged an entire industry around it.

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Since its first announcement back in 2008, bitcoin has inspired people worldwide to start taking more control over how they exchange value and store wealth. Let’s explore what it is and why this form of digital currency has become such a driving force and forged an entire industry around it.

The Origins of Bitcoin

Bitcoin is the first cryptocurrency to really start catching on. While there were some projects prior, these were mainly niche and experimental in nature. The domain bitcoin.org was first registered back on August 18th, 2008; this is the first point of reference that is easy to verify. Following this, an announcement was made on a cryptography mailing list by a person going by the pseudonym Satoshi Nakamoto who to this day still has no publicly verified identity. At this point, the whitepaper underlining the key functionality and overview of the network as released, this now important document is known as the bitcoin whitepaper.

On January 3rd, 2009, the first bitcoin block was mined, known as the genesis block. Five days later, the first bitcoin software was released and announced on the same cryptography mailing list. From this moment on, bitcoin slowly began to grow and evolve into the robust network we have today.

How Does it Work?

Bitcoin, at its core, works using something called a blockchain; this is a public ledger that contains all recorded transactions on the network that have been confirmed. Having a public ledger allows for not just significant levels of transparency but also the ability to cross-check and confirm the validity of transactions. Bitcoin also leverages the power of decentralization by allowing anyone to participate, which spreads out the network across the world, making it increasingly difficult to overwhelm the network and do something like fake a transaction.

Unlike a photo, video, or even a document like this one, bitcoin can’t just be copied and passed around. The blockchain keeps track of where each bitcoin in circulation exists at any given time and what wallet has control of it. The bitcoin software, design, and other core material are all open-source, allowing anyone technically to verify that in-fact no one is in control of bitcoin and that everyone is free to take part.

What are Bitcoin Nodes?

Bitcoin nodes form part of the network. Anyone can start these with an internet connection and a little hardware up to the task. Nodes are used to validate transactions and blocks, as the ledger is public and kept by many people; this makes it efficient to quickly verify and validate transactions occurring on the network once confirmed. Some people and businesses also prefer to run their own nodes to be even more confident in the data they are receiving.

How Do You Mine Bitcoin?

Mining bitcoin is how new bitcoin enters circulation while helping secure the network in a powerful way. Using an algorithm called proof of work, bitcoin is secured essentially using computing power at a large scale. The more the network grows, and the more mining power is added to the network, the more secure it becomes.

While nodes are used to verify existing transactions, mining adds new blocks to the chain and gets transactions into these blocks. When mining bitcoin, you perform complex maths in the form of complicated puzzles, with the goal being to discover a new block and hopefully earn the reward for doing so if you did it first.

While in the early days of bitcoin, it was possible to mine using computer CPUs and then graphics cards efficiently; the network has grown to be so competitive that specialized hardware called ASIC miners now dominate bitcoin mining. While this may sound complex, and in some ways it is, the difference is that an ASIC miner is not good at general computing; it is usually built to perform a specific task exceptionally well, and in this case, it’s solving the complex puzzles required to find new blocks.

What is the Value Proposition of Bitcoin?

Bitcoin has a range of qualities that make it valuable. Firstly it is decentralized. No one controls the network, owns the network, or can make decisions that the majority don’t agree to follow. Thanks to it not having any form of centralized control or owner, it is also censorship-resistant. As long as there are people that want to run the software and support the network, it can continue to exist. It is also borderless, allowing people worldwide to exchange value with freedom, ease, and speed.

One other stand-out feature that provides value to bitcoin is that it is finite. Only 21 million bitcoins will ever exist. These are slowly minted as rewards for miners finding new blocks, but every four years, a halving event occurs where the reward for each new block is halved, eventually reaching zero and supporting this final cap.

The exact value of bitcoin at any given time is speculative and decided on by the users exchanging it at scale, similar to other assets like stocks or precious metals.

Where Can I Buy Bitcoin?

Bitcoin is actively traded worldwide in a variety of ways. Everything from small personal transactions between friends to huge over-the-counter transactions (OTC) occur in the modern bitcoin landscape. However, many people use bitcoin exchanges to trade their cryptocurrency.

Bitcoin exchanges come in various forms, but most can be broadly classified as order book exchanges or peer-to-peer (P2P) exchanges. Buying and selling bitcoin using centralized order-book exchanges is a valid option, but it does come with some drawbacks. Using a centralized exchange requires you to pass control of your bitcoin to the exchange. This is something that not everyone is comfortable doing, and the permanence of bitcoin transactions can make this a higher-risk choice. There’s also a restriction on the types of payment methods you can use to send and receive local currencies (fiat) and even which kinds when using order-book exchanges.

P2P marketplaces, on the other hand, operate in a way that allows you a lot more flexibility. While some still force you to use a centralized wallet, others like LocalCoinSwap allow you the choice to choose either from a managed wallet for speed and convenience or a non-custodial wallet which only you ever have access or control over.

The flexibility of P2P comes from the ability to trade more directly with other people. It is excellent for a beginner to trade with an established vendor on a P2P exchange as they will often find this approach more familiar to different types of transactions they have made in the past. As you are trading with real people, you have many more options; you can select from a wide variety of payment methods, traders with different experience levels and terms, and even what local currency you’d prefer to deal with during trades.

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