What is Bitcoin?

Bitcoin(BTC) is commonly referred to as cryptocurrency, digital currency, or digital money. It’s like an online version of cash. You can use it to purchase products and services, though currently not many stores accept Bitcoin and some countries have banned it entirely.

Bitcoin (BTC) is the first decentralized peer-to-peer electronic cash payment network that allows value to be transferred between parties. Unlike traditional payment networks, Bitcoin eliminates the need for a centralized controlling authority, such as a government or central bank. Instead, transactions and balances are stored on a shared public ledger called the blockchain, which is verified by thousands of computers (known as nodes) that maintain the network worldwide. Transactions are conducted without intermediaries, enabling anyone with Internet access to send money to anyone else anywhere in the world.

To avoid confusion about bitcoin, it needs to be separated into two components: the bitcoin token and the Bitcoin protocol. The bitcoin token (symbolized as ₿) is a piece of code that represents ownership of a digital concept. The Bitcoin protocol (with a capital B), a distributed network that maintains a ledger of bitcoin token balances. Both are referred to as “bitcoin.”

Who Created Bitcoin?

A software programmer with the nickname Satoshi Nakamoto proposed bitcoin in 2008 as an electronic payment system based on mathematical proof. The idea was to create a medium of exchange independent from any central authority that could be transferred electronically in a secure, verifiable, and immutable way.

To this day, no one knows who Satoshi Nakamoto really is.

How Does Bitcoin Differ from Traditional Currency?

Bitcoin can be used to pay for things electronically if both parties are willing. As such, it resembles ordinary dollars, euros, or yen, which are also traded digitally.

However, it differs from fiat digital currencies (dollars, euros, etc.) in several important ways:

1 – Decentralization

The most important characteristic of Bitcoin is that it is decentralized, meaning no single organization controls the Bitcoin network. It is maintained by a group of volunteer developers and run by a network of dedicated computers distributed worldwide. This attracts individuals and groups uncomfortable with the control that banks or government institutions exercise over their money.

Bitcoin solves the double-spending problem in cryptocurrency networks (where digital assets can be easily copied and reused) through a clever combination of cryptography and economic incentives. In cryptocurrencies, this function is performed by banks, giving them control of the traditional system. With bitcoin, the integrity of transactions is maintained by an open, distributed network that is not owned by anyone.

2 - Limited Supply

Fiat currencies (dollars, euros, yen, etc.) have unlimited supply - central banks can issue as much as they want and can attempt to manipulate currency value relative to other currencies. Those holding currency (especially citizens with few alternatives) bear this cost.

With bitcoin, the opposite is true - the supply is strictly controlled by the underlying algorithm. A small amount of new bitcoins appear each hour and will continue to do so at a decreasing rate until reaching a maximum of 21 million. This makes bitcoin more attractive as an asset - in theory, if demand increases and supply remains fixed, the value will increase.

3 - Pseudonymity

While senders of traditional electronic payments are usually identified (for verification and anti-money laundering compliance), bitcoin users theoretically operate anonymously. Since there is no central verifier, users don’t need to identify themselves when sending bitcoin to others. When a transaction request is sent, the protocol checks all previous transactions to verify the sender has the necessary bitcoins and the authority to send them. The system doesn’t need to know the person’s identity.

In practice, each user is identified by their wallet address. Transactions can, with some effort, be traced this way. Furthermore, law enforcement has developed methods to identify users if necessary.

Moreover, most exchanges are legally required to perform identity checks on customers before they are allowed to buy or sell bitcoin, creating another way bitcoin transactions can be tracked. Since the network is transparent, all aspects of a specific transaction are visible. This makes bitcoin not an ideal currency for criminals, terrorists, or money launderers.

4 - Immutability

Bitcoin transactions cannot be reversed, unlike typical electronic money transfers.

This is because there is no central adjudicator who can say “okay, refund the money.” Once a transaction is recorded on the network and more than an hour has passed, it cannot be modified.

While this can mean losing bitcoin permanently, it also means any transaction on the bitcoin network cannot be interfered with.

5 - Divisibility

The smallest unit of bitcoin is called a satoshi. It is one hundred millionth of a bitcoin (0.00000001) - eight decimal places. This can allow for microtransactions that traditional cryptocurrencies could hardly enable.