If you’re reading this, then Bitcoin has somehow lodged itself into your daily train of thought and you’ve decided to figure out once and for all, What’s Bitcoin?! Within this article we’ll cover Bitcoin’s humble beginnings, lay the groundwork for how it operates under the hood, and, lastly explain how you can acquire and use your Bitcoin!
In the tail-end of one of the most catastrophic financial crises of the 21st century, The Great Recession of 2008-2009 left a global economy in disarray. Unemployment levels were at all-time highs, U.S interest rates fell to 0% as the dollar soared, inducing fear of runaway deflation and global trade imbalance. As a result, the FED resorted to quantitative easing efforts, injecting copious amounts of dollars into the economy. Meanwhile, a pseudonymous figure (or group) by the name of Satoshi Nakamoto, had plans in offering an ingenious -and contentious – solution that will revolutionize the financial ecosystem; Bitcoin.
Electronic Cash is Born
On October 31st, 2008 Satoshi Nakamoto published what is now considered a relic in most crypto communities, the Bitcoin whitepaper. Within this document, Nakamoto outlined an intricate electronic cash payment system that will eliminate the need for intermediaries and further promote secure, censorless peer-to-peer transactions. By January 2009, Nakamoto successfully executed the first Bitcoin transaction between himself and the late cryptographer Hal Finney. Since then, Bitcoin has exploded in popularity, gradually maturing into the universally accepted asset Nakamoto envisioned.
How does Bitcoin Work Under The Hood?
Unlike traditional fiat currencies, Bitcoin isn’t a physical, limitless asset like the dollar. In fact, it’s the opposite. Bitcoins are generated via a process called mining. During this process, computers from all over the world (miners) are simultaneously solving increasingly difficult mathematical equations/puzzles. When a miner solves the equation/puzzle (hash), it compiles any pending transactions within a timestamped log, known as a block, and broadcasts it onto the distributed ledger.
This distributed ledger is comprised of multiple, interconnected blocks that were validated by the rest of the Bitcoin network; hence the term blockchain. This data is distributed and stored in computers known as nodes. Upon validating this new block, each node will update its copy of Bitcoin’s ledger. Once this process is complete, the system generates a fixed amount of Bitcoins and rewards them to the respective miner, known as the block reward. Interestingly enough, the block reward is cut in half every four years, which is often a highly anticipated event known as the halving (or halvening). This checks & balance mechanism is known as Proof-of-Work.
As more and more miners compete against one another to solve this equation/puzzle (Hashcash), the difficulty to mine a block increases significantly. Thus, high difficulty indicates a need for more computing power to mine the same number of blocks. Conversely, if miners begin to leave the network, mining difficulty decreases; making it easier to generate more blocks. This ebb and flow dynamic was intentionally implemented by Satoshi to regulate network inflation. The average block time is around 10 minutes per block.
What Does This Mean?
Allow me to break it down in a few bullet points:
- Decentralized: There isn’t any definitive owner(s) of the network nor can any single entity control it.
- Peer-to-Peer: All transactions are executed amongst participants
- Borderless: Little-to-No barriers of entry. Bitcoin offers seamless transactions without the need for any intermediaries at low fees.
Immutable: Bitcoin’s blockchain is completely tamperproof, meaning that all transactions can never be changed or retracted.
Why is Bitcoin valuable?
In order for an object to be considered money, it must share three chief functions:
It Must Be a Store of Value
An asset that can retain value over long periods of time is considered a store of value. A great example of this is gold. If you were to purchase an ounce of gold today, you could be reasonably certain that the price would not devalue significantly over time. In fact, you’re anticipating that your newly acquired ounce of gold will be worth the same price of when you bought it (if not, more).
Gold is a fantastic example because it’s durable and scarce. If you were to bury your ounce of gold in a time capsule for 15 years, in 15 years time that ounce of gold would have – most likely – appreciated in value while maintaining its original luster. In order to retain value, especially for long periods of time, gold’s supply must remain limited and met with high demand. Thus, in times of economic turmoil (e.g. The Great Recession or the peak of the COVID-19 Pandemic), people tend to turn to gold as a “safe haven” asset to, you guessed it, store their value for the time being.
This begs the question, ‘is it true that Bitcoin is digital gold?’ In some ways, yes. Bitcoin is a hard-capped, scarce asset – of which only 21,000,000 will ever exist. Alongside its scarcity attribute, it requires a significant amount of effort (via Proof-of-Work) to mine and utilize them. Although scarce, gold does not hold a definitive supply, suggesting that more gold could be dug up and added into circulation. This said, Bitcoin’s limited supply, apace with its quadrennial halving procedure, offers a deflationary element that bolsters its utility as a store of value!
It Must Be a Unit of Account:
In order for any transaction to occur, its value must be measured by some sort of exchangeable asset, right? When you’re grocery shopping, the price of a hand of bananas is usually quoted in dollars instead of slices of bread. Why? Because dollars are commonly accepted as an instrument to measure the market value of goods, services, income, and transactions.
Bitcoin, on the other hand, is gradually pervading and attaining this functionality. For instance, some merchants are beginning to accept Bitcoin as a method of payment (or medium of exchange), however, will not price their services or goods using its unit of measurement (BTCs or sats – also known as Satoshis). The satoshi (sat) is the smallest unit of Bitcoin that can be recorded on the blockchain. 1 Satoshi is one-hundred millionth (0.00000001) of a single Bitcoin. At the time of writing, 1 U.S. Dollar is equivalent to 7,096.47 Satoshi.
It Must Be a Medium of Exchange:
Similar to how a unit of account must be a commonly accepted form of measurement, a medium of exchange suggests that the currency/asset that’s being interchanged must be a widely accepted method of payment. For example, whenever you go to the mall (remember those?) or, say, Amazon, you’re confident that upon checkout the cashier (or payment system) will accept your U.S. dollars as a form of payment. Next time you have cash in hand, take time to actually look at the bill, you’ll notice that it says “This note is legal tender for all debts, public and private.” Meaning, that the U.S. government acknowledges the use of U.S. dollars as the standard currency of exchange.
If we were to follow Satoshi Nakamoto’s vision of delivering a decentralized peer-to-peer payment system, by design Bitcoin would be the medium of exchange. In fact, one would argue that Bitcoin’s exponential adoption rate adheres to Gresham’s law, which states that bad money drives out good money. Suggesting that when presented with two currencies, the market will spend the one deemed inferior and accumulate the more valuable one. In the case of Bitcoin, individuals are spending their fiat currencies (paper money) and hoarding their Bitcoin as a store of value. This said as Bitcoin continues to penetrate mainstream markets, supported by an ever-growing network, liquidity increase, and price stability, we can anticipate a future in which Bitcoin is utilized for daily transactions; representing a robust medium of exchange. We previously wrote an article that listed just some of the many things you can buy with bitcoin.
As we continue to dive into Bitcoin’s proverbial rabbit hole, we’ll turn our attention to how Bitcoin wields all the characteristics needed to be considered sound money, the types of Bitcoin wallets you can leverage to store your coins, and lastly, where can you acquire Bitcoins at an affordable price.
- What is Bitcoin (BTC)?
- What is blockchain and what is it used for?
- What is a Bitcoin Mining Pool?
- What is Bitcoin Cloud Mining?
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