April 23

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What is Bitcoin (BTC)… Really?

Cryptospace

The world’s first cryptocurrency has been around for over a decade now, and it remains the most valuable and most popular digital asset by a huge margin. It’s seen astronomical price surges and has introduced an entirely new way to think about money. But as revolutionary as this financial technology has already been, there are many people who still have little to no knowledge of what exactly Bitcoin is.

If you, or someone close to you, is one of those lost souls wondering “what is Bitcoin?”, read on and you’ll find out all you need to know: how Bitcoin works, how to buy and sell Bitcoin, and much more besides.

Fiat Currencies and Cryptocurrencies.

Bitcoin is a cryptocurrency. This is a type of currency, similar to the US Dollar, the British Pound Sterling, or the Euro, which are referred to as fiat currencies. Like any currency, it has three basic functions: a medium of exchange (it allows people to trade goods and services), a unit of account (it creates a record of assets and liabilities, registering who owes what to whom), and a store of value (it can be reliably held on to and retrieved at a later date, to transfer purchasing power into the future). 

A Bitcoin is a token that gets passed around as part of an economy, but unlike most fiat currency tokens which are usually physical objects (coins, notes, etc.), it exists exclusively as an entry in a computer system.

What is the Blockchain?

This aforementioned computer system is a ledger or a list of individual transactions, that is distributed across a network. Anyone can access it, and see a public record of all debits and credits in the history of Bitcoin. It’s more commonly referred to as a “blockchain”. There are many different types of blockchain, with a variety of purposes, but the Bitcoin blockchain was developed primarily as a payment system.

Blockchain technology was first proposed back in 1991, but it has only become widespread as an idea in the past decade or so, mostly since the launch of Bitcoin. An entirely new type of database, it offers a way to eliminate human error and the need for third-party verification in all kinds of processes, providing guarantees of security and full transparency.

The blockchain differs from conventional databases because of how it arranges data. Instead of using tables, the system stores its information in blocks, linked together sequentially. This creates a long, unbroken chain of timestamped entries, which is shared across multiple computers, and basically impossible to reverse or to tamper with. Besides Bitcoin and other virtual currencies, potential use cases for blockchain technology include: 

  • Publicly-monitored, automated voting systems for elections
  • Transparent supply chains that allow consumers to trace the history of their goods
  • More secure healthcare and property records.

Obviously, national currencies have been sent electronically and bank accounts have been registered online for almost as long as computers have been around, but these systems are always ultimately backed up by cash (or sometimes other types of asset, such as gold). Cryptocurrencies’ basis on the blockchain means that they differ from the digital fiat system in a number of important ways. 

Trust and Forgery.

The “crypto” in the name of cryptocurrencies refers to the fact that they rely on cryptography to provide security. They use their blockchains’ complex computer coding to prevent forgery, which is one of the fundamental requirements of any functioning money system.

With fiat currencies, forgery can allow people to create fraudulent versions of tokens. A forged $5 bill will devalue the dollar by untethering it from the real, material economic system that is supposed to underpin it. If bills were too easy to forge, a currency would no longer be trusted as a secure currency, and the system would fall apart rapidly. Why would I accept a token as payment for my goods or services, if I’m not sure that it will be accepted by someone else when I need to pay for something? How can we keep track of people’s debits and credits, if a new dollar can just be created out of thin air? 

Trust is what the entire currency relies upon, and it’s encouraged in part by making the bills extremely difficult to forge, through the use of complex printing techniques as well as legal force. There’s only one body that is allowed to create new tokens, and anyone else who tries to do so will face criminal charges. National governments are solely responsible for the circulation of their fiat currency, and the monetary system depends ultimately on their authority.

Trust vs. trustless systems.

Virtual currencies have an even greater forgery problem than fiat money, as there’s not even a real physical coin or note that a false one could be compared to. As the token is essentially imaginary, what would stop someone from using the same one multiple times? Known as the “double-spend” problem, this is an issue that prevented digital money from getting off the ground for a long time.

Bitcoin was the first digital token to successfully implement a solution to the double-spend problem. Its blockchain makes use of a “proof-of-work” system, which means that a set amount of resources (in the form of processor power) has to be committed to the payment network in order to verify that a transaction is valid. This process is known as mining, as whoever commits the most resources is usually rewarded with newly-created Bitcoin, as if they’ve just struck gold during a large mining operation. (For more about Bitcoin mining, check out our guide). This mining reward is an incentive to keep the system operational, and the effort involved means that it’s extremely difficult to falsify a Bitcoin transaction. It’s also usually counter-productive, as you would have more to gain from simply claiming the mining reward.

Instead of relying on trust, the Bitcoin currency system is essentially “trustless”, relying instead on computer code and financial incentives to keep people honest. The blockchain can, in theory, be altered by anyone. But there has to be a consensus across the network on which version to accept, and this consensus is usually found by the proof-of-work system itself. This means that individuals are placing their trust in the system, as it’s determined by its algorithm, instead of any individual or group of individuals. This trustless aspect also means that cryptocurrencies are decentralised. There’s no single authority who decides the validity of a particular transaction.

Decentralization vs. centralization.

This decentralization is, for many, the most crucial aspect of cryptocurrencies. It’s why the most passionate Bitcoin advocates see it as the future of global finance. Bitcoin is a fully transparent payment network, open to all, and free from the influence of private parties. It’s also inherently borderless, independent of any nation and the interests of its government and other officials. This could be a huge benefit for people in countries with more repressive regimes. Even in more stable democratic states, many see Bitcoin’s freedom from government interference as a way to avoid a devaluation of money by their institutions.

“Be Your Own Bank”.

In theory, everyone on the Bitcoin network is fully in charge of their own money, without relying on a third party. Individuals can keep their funds in a “wallet”, which is essentially a digital record of their transactions on the blockchain. A software wallet keeps this record in specialized software, and a hardware wallet allows the data to be stored on some hardware like a USB device. There are also paper wallets available, with printed out QR codes to be scanned.

“Be your own bank” is one of the slogans that many in the community like to share, as it encourages freedom from the finance sector. Not only does Bitcoin allow people to avoid the effects of central bank manipulation of the money supply, it also allows them to keep their funds secure without having to pay bank fees or worry about having access to a branch or a website.

However, the increasing popularity of Bitcoin and the cryptocurrency market over the years has been accompanied by the growth of centralized institutions within the market. Users are increasingly turning to third-parties as a way to limit their own liability for their funds. For example, a huge number of people make use of a small number of crypto exchanges and trading platforms, with Binance and Coinbase being two of the most popular. These businesses act as custodians for customers, allowing them to keep their Bitcoin and other cryptocurrency funds in their wallets for easy access. They also act as intermediaries for trades, and they charge a commission.  

Many exchanges have also been known to profit from the data they keep about customers’ holdings and the trades they have requested, selling them on to companies who are looking to get an advantage in the market.

Bitcoin: the early years.

Bitcoin was launched in January 2009, by an unidentified individual (or group of individuals) going by the name Satoshi Nakamoto (more on him/her/them later…). This followed the publication of a whitepaper, “Bitcoin: A Peer-to-Peer Electronic Cash System”, in October 2008. The idea of a kind of “digital cash” wasn’t new, but Bitcoin was the most fully-realised at that point in time.

Nakamoto’s new electronic payment network was initially used primarily for proof-of-concept transactions, just for an inner circle of cryptographers and other tech-minded people to test how well it would work. However, there was at least one recorded instance of the currency being traded for goods. A hungry member of the Bitcointalk forum, Laszlo Hanyecz, offered 10,000 BTC (the abbreviation commonly used for Bitcoin as a currency) to anyone who would buy him a Papa John’s pizza. Based on current prices, that was $600 million worth of pie.

In the popular imagination, Bitcoin was initially associated with the illegal online marketplace Silk Road. Between its launch in February 2011 and its closure by the FBI in October 2013, over 100,000 people used the “dark web” site to buy anything from hard drugs to firearms, and BTC was the only currency accepted on there. It was appealing to the administrators because of its fundamental anonymity – it’s extremely difficult to track a Bitcoin transaction to any of the parties involved in it.

Increasing popularity of Bitcoin.

In the years following the Silk Road closure, Bitcoin’s popularity continued to grow. A number of other cryptocurrencies also started to spring up, following in its wake. Debates over the legal status of these digital currencies were starting to become increasingly common, as government authorities were turning their attention to regulation, with Bitcoin still strongly associated with criminal enterprises.

However, there was more acceptance in other areas. The world’s first Bitcoin ATMs were launched in 2013, in Vancouver, Canada. Meanwhile, the leading online crypto broker Coinbase was continuing to make Bitcoin trading accessible to a mainstream market, and it reported BTC sales of over $1 million for the first time in February of the same year. Cyprus’ University of Nicosia even started accepting Bitcoin as payment for tuition fees.

Just as Bitcoin was really starting to take off, a huge setback came in the form of the Mt. Gox hack in February 2014. This was one of the biggest online Bitcoin exchanges at the time, and it was forced to file for bankruptcy after 744,000 BTC was stolen from the platform following a security breach. This kind of exchange hack has happened on and off since then, but rarely on such a large scale.

BTC: peaks and troughs.

The Bitcoin price has been steadily growing throughout most of its history. From an estimated starting price of just $0.00008, it first hit the dollar mark around two years after its launch, in 2011. Wild volatility followed this, with the occasional spike being followed by a crash. In 2017 and 2018, this cycle was shown at its most extreme.

After starting the year under $1000, the BTC price broke through this level for the first time in February. It then continued to surge at an accelerating rate, drawing in a huge number of investors from outside its usual market who were seeking to get a piece of the action. At its peak, in December 2017, 1 BTC was trading for around $19,000. Then it all went wrong as the new year rolled in. 

Between January 6 and February 6, the price crashed back down by 65%. This was partly exacerbated by a hack of over-the-counter Bitcoin trading platform Coincheck, which lost over $500 million worth of Bitcoin to thieves. There were also rumors that South Korea, a popular spot for crypto trading, was about to ban the practice, leading to a fall of over 10% in one day. The price continued to fall throughout the whole year, eventually hitting a low of just over $3,000 by January of 2019. In terms of total price drop – over 80%-, this was a bigger price crash than when the dotcom bubble burst in the late 90s.

After a relatively stable 2019, and a slight recovery throughout most of 2020, Bitcoin saw another huge boom from December through to March 2021. It increased in value by over 400% and peaked at $63,000. At the time of writing, the BTC price has only pulled back a little from these dizzy heights, and even the surge of 2017 now seems like a footnote. Of course, it’s impossible to tell what the future will hold with such a speculative asset, but more and more people are starting to see its value, particularly as more economic recessions are predicted.

Who is Satoshi Nakamoto?

As Bitcoin has increased in popularity and a whole community of fans, advocates, and evangelists has grown around it, the identity of the top crypto’s founder is a mystery that has attracted a huge amount of attention. 

Satoshi Nakamoto was the name given as the author of the original Bitcoin whitepaper. The genesis block for the Bitcoin blockchain, mined in 2009, was also signed with that name. A user by that name went on to found the Bitcointalk forum and posted regularly on there. No personal information was ever shared in Satoshi’s messages, though opinions and ideas about the function of Bitcoin and its relation to the banking sector were sometimes given. 

Sometime in mid-2010, Satoshi handed over control of various domains and other important parts of the Bitcoin network to other prominent members of the community, before disappearing without a trace. 

Clues to Satoshi’s true identity.

Though there’s very little real information to work within the search for Satoshi Nakamoto’s true identity, numerous theories have been developed based on what clues the community does have available. 

Although Satoshi’s P2P Foundation profile claims that they’re a 37-year-old Japanese man, their posts seem to be written in native-level English. There is also some evidence to suggest that they might be British. Posts attributed to Satoshi made use of expressions like “bloody hard”, and “maths”, as well as British spellings of words like “colour” and “grey”. The Bitcoin genesis block also included a quote, for timestamping reasons, referring to a headline from the London Times: “The Times 03/Jan/2009 Chancellor on brink of second bailout for bank”. This also suggests an interest in British politics.

Potential suspects.

Satoshi sleuths have regularly identified any number of people as the real Satoshi Nakamoto. Some of the individuals claimed to be the mysterious Bitcoin founder include: 

  • Hal Finney. An acclaimed software developer who worked on cryptography projects around the time that Satoshi was developing Bitcoin. Finney also received the first Bitcoin transaction from Satoshi and was the first-named person besides Satoshi to use the software and fix elements of the code.

  • Nick Szabo. Another developer and decentralized currency enthusiast, Szabo had published his own paper about a proposed precursor to Bitcoin. His linguistic style bore many similarities to that seen in the Bitcoin whitepaper, but he’s always denied the link, and the “stylometric analysis” that was used hasn’t convinced many people.

  • Craig Wright. The most controversial figure associated with Satoshi Nakamoto and the Bitcoin project. Wright is Australian, and this Commonwealth background provides the strongest link to the British connection previously mentioned. He’s a software engineer who was involved with finance in various capacities for a couple of decades before the launch of Bitcoin. He’s also one of the few potential Satoshi candidates to go along with the claims, and articles in popular publications including Wired and The London Review of Books covered his claims to be the Bitcoin founder. 

However, many people believe Wright can’t be trusted, and suggest that he might be making the claims to get publicity for himself. When asked, he was unable to provide the cryptographic proof that could have confirmed his role in creating Bitcoin, and his basic programming abilities have been called into question. Wright has threatened to sue any number of people who have denied his claims to being Satoshi. He’s also been a source of controversy due to his involvement with an offshoot of the original Bitcoin blockchain, known as Bitcoin Cash.

  • Multiple people. Although the hunt for the real Satoshi is a fun pursuit for Bitcoin devotees, the idea that the first crypto was created by just one individual is rejected by many. Some people who emailed “Satoshi” have claimed that the Bitcoin code is too well-designed to be the product of just one person. Along with the fact that a single creator has been so hard to find, a plausible theory is that Satoshi Nakamoto refers to a whole group of people, involved to a greater or lesser degree with the development of the software.

Bitcoin: the future.

Bitcoin has come a long way since its launch by Satoshi Nakamoto back in 2009, but many people believe that it’s only just getting started. 

In recent years, the main function of BTC and most other cryptos has been an investment vehicle. People with varying degrees of passion for the cryptocurrency project have bought into them as a way to make money, taking advantage of the regularly huge price spikes in this new asset class. Although the Bitcoin price growth has been, in the long-term, mostly a relatively stable curve upwards, the volatility has also led many investors to see major losses. People inside and outside the community are dismissing the price changes as being evidence that the Bitcoin market is just an economic bubble. Some even claim that it has no intrinsic value, functioning more like an online casino.

Widespread adoption.

This kind of attitude is unlikely to go away anytime soon, but Bitcoin advocates see real potential in the crypto. As more and more people hold BTC, more merchants and vendors will see it as a valid payment option, for goods and services. There are currently around 14,000 Bitcoin ATMs worldwide, allowing users to quickly exchange cryptos for fiat currency in the same way that you might use your credit or debit card. Bitcoin is also accepted as payment, either directly or indirectly, by a number of leading businesses, including Whole Foods, Starbucks, and Microsoft. 

Currently, slow transaction speeds, high fees, and unfamiliar technology are holding back more widespread adoption, but this situation is likely to improve rapidly, particularly if you consider how much progress has already been made in just over a decade.

A new store of value.

Besides being a new unit of exchange for carrying out digital transactions, Bitcoin is also seen as perhaps the most reliable store of value for the global economy. Many describe it as “digital gold”, as it has a built-in scarcity that secures its value in the long-term. Unlike fiat currencies, which can be printed as and when central authorities see fit, new Bitcoin requires a huge amount of resources to produce, much as mining gold or silver takes a huge amount of resources. Bitcoin also has a universally-agreed hard cap at 22 million, at which point no more BTC will be minted.

Gold is currently seen as a “safe haven” asset, as it’s essentially immune from the ups and downs that can affect national currencies and the stock market. If some of the investments made in gold were to be transferred to Bitcoin instead, this could lead to huge potential growth for BTC. This would only strengthen its reputation and potential as a store of value, leading to even more investment, until it’s eventually the new global standard to store value. 

The total global gold market is worth over $7 trillion, with physical cash worth over $30 trillion and stocks worth over $60 trillion, and Bitcoin stands to take a significant fraction of these markets. Over the past few years, traditional financial institutions such as Fidelity and the Intercontinental Exchange have become actively involved in the crypto market, highlighting its increasing acceptance and potential as a new monetary technology.

Bitcoin and other cryptos have the potential to change the way finance works forever, and there’s never been a better time to get involved. Whether you’re an expert or a complete beginner, you can visit a Cryptospace location to get all the information you need, as well as buying/selling Bitcoin, and a wide range of other services.


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