What Is Bitcoin?
Bitcoin has taken the world by storm in the past five years. Now when you turn on your TV in the morning to watch the market open you will see its price right there along with all of the major stock indexes. Bitcoin has also been further integrated into the financial system by the institutional investment it now enjoys; some of the biggest companies and most wealthy individuals in the world all hold BTC which is giving it even more traction than before.
But still many people are unsure of what Bitcoin really is. It is admittedly a complex concept and technology, but there is a way to understand some of the core concepts that make Bitcoin what it is and the resulting utility it creates.
That's why we have created this easy-to-read guide to explain the nuts and bolts of the Bitcoin decentralized network and what it really is and can be used for.
Bitcoin was created in 2009 shortly after the 2008 economic recession. The seismic events of 2008 had revealed a new concern for centralized financial systems and out of this grew the first truly decentralized peer-2-peer cash system: Bitcoin. This network was supposed to be able to simply send financial transactions and the value they hold to one another without the need for any centralized authority. The Bitcoin network would inherit its infrastructure from the community of miners that ran and verified its transaction, and get its security from cryptographic means.
It was this cryptography element that also interested some users to see Bitcoin as a store of value, as a comparable virtual gold. Today this is how we know Bitcoin; it now sets the bar and trends for the entire cryptocurrency market with a total market capitalization of over $777 trillion. Bitcoin also famously has no leader, instead, it is a mysterious figure known as Sitoshi Nakomoto, a riddle yet to be solved by the community. You can find the Bitcoin white paper online written by Satoshi that sets out the core principle of how this technology works.
How Bitcoin Works
You can imagine the Bitcoin network as a big order book full of transactions, or a ledger. Users can send amounts of Bitcoin to other users on this ledger by using a specific address, just like with a traditional bank transaction. But where a bank transaction is sent to the centralized network of that bank to be verified Bitcoin is sent to the decentralized Bitcoin ledger. This is how funds are sent to users.
Miners are the next crucial part of this puzzle as they provide the physical infrastructure for this platform to be run on. Once they have verified the transactions and sorted them into blocks users know that the funds they are sending and receiving are secure, and this is what creates a functioning financial network. It really is more simple than you may think, at least when we talk about its process in this simplified way. The technology behind this that makes this all possible is truly amazing and has use-cases that we may not have even thought of today, as is the nature of novel technology. But at its core, this is how the Bitcoin machine works.
So, What Is Bitcoin?
To truly understand what Bitcoin is we need to look at what utility it has, or the job it is trying to do. This subject is somewhat debated by the cryptocurrency community, but we can safely distill Bitcoin utility, what it does, and therefore what it is into three core facets.
A tool to transfer wealth (Peer-2-Peer decentralized transfer)
Bitcoin as a network:
The original utility for the Bitcoin network was to act as a method of transferring funds from one user to another using a secure address in a decentralized way that doesn't require any intermediary. Essentially this means users are able to send funds to one another, like with any traditional bank, but instead funds would directly move from one individual user to another. Users must then wait for Bitcoin confirmations, made by the network’s miners, to be confident that the transaction has been accepted and will not fail.
A store of value (capped and deflationary)
Bitcoin as the BTC token:
The original purpose of the Bitcoin network has now somewhat evolved over time. Many users primarily now see it as a store of value that can act as a hedge against the inflation of the modern economy and also even poor performing or stressed economies.
Some draw a comparison to gold in this respect as the historical performance of Bitcoin has seemed to only go up. This has led to many believing they can put their funds into Bitcoin and leave them there to slowly appreciate over time.
Of course, this is a very risky strategy as there is no guarantee that BTC will continue its upwards trend; in fact, some financial commentators suggest Bitcoin even lacks a real utility which greatly increases the chances of its value reducing.
A method of commoditizing energy (Proof-of-Work)
Bitcoin as a source of paid labor:
The third and final utility of the Bitcoin network is equally one of its biggest criticisms. The Proof-of-Work consensus model that underpins the network means that miners need to use extreme amounts of energy to solve complex algorithms to thereby verify transactions and create Bitcoin confirmations.
This means that users are able to use the Bitcoin network to turn energy into BTC value. While it is criticized by many for damaging the environment it still remains one of the core concepts to understand when asking ‘what is Bitcoin?’.
As you will have read in this guide, mining is the engine of this decentralized system. Without understanding what this concept is, it's very difficult to have a robust idea of what Bitcoin is, so here we’re going to do a quick dive into what this concept is and how that makes Bitcoin what it is.
There are two core concepts to understand about the nature and functions of Bitcoin mining;
The process of new Bitcoin entering the overall supply via rewards for work
The process in which transactions become confirmed
Supply and Rewards
When users send transactions to one another they are entered into an unconfirmed transactions pool to be sorted and verified by the network’s miners. This verification process is called mining and essentially consists of computers solving complex mathematical equations.
Once a miner successfully creates a block they are rewarded with Bitcoin and the overall market supply is slightly increased. These rewards are halved every four years as a deflationary measure to ensure the integrity and value of the Bitcoin supply.
It is designed in this way to be a direct antagonist to the current financial system.
Bitcoin confirmations are one of the core pillars providing security to the financial ecosystem and relate to the labor-intensive part of the network.
When a user signifies that they want to make a payment in Bitcoin this is sent to an unconfirmed transaction pool and miners undergo the verification process. Once this verification process is complete the block is constructed - we can describe this as one confirmation. Once this group of transactions is confirmed and grouped into a block miners then begin working on the next block. Blocks are constructed, or chained, on top of one another so every time a new block is added to the chain it becomes harder to manipulate or change an old transaction.
Therefore we can understand Bitcoin as a communal network of miners (nodes) performing work for rewards that then contribute to the security of the system and the overall supply.
To summarize, Bitcoin is three things: a network (the Bitcoin blockchain), a token (BTC), and a source of paid labor (mining). It ultimately can be used for transferring wealth between two individuals without the need for an intermediary, storing value in a decentralized manner, or as a way to commodify energy and use it to earn BTC.
Bitcoin can be thought of as a quite straightforward concept expressed in very complex technology. It represents the more conservative end of the cryptocurrency spectrum and looks to do a simple job securely and well.