What is Bitcoin?
What is Bitcoin, and how does cryptocurrency work? Discover more about how to buy, sell and hold bitcoin with our secure, UK wide bitcoin wallet
Bitcoin is the world’s best known and most popular cryptocurrency. Launched in 2009 as a “purely peer-to-peer version of electronic cash,” as its whitepaper described, Bitcoin is a decentralized alternative to a monetary system that no longer works for the people.
Built on a public blockchain to ensure trust and transparency, Bitcoin enables individuals around the world to transact value without relying on a third party. In fact, Bitcoin’s technological underpinnings make it possible to securely self-custody wealth in completely unprecedented ways.
A verifiably scarce asset, Bitcoin has a fixed and steady supply of 21 million coins, each of which is divisible into 100 million units known as satoshis. By favoring such a hard cap, Bitcoin is the antithesis of fiat currencies whose supply is routinely expanded by central banks around the world. For this reason, Bitcoin is often referred to as “digital gold.”
It was all a dream
Bitcoin was created by a pseudonymous figure known as Satoshi Nakamoto, with various developers and cryptographers soon joining the movement to help realize Nakamoto’s vision. Initially, conversation occurred via a specialist mailing list before transitioning to the bitcointalk.org forum.
In the Bitcoin whitepaper, Satoshi described an “electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
Satoshi’s feelings towards such trusted third parties were revealed in a notation inscribed in the Bitcoin genesis block, the first transaction ever included in the eponymous blockchain. It read: “The Times 03/Jan/2009 Chancellor on Brink of Second Bailout for Banks.”
Bitcoin was designed to be impervious to the influence of governments and central banks, and in particular to irresponsible monetary policy and unchecked fiscal spending.
Highly secure, privacy-preserving, apolitical, and immune to seizure, bitcoin has been described by its proponents as the “hardest currency” in history. 18 million bitcoin have already been introduced into circulation, with the final bitcoin scheduled to be mined in the year 2140.
Built on blockchain
The Bitcoin network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be altered without redoing the chain.
Miners receive bitcoin as a reward for verifying these blocks of transactions and adding them to the ever-extending chain, with a new block produced every 10 minutes. An inbuilt difficulty adjustment mechanism, meanwhile, prevents miners from flooding the market with new bitcoin and therefore skewing the currency’s stable stock-to-flow ratio.
Miners run computers that solve complex mathematical problems and compete for new bitcoin. In the early days, it was possible for individuals to mine using graphics cards (GPUs) but as the network grew, GPUs were supplanted by application-specific integrated circuits (ASICs) and mining pools. These days, dedicated Bitcoin mining companies with vast resources compete to win block rewards.
The amount of computing power expended on the Bitcoin protocol, in the form of nodes distributed around the globe, means the network is incredibly difficult to attack. Since its creation in 2009, there has not been one instance of double-spend, in which a user fraudulently transacted with coins they didn’t own.
With no financial intermediary to speak of, there are no bank accounts in the Bitcoin world. Instead, cryptocurrency wallets enable users to interact with the blockchain and send/receive funds.
Each digital wallet contains a public and private key pair. The public key, which is composed of a long string of letters and numbers, forms the address to which other network users can send bitcoin. The private key authorizes the wallet’s owner to transfer such funds to any other address.
Providing a wallet owner stores their private key in a safe place, they can always access their bitcoin. Indeed, without the private key, theft is virtually impossible.
Although every individual is free to use a noncustodial wallet, custodial alternatives owned by third parties such as cryptocurrency exchanges offer a different experience: users do not need to worry about a private key, which is encrypted by the custodian and kept out of sight. Non-custodial wallets (specifically hardware wallets, which resemble pen drives) are considered the gold standard from a privacy and security perspective, with the “not your keys, not your bitcoin” refrain describing the sentiments of many bitcoin maximalists.
Bitcoin is here to stay
In little over a decade, Bitcoin has become the sixth largest base money in the world excluding gold and silver, and the seventh largest when both base metals are taken into account.
With a market capitalization of over $1 trillion, a thriving user base, and solid infrastructure in the form of digital asset exchanges, wallet providers, and payment gateways (Visa, PayPal), Bitcoin is rapidly gaining mainstream status as a popular store of value. In recent years, public-listed companies such as Tesla and MicroStrategy have added billions of dollars worth of bitcoin to their balance sheets – and the former will even accept BTC as payment for its cars.
Many Bitcoin advocates believe the asset will one day supplant the US dollar as the world’s reserve currency. Whether or not this event comes to pass, Bitcoin is certain to onboard many more individuals disillusioned by centrally-controlled fiat and eager to return to a sound monetary standard.