Bitcoin 101: what you need to know
Bitcoin was officially launched on January 3, 2009, by an individual or group of individuals using the pseudonym Satoshi Nakamoto. Since then, Bitcoin has become the most important cryptocurrency in terms of market capitalization, trading volume, social media presence, and mainstream recognition. In this post it will be explained what Bitcoin is, how it works and why investors choose this digital asset.
What is Bitcoin?
On October 31, 2008, Satoshi Nakamoto published a white paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System." In this document, Satoshi Nakamoto, who remains anonymous to date, outlined the foundational principles and technology behind Bitcoin, including blockchain. Nakamoto's goal was to create a decentralized digital currency that could operate without the need for a central authority, such as a government or financial institution. Later, on January 2009, the bitcoin network was implemented and the first block of Bitcoin was mined.
Bitcoin is a digital currency that exists solely online. Unlike traditional currencies like the US dollar or the euro, Bitcoin is not issued or regulated by any central authority. Instead, it relies on a decentralized network of computers to maintain and secure its operations.
How does it work?
Bitcoin transactions are similar to sending digital files via email. When you want to send bitcoins to someone, instead of using an email address, you need their Bitcoin address. This public address is a string of alphanumeric characters. You then create a transaction by specifying the amount of Bitcoin to send and the recipient's address. This transaction is broadcasted to the network, verified by miners, and recorded in the blockchain.
Blockchain: the technology behind Bitcoin
At the core of Bitcoin, and other cryptocurrencies, is a revolutionary technology called blockchain. A blockchain is a distributed ledger that records all transactions across a network of computers. Here is how it works:
- Transactions: When a Bitcoin transaction is made, it is broadcasted to the entire network.
- Verification: Network nodes, known as miners, verify the transaction using complex mathematical algorithms.
- Block creation: Once verified, the transaction is grouped with others into a block.
- Chain formation: Each block is linked to the previous one, forming a chain. This chain of blocks is known as the blockchain.
The blockchain is public and immutable, meaning once a transaction is recorded, it cannot be altered. This transparency and security are key features of Bitcoin.
Mining bitcoins
Mining is the process by which new bitcoins are created and transactions are added to the blockchain. Miners use powerful computers to solve complex mathematical problems that validate transactions and secure the network. The first miner to solve the problem adds the block of transactions to the blockchain and is rewarded with newly created Bitcoin. This process, known as Proof-of-Work, ensures that the network remains secure and that new bitcoins are introduced into the economy in a controlled manner.
Why Bitcoin?
Here are three reasons for choosing Bitcoin as an investment or means of exchange:
Decentralization
Unlike traditional currencies, which are controlled by central banks, Bitcoin operates on a peer-to-peer network without a central authority. As a consequence, no single entity can control or manipulate the Bitcoin network.
Limited supply
Bitcoin has a finite supply, with a maximum of 21 million bitcoins that can ever be created. This scarcity is built into the protocol to mimic the properties of precious metals like gold or silver. The limited supply is often seen as a hedge against inflation.
Security and transparency
Every transaction is recorded on the blockchain, making it possible for anyone to verify the authenticity of a transaction. Additionally, the decentralized nature of the network makes it incredibly difficult for bad actors to alter the blockchain or commit fraud.
Remember that before making any investment decisions, you should carefully consider your financial situation, level of experience, and risk appetite.