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Bitcoin was created in 2009 based on a core foundational principle: What if there was peer-to-peer, digital money that wasn’t controlled by governments or banks?
Founded by pseudonymous creator Satoshi Nakamoto, the first ever cryptocurrency was born in the aftermath of the 2008 global financial crisis, amid high unemployment and insolvent banks across the world.
Nakamoto outlined his vision for bitcoin in his now famous whitepaper, titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” In it, he detailed a plan for an alternative payments system for individuals. But instead of relying on third-party institutions, like banks or governments, transactions were to be facilitated solely by mathematical algorithms known as cryptographic proofs.
Since bitcoin’s blockchain went live on Jan. 3, 2009, it has grown from being practically worthless, into becoming one of the most important asset classes in history, with its creation spurring thousands of new blockchains and hundreds of thousands of new cryptocurrencies.
What Is Bitcoin?
Put simply, bitcoin is a currency that’s native to the internet that any one individual or institution can’t control. In its purest form, bitcoin functions as a medium to exchange value between parties irrespective of location.
But it can function as other things too, like an investment, “digital gold,” or a hedge against inflation in local currencies.
As a currency though, bitcoin is defined by a few fundamental qualities:
- There will only ever be 21 million bitcoin, making it an inflation-resistant currency.
- Anyone can access bitcoin and send bitcoin anywhere in the world, without needing a bank or any financial intermediary.
- Every bitcoin transaction is tracked on a decentralized, public ledger.
Most currencies we’re familiar with today, such as the U.S. dollar, or the euro, are government-issued currencies — also known as “fiat currencies” because they are unbacked, worthless notes that only possess any trading value because a head of state says so, and citizens must comply.
Bitcoin, though, is issued by a decentralized network of interconnected computers, and as a result, isn’t limited by arbitrary limitations imposed by governments or banks. Spending, holding, or transferring bitcoin can be done without a middleman (like a bank or payment processor), and anyone can transfer as much bitcoin as they’d like, to anyone in the world.
Why Is Bitcoin Special?
Bitcoin is more than its $1 trillion-plus market capitalization.
These are a few reasons why bitcoin represents a new kind of money:
Bitcoin champions privacy
Using banks or payment processors often means sharing unnecessary personal information in order to complete simple transactions. With bitcoin, there are no bank statements, email addresses, or identifying information required to send or receive bitcoin.
And since bitcoin is secured by cryptography, there’s an extremely low risk of having your personal financial information compromised.
Bitcoin is open source
Everything about bitcoin is available publicly. The whitepaper that preceded its creation can be read online easily, for free. And since it’s an open-source program and a public blockchain, every single bitcoin transaction can be viewed publicly.
This makes it nearly impossible to be manipulated; miners won’t confirm fraudulent transactions and it is highly unlikely for any single entity to take over a majority of bitcoin’s mining capacity to force the network to do so.
Bitcoin is accessible to all
Bitcoin isn’t limited by borders, banking hours, or social status. Anyone with access to the internet can access bitcoin anytime. And there aren’t any limits on how much you are allowed to send, or to whom.
Bitcoin is secure
Since its inception in 2009, the bitcoin network has never been hacked. This is a result of its decentralized nature, which prevents there from being a single point of failure that’s vulnerable to a hack.
How Does Bitcoin Work?
The bitcoin network is composed of bitcoin (BTC), which is the network’s native currency, and the bitcoin blockchain, which is what allows transactions to be verified and stored in a way that’s public and secure.
As the world’s first completely open-source payment network, bitcoin isn’t managed by any individual or company. Instead, it relies on its blockchain, which is a public ledger that tracks who owns what, similar to how a bank might track assets, and a decentralized network of “miners.”
Bitcoin miners are essentially a system of specialized computers that run open-source code to track and verify every transaction being logged, as well as unlock new bitcoin.
You can think of these miners as akin to a real gold miner. But, instead of digging deep underground for gold, bitcoin miners are essentially competing to solve a complex math problem first, to earn a reward in bitcoin, while also providing their combined computing power to the bitcoin network to ensure its stability, security, and decentralization.
Every 10 minutes or so, a new batch of transactions is added to the blockchain, via new “blocks.” The validity of those blocks is confirmed by the miners through solving the math problem, and once confirmed, the data from new transactions gets added to bitcoin’s blockchain — now part of a permanent, unalterable record. The miner who solved the problem more efficiently is awarded new bitcoin, with the amount of bitcoin awarded being cut in half every four years, until all 21 million bitcoin have been unlocked.
As of June 2024, more than 19 million bitcoin have been mined.
In the early days of bitcoin, almost anyone with a desktop PC could attempt to mine bitcoin. But as the endeavor got more competitive, requiring increasingly expensive equipment, publicly traded firms now exist with the sole purpose of pooling resources together to mine bitcoin, making it difficult for the average person to get involved.
As bitcoin mining gets more competitive though, bitcoin’s network becomes more secure and more decentralized, since the amount of computing power required to “take over” a majority of bitcoin’s mining capacity is ever-increasing.
Even if one miner, or a group of miners attempted to defraud the blockchain, all the other miners are still in place to verify the correctness of any transactions before they’re officially verified and stored on the blockchain. To even attempt to override the majority of bitcoin miners would cost billions of dollars in hardware costs alone, plus enormous amounts of electricity, to acquire enough computing power to take over the network via a fabled “51% attack.”
Where Does Bitcoin Get Its Value?
Currencies have value for a variety of reasons.
Fiat, or government-controlled currencies, technically aren’t backed by anything and often derive their value from a combination of supply and demand; faith in that government’s ability to collect and levy taxes; and belief that other parties will accept that currency in commerce. But those currencies are reliant on governments and banks, to manage them and to facilitate their use.
Bitcoin derives its value from similar factors, like supply and demand. But instead of bitcoin holders needing faith in any one government to uphold its value or usage, its decade-plus history as a viable and convenient way to store value has given holders faith in its stability.
And critically, unlike fiat currencies, bitcoin is verifiably scarce. While tens of billions of U.S. dollars are printed annually, there will only ever be 21 million bitcoin. This protects bitcoin from the inflationary pressures of other fiat currencies and means that in the long term, it is near certain that bitcoin’s value in terms of fiat currencies will continue to rise, because it’s proven itself to be a viable and convenient way to store value, which means it can easily be traded for goods, services, or other assets. It’s scarce, secure, portable (compared to, say, gold), and easily divisible, allowing transactions of all sizes.
How Can I Buy And Store Bitcoin?
The easiest way to purchase bitcoin is via a reputable cryptocurrency exchange, such as Coinbase or Binance. Using a cryptocurrency exchange, you can connect a bank account or debit card, and purchase the amount in bitcoin that you’d like.
Beyond cryptocurrency exchanges, there are also peer-to-peer trading platforms like Paxful that allow you to purchase or sell bitcoin directly to another individual.
Once you have some bitcoin, you have the option to either leave it on an exchange or move it into a self-custody wallet. Keeping your bitcoin on an exchange is often the most hassle-free way to hold bitcoin. However, using a self-custody wallet is widely seen as more secure.
While on exchanges, you’re relying on that exchange to remain in operation, whereas with a self-custody wallet, you’re guaranteed to always have access to your bitcoin as long as you have your wallet’s “private keys,” which are a cryptographic, randomly generated password that grants you access to your assets.
Bitcoin: A Financial Revolution
Bitcoin has firmly established itself as a groundbreaking financial asset since its inception in 2009. Born out of a desire for a decentralized, peer-to-peer digital currency, Bitcoin offers a unique blend of features that set it apart from traditional fiat currencies. Its fixed supply of 21 million coins ensures its inflation resistance, while its decentralized nature promotes security and transparency.
As a medium of exchange, store of value, and even an investment vehicle, Bitcoin has proven its versatility and resilience. The global, borderless nature of Bitcoin makes it accessible to anyone with an internet connection, breaking down barriers imposed by traditional financial systems. Moreover, its robust security, backed by cryptographic proofs and a decentralized network of miners, has maintained its integrity over the years.
Whether viewed as “digital gold,” a hedge against inflation, or simply a new kind of money, Bitcoin’s impact on the financial landscape is undeniable. As more people and institutions recognize its value and potential, Bitcoin continues to gain traction and legitimacy in the world of finance.
For beginners, understanding Bitcoin’s foundational principles, its workings, and its potential applications is crucial. Whether you are considering investing in Bitcoin or simply exploring its possibilities, it’s clear that Bitcoin is more than just a digital currency; it represents a paradigm shift in how we perceive and use money in the digital age.
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