It’s all over the news. You’ve heard it’s been going up in price, that it is volatile. Backers say it is the future, that it may go up to $1,000,000, and it will become the global reserve currency. Detractors say it’s not hard money, it’s magic internet money, that it could go down to $0. Some even go so far as to say it’s a giant Ponzi scheme.
You are either in the know, or friends, family, and co-workers are talking to you about it. And it’s not just that one annoying guy like it was in 2017. It seems like it’s everyone.
So… What the heck is Bitcoin?
To fully explain what Bitcoin is, I am going to go more basic and dive into what money is. What is money? Money is an idea. To be considered valid, there must be confidence that if one accepts money, he will then be able to turn around and use that money somewhere else and that it will then be accepted.
Money is any object that is generally accepted as payment for goods and services and repayment of debts. The main functions of money are distinguished as:
1) a medium of exchange
2) a unit of account
3) a store of value
Once upon a time, money such as US Dollars were backed by an actual commodity, such as gold. One could exchange these slips of paper referred to as “money” for a certain amount of gold, silver, or another metal. This could even be tied to any other commodity, such as oil.
This is not the case anymore. World currencies are issued by central banks and are not tied to any asset such as gold. One must have confidence in the country’s government of the central bank and the ability of the currency to continue to have value.
Like US Dollars, the Euro or any other central bank is considered a form of money. Why? Because it follows the basic functions of money:
A) a medium of exchange
B) a unit of account
C) a store of value
OK, fine, you say, but I haven’t told you what Bitcoin is…what the heck is it???
Okay, well, you asked for it — get ready for some terminology. Don’t worry I will break it down further:
Bitcoin is decentralized. It is a digital currency and a payment network. It is trustless, supported by a vast network of computers over the internet that utilizes complex programs based on cryptography to enable its use and maintain its security. This is also why it is referred to as a crypto-currency. Bitcoin transactions are confirmed by this same network of computers, and when a certain amount of these transactions are completed, they are stored in a database of a permanent format, called a block. These blocks are stored chronologically, one after the other in a chain. Thus, they are collectively known as blockchain.
Bitcoin was the first application of blockchain technology and the first crypto-currency. There were prior attempts at digital cash before Bitcoin, but none were broadly adopted.
Breaking these concepts down further:
- Bitcoin is decentralized. Any two people, anywhere in the world, can send Bitcoin to each other without the involvement of a bank, government, or other institution. Instead of being controlled by a central bank or government, it is maintained by a vast network of computers over the internet. Why this is important? If a file is stored on a single computer, and your computer is hacked or crashes, your file is insecure or lost. If you store the data on a decentralized network of millions of computers in hundreds of countries, it is protected because it is not feasible to hack all those computers at the same time. And if one computer goes down, you are backed up by all the other computers. No one computer controls the others, but they share or distribute their control.
- Bitcoin is a digital currency. There are no physical “Bitcoin” or “Bitcoins”. Any possession or balance of bitcoin is recorded digitally. In our current age, with computers, email, the Internet, smartphones, and mobile applications, digital forms of payment are becoming more popular and cash and traditional methods are becoming less popular.
- Bitcoin is also a payment network, in addition to being a currency. VISA, Zelle, and bank wires are payment networks. The US Dollar is a currency. Bitcoin is both.
- Bitcoin is a trustless system, meaning it does not require trusting a 3rd party like a bank to verify it or a government to make laws enforcing its use. A check can bounce, a credit card can be charged back, cash can be counterfeit, or even not accepted depending on the merchant or the region you travel to. However, Bitcoin operates under specific rules, using cryptography programs executed by a network of computers over the internet. When Bitcoin is sent, it is recorded on the blockchain. It either shows up in your wallet, or it doesn’t, no counterfeits. Once it is confirmed, there are no chargebacks like a credit card. You don’t need to wait for the check to clear, Bitcoin won’t bounce once it arrives.
- All Bitcoin transactions are verified by this decentralized computer network which uses cryptography (noun: the art of writing or solving codes.) to confirm and then permanently record transactions. These transactions are stored in blocks. When Bitcoin first started, there was no specified size limit. Satoshi Nakamoto added a 1-megabyte block size limit back when he was still the lead developer of the project. Then in 2017, Bitcoin’s block size limit was changed in terms of how it is counted. Some data basically weighs more than other data. In practice, Bitcoin blocks now have a theoretical maximum size of 4 megabytes and a more realistic maximum size of 2 megabytes. The exact size depends on the types of transactions included. This permanent record, or blockchain, is composed of one block following the next. It’s like a gigantic, fancy database. It is decentralized (located in many places on the internet), instead of being centralized (stored in one place).
- Bitcoin was created by Satoshi Nakamoto on 3 January 2009. We don’t know if Satoshi was a person or a group of people.
- In 2010, the first known commercial transaction using bitcoin occurred when programmer Laszlo Hanyecz bought two Papa John’s pizzas for 10,000 Bitcoin.
- In 2011, other cryptocurrencies started to appear, modified versions of Bitcoin.
- By June 2011, a number of organizations started accepting Bitcoin as a method of payment.
- By October 2012, BitPay reported having over 1,000 merchants accepting bitcoin under its payment processing service.
- By February 2013, the Bitcoin-based payment processor Coinbase reported selling $1 million USD worth of Bitcoin in a single month at over $22 per bitcoin.
- In December 2013, Bitcoin’s price went over USD 1,000 for the first time.
- In November 2017, Bitcoin’s price went over USD 10,000 for the first time.
- In February 2021, Bitcoin’s price went over USD 50,000 for the first time.
- There will only be 21 million Bitcoin ever created. New Bitcoin is created at a specific rate, which gets 2x slower every four years.
- It isn’t necessary to buy an entire Bitcoin. A Bitcoin is divisible into up to 100 million parts. Each one is called a satoshi, or sometimes “sat” for short.
- Bitcoin’s past transactions are recorded on a publicly available permanent record, in other words, a really epic database which is called a Blockchain.
I hope you have a better understanding of Bitcoin as a result of this article. And I sincerely hope you can better understand and take advantage of this growing part of the financial world to lead a happier life!
Coming up next week:
What is Ethereum?
A Guide to the #2 Crypto in under 10 minutes
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This article is not investment advice, nor does it take your personal financial situation into account. Never invest more than you are willing to lose, and don’t buy Bitcoin or other investments on credit. I write about my observations and personal opinions with the purpose to share what I have learned with others.
Disclosure: I am invested in Bitcoin and other cryptocurrencies.