Bitcoin was the first. But what is it?

By now, most people would read or heard some kind of Bitcoin News. Bitcoin is the first of an ever-growing number of digital currencies operating on decentralised peer-to-peer networks, with no central authority or government backing. However even today in late 2018, people are still asking, “What is Bitcoin?”.

Bitcoin has always been the leader of the pack – the first digital coin to bring cryptocurrencies to the mainstream public. Put simply, it enables payments to be sent between people without passing through a bank or payment gateway. For newcomers, the concept may be hard to grasp at first, but Bitcoin is a created and held electronically. Like any cryptocurrency, Bitcoins aren’t physical and they don’t exist in the true sense of the word. Much like a photo on your iPhone, they exist only in the digital world and produced by computers in a concept called mining.

Beginning in 2009, Bitcoin has seen unprecedented growth in the last few years, gaining huge media and public attention based on its lofty price climb with people all over the world wanting to own Bitcoin (or a piece of one) for themselves.

You can learn more in our Bitcoin Price blog.

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What is Blockchain?

Arguably the most exciting aspect to come from the cryptocurrency revolution is the Blockchain. The Bitcoin blockchain is a public ledger of all the transactions ever made on the Bitcoin network and a record of who owns the coins.

When a transaction is made, it is added to the next ‘block’ in the blockchain and confirmed using a series of complex computations by computers of other users on the network. This is a process known as mining.

The blockchain is revolutionary because it solves a problem that until now has stopped digital currencies from working — the issue of double spending. Once a transaction has been made and a miner has added the transaction to the blockchain, it is immutable – it cannot be reversed, and the network reaches a consensus that the coin (or part thereof) now belongs to a new owner.

The technology behind Bitcoin is fascinating and is being studied to this day. You can read and learn more in our Bitcoin Technology blog.

Bitcoin Mining

Bitcoins are mined by people (or groups, or companies) by doing a series of complex mathematics. When someone sends a bitcoin to someone else, the network broadcasts that transaction to the latest ‘block’ on the blockchain. Computers then add these transactions to the ledger and the miners confirm them, building up to a number of ‘confirmations’ that then becomes an immutable record.

Bitcoin has a block reward scheme to pay miners for helping keep the network active and correct. The more computational power a miner has, the greater the chance they are the one to mine the latest block in the blockchain and receive the reward. This is the incentivised scheme that drives the entire Bitcoin network.

Mining uses specialised software and increasingly powerful hardware, and has of late become quite energy-intensive (see Disadvantages). Thousands of miners compete simultaneously – much like a 100-metre dash – but only one miner will win the race and end up receiving the Bitcoin reward for their effort.

Satoshi Nakamoto & Bitcoin

Bitcoin and the blockchain technology was created by someone under the pseudonym of Satoshi Nakamoto and released as a working beta in 2009. The whitepaper listed its goal as being “a new electronic cash system” that was decentralised with no server or central authority. After developing the technology in 2011, Nakamoto turned over the source code and domains to others in the bitcoin community and subsequently vanished. This has added an air of mystery surrounding Bitcoin, and in some ways, given it even more notoriety. Put simply, no one knows who created Bitcoin. Satoshi’s true identity remains unknown and many have asked the question why someone would create such amazing, revolutionary technology only to hand it over for free and claim no recognition. Over the years, numerous people have claimed to be Satoshi but no definitive proof of Satoshi’s identity currently exists.

Due to this mystery, the Bitcoin Foundation was created in 2012 with goal of protecting and promoting the use of bitcoin for the benefit of users worldwide. Former lead bitcoin developer Gavin Andresen is employed by the foundation as “chief scientist”.

What is ‘Bitcoin’, and what is ‘bitcoin’?

Its important to note and seperate the two meanings of Bitcoin and bitcoin. Bitcoin with an uppercase ‘B’ is actually the blockchain component of Bitcoin. Bitcoin with a lowercase ‘b’, is actually the currency itself.

But in summary, the question of ‘What is Bitcoin’ really comes down to the follow points. It is;

  • A decentralised currency – no one person or group controls Bitcoin transactions.
  • Uses a Blockchain ledger.
  • Divisible – Bitcoin can be divided into smaller units which has future potential for micro-transactions
  • Pseudonymity – users of Bitcoin are semi-anonymous with only a random address to identify them.
  • Low transaction costs (see also, Disadvantages).
  • Around 3-6 transactions per second (TPS).
  • Immutable (irreversible) transactions
  • Bitcoin (BTC ticker) currently has a circulating supply of 16 million (total 21 million).

Some key advantages of Bitcoin

  • First to market ‘brand’ recognition
  • Currently, the most legitimate and widely-accepted cryptocurrency
  • The only cryptocurrency to be in operation for over 8 years
  • Has the highest hash rate of any cryptocurrency, essentially meaning it has the highest network security and a majority hashrate attack is unlikely
  • Open source and most refined code of any cryptocurrency
  • Has a futures trading fund
  • Truly decentralised; no official Bitcoin company, other than developers and third parties working on upgrading its source code
  • Maintains the dominate market cap of cryptocurrency market
  • Mobile-friendly payments
  • No risk of charge-backs or reversed transactions
  • Transparency – transactions are available for everyone to see on the blockchain.

Some disadvantages

  • The price of Bitcoin is extremely volatile when compared to fiat currency or more traditional asset classes
  • Adoption in mainstream retail and service providers is still slow
  • Vulnerable to slow transaction times – when too many transactions (volume) are broadcast at once, a queue is formed and confirmation times can be lengthy
  • Vulnerable to high fees – when transactions are queued up in the mempool (Bitcoin’s transaction queue) fees surge on the network
  • Like any cryptocurrency, Bitcoins are easily lost – reportedly there are already at least 3 million coins lost through users losing their private keys
  • High energy consumption to run the Bitcoin network – each individual bitcoin transaction uses approximately 700KWh of electricity; enough to 23 power homes for a single day[1].

Where is Bitcoin going?

Bitcoin is the granddaddy of cryptocurrencies and without question is here to stay. It’s recent (and incredible) price surges are due to the fact that people are using it and witnessing the amazing potential it continues to show. Without a doubt, Bitcoin fans believe wholeheartedly it is the future of digital currency, and the mainstream public are quickly turning their attention to the coin and wanting to get in on the ride. We’ve all seen the headlines in the press ‘If you had’ve bought Bitcoin in 2010 you’d be a gazillionaire by now…’. Stories like this only fuel the interest and appeal of Bitcoin, not to mention a relatively small fixed supply places a certain fear-of-missing-out pressure on those who are yet to own some of the digital asset.

However, Bitcoin’s history has had a few rough patches. Whether it can overcome the hurdles it currently faces (occasional high fees and slow transactions) is unknown. Bitcoin’s hardcore fans claim that its issues are only temporary and Bitcoin will continue to dominate the market due to its first-mover privilege, among others. While Bitcoin was created as a digital currency, lately these high fees and slow transactions has meant it’s more leaned towards becoming a digital store of value – a Gold 2.0, if you will.

With better technology and newer cryptocurrencies evolving daily, Bitcoin’s success isn’t a guarantee – it has work ahead of it to stay at the top. It is, in effect, a first-generation (1.0) cryptocurrency and in this space, technology moves at such a rapid pace that things can quickly change and the mighty can become yesterday’s news.

But with technology like the Lightning network on the horizon (a second layer network to help Bitcoin scale), the future still looks incredibly bright and if it makes the right moves, Bitcoin can easily remain the dominant cryptocurrency in the space for years to come. Given the low total supply of Bitcoin, despite its volatility, its value is attractive against the more traditional assets.