Even though Bitcoin was first proposed in 2008, it remains a mystery to many 12 years later. Don’t worry! Here’s everything you need to know about the first cryptocurrency.
Bitcoin is a topic which has been subject to a lot of misinformation and fake news for quite some time now. This has caused a lot of us to be misled or misguided and lost in the overwhelming world of Bitcoin. This is our effort to simplify Bitcoin for you and your friends, especially those who say “I don’t understand anything about this BIT COIN THING”.
What is Bitcoin?
Bitcoin is the leading cryptocurrency (digital currency secured with high-end cryptography) currently in use today. Both parties willing, it can be used as a form of digital payment, just like any of the other currencies (like INR, USD, GBP, etc.) in circulation. However, Bitcoins vary from other fiat currencies in the following ways:
#1 Bitcoin is Decentralised
Each and every fiat currency is regulated and controlled by a central entity. The monetary policies of various governments directly affect the value of the money you hold and can prove to be a risk. Bitcoin, on the other hand, is completely decentralised. No single organisation owns or controls the cryptocurrency, and is entirely maintained by a network of users. Every transaction is verified through a consensus of the users, and not by any single authority/third-party like a bank.
#2 Bitcoin is finite
At any given point in time, the number of bitcoins cannot exceed 21 million. New bitcoins are created through a process called Bitcoin mining, currently at a rate of 6.25 coins per block, with this amount halving roughly every 4 years. Once this reaches the limit of 21 million (sometime in the year 2140) there will be no additional influx of bitcoins. The same cannot be said about any fiat currency. At any time, the controlling entity may choose to print as much money as it wants to, ultimately leading to inflation and reduction in the value of your hard-earned money.
#3 Bitcoin is Pseudonymous
Bitcoin doesn’t offer complete anonymity, but it does offer the ability to be pseudonymous. With every single transaction verified independently by the network of users, the identity of the parties to the transaction is not required. However, transactions can still be tracked (through wallets) if required.
Since transactions involving fiat currencies usually occur via clearing houses (such as banks), anonymous transactions are largely an alien concept in our conventional monetary systems.
#4 Bitcoin allows Microtransactions
While fiat currencies do have some level of divisibility, Bitcoin goes above and beyond, with the smallest possible unit (satoshi) being one hundred millionth of a bitcoin (0.00000001 BTC). This enables even the smallest of the transactions, unlike traditional digital currency.
#5 Bitcoin is Immutable
It is virtually impossible to commit fraudulent transactions using bitcoins. Each and every transaction is verified by the process of mining. This ensures that there are no duplicate transactions. Transactions cannot be reversed either, making any transaction on the Bitcoin network impossible to be tampered with.
Bitcoin: A Brief History
Bitcoin was invented by a person/group of persons under the pseudonym “Satoshi Nakamoto”. It was first proposed in the year 2008, in the now-famous whitepaper titled “Bitcoin: A Peer to Peer Electronic Cash System”. He launched the software around January of 2009 and the first-ever bitcoin block (now called the genesis block) was mined, revolutionizing the way people think about currencies for years to come. Since then, a number of developments have occurred as Bitcoin evolved, with the latest being the halving that happened on May 12, 2020. The markets have been more volatile than most assets you could think of, but Bitcoin has largely been on a one way trajectory – upwards – for most of its life.
On its journey, it gave birth to the larger cryptocurrency sector as a whole – with all sorts of utility tokens coming up to serve different needs. It has even split into multiple variants of itself as members of the Bitcoin community differed in their visions for the way forward. For a more detailed version of events, do check out some of our other posts.
Advantages of Bitcoins
Inflation-proof: We know that Bitcoins are decentralized, finite and immutable, but why are they made this way? Bitcoin, due to its finite nature, is inflation-proof. The number of bitcoins in circulation at any single point of time can be calculated, and the value of bitcoins you own is the value of bitcoins you see. The number of bitcoins cannot be altered or manipulated in any way, making it extremely similar to gold in this regard. This is the reason why Bitcoin is popularly referred to as “digital gold”.
Secure: Bitcoins are tamper-proof and a secure way of transacting money.
No regulatory over-reach: Bitcoins also offer you the complete freedom to choose what you do with your money. No one can stop you from using your money to do what you want to do, whenever you want to do it.
Truly Universal: Since it is completely digital, and without a single governing entity, transactions are not limited by geographical and political hurdles. Transaction charges are ultimately cheaper than it is possible with fiat currency.
Is Bitcoin a Currency?
Of course, with currencies being primarily used as a medium of exchange, it is easy to forget the other characteristic which makes currencies the most important tool in today’s economy; it’s property to act as a store of value. Store of value is the property of any asset to retain its value over the years without much depreciation, allowing it to be stored and used at a later time period.
Keeping the important characteristics of what constitutes a currency in mind (medium of exchange and store of value) in mind, we need to evaluate if Bitcoin satisfies the characteristics to be classified as currency.
Medium Of Exchange: Bitcoin is being used as a medium of exchange by many business owners and individuals alike across the world. Almost instant settlement and the security of Bitcoin preventing charge backs, double spending enables people from all across the world to use Bitcoin as a medium of exchange.
Store Of Value: Bitcoin is not perishable, it does not have an expiry date, and can be used forever. Additionally, since there is a limited number of bitcoins present, it will be a better store of value than currency is, and will be as effective (if not better) than gold as a store of value.
To summarize, Bitcoin is an application – the largest and most popular one – of the blockchain, which users can use to mine, transact and trade. It offers a wide variety of advantages to its users along with an unprecedented level of freedom and control over what they own. It is not bogged down by a central authority, while remaining extremely safe to use, making it one of the most alluring forms of currency.
How to Acquire bitcoins
There are two ways to acquire bitcoins – Mining, Buying.
Mining: Bitcoin mining is the process of verifying transactions and adding blocks in the distributed public ledger of the Bitcoin blockchain, by solving a unique puzzle. These Miners earn newly generated coins in reward for maintaining the system.
Follow this article to learn about Bitcoin Mining and how to earn newly generated bitcoins.
Exchanges: Much like stock exchanges, we also have cryptocurrency exchanges. You can buy or sell crypto on these exchanges.