What Is Bitcoin?

What is Bitcoin

Bitcoin is known as the first digital currency, and it is not only the origin of Blockchain but also opens up investment opportunities for many in the cryptocurrency market. Let’s find out what Bitcoin is and why it is so valuable through the following article by CoinMinutes.

What Is Bitcoin?

Bitcoin is the first decentralized digital currency in the world. It is released as open-source software and is not under the control of any individual.

Introduced in 2009, Bitcoin was invented by an anonymous individual or group of developers known as Satoshi Nakamoto. The emergence of Bitcoin laid the foundation for developing the cryptocurrency market.

Statue of Satoshi Nakamoto
Statue of Satoshi Nakamoto in Budapest, Hungary

The term “cryptocurrency” is not only a means of payment but also a type of digital asset secured and verified by cryptography. This is thanks to blockchain technology, a decentralized ledger without a single controlling organization or entity. This makes Bitcoin a decentralized system, where every transaction is conducted directly between users without the need for intermediaries.

The Bitcoin network operates as a peer-to-peer network, where people can exchange value directly with each other without the need for the intervention of intermediaries. This helps reduce transaction costs and creates an efficient payment system.

With a total limited supply of 21 million bitcoins, no one can alter this figure, including Satoshi Nakamoto – the person or group who laid the foundation for developing the cryptocurrency market. This creates a kind of credibility and trust among users, as they know that no additional bitcoins will be created after reaching this number.

Bitcoin can be divided into smaller units known as satoshis (sts) with the ratio of 1 BTC = 100,000,000 Satoshi, which means one Satoshi is equal to 0.00000001 BTC.

Why Is Bitcoin Valuable?

The greatest value of Bitcoin comes from its decentralized nature. It is one of the types of assets not controlled by any organization, government, or authority, and it is not subject to transaction freezes or elimination due to the decisions or regulations of any particular country.

Limited assets like Bitcoin, Gold, and real estate are considered true assets, while fiat currencies are prone to inflation. Therefore, Bitcoin is considered an investment or a hedge against currency inflation.

Bitcoin digital gold
Bitcoin is considered digital gold

In summary, Bitcoin is valuable for the following main reasons:

  • Scarcity: The supply of Bitcoin is limited to 21 million coins.
  • Decentralized: Bitcoin operates on a decentralized and secure blockchain technology, ensuring transparency and immutability of transactions.
  • Acceptability: People are becoming familiar with cryptocurrencies. Many are adopting cryptocurrencies due to the limitations of their financial systems.

When Was Bitcoin Created?

Bitcoin was created by an individual or group using the pseudonym Satoshi Nakamoto in a whitepaper titled: ‘Bitcoin A Peer-to-Peer Electronic Cash System’, released in October 2008. The whitepaper introduced the idea of a decentralized digital currency that may alleviate the challenges associated with old centralized financial systems.

The Bitcoin network officially operated in January 2009 with the release of its open-source software. The first block of the blockchain, known as the genesis block, was mined by Satoshi Nakamoto. This marked the beginning of Bitcoin’s history.

Bitcoin History

  • 2008: The domain name “Bitcoin.org” was registered by an anonymous individual using privacy protection services. The Bitcoin Whitepaper, titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” released by Satoshi Nakamoto, described a decentralized digital currency system for peer-to-peer transactions using blockchain.
  • 2009: Satoshi Nakamoto mined the first block of Bitcoin, this is called the “Genesis Block”.
  • 2010: The first commercial Bitcoin transaction occurred when Laszlo Hanyecz paid 10,000 Bitcoin for two Papa John’s pizzas in Jacksonville, Florida. In the same year, the first Bitcoin exchange Mt. Gox was founded.
  • 2011: Silk Road, an online black market, operated for two years before being shut down by federal authorities in 2013. Silk Road played a key role in the early adoption of Bitcoin as a medium of exchange in the real world.
  • 2012: The first Bitcoin Halving event has taken place. During the first Bitcoin halving, the block reward was reduced from 50 Bitcoins to 25 Bitcoins.
  • 2013: The first Bitcoin ATM was installed in Vancouver, Canada in October 2013, marking the beginning of a global trend.
  • 2016: Joseph Poon and Thaddeus Dryja released the Lightning Network whitepaper, proposing an off-chain protocol for faster and scalable processing of transactions on the Bitcoin blockchain.
  • 2021: Bitcoin’s market capitalization reached $1 trillion for the first time.
  • 2023: Developer Casey Rodarmor introduced the Ordinals protocol on Bitcoin.

Throughout its history, Bitcoin has faced debates over its scalability, governance, and overall balance between decentralization and regulation. It has also inspired the creation of thousands of other cryptocurrencies and blockchain projects, contributing to the broader development of the blockchain and cryptocurrency ecosystem.

Key Milestones of Bitcoin History
Key Milestones of Bitcoin History

How Does Bitcoin Work?

Instead of using middlemen like traditional systems, Bitcoin lets users trade directly with each other through a peer-to-peer network, cutting out the need for third-party involvement.

At its core is blockchain technology, or “distributed ledger,” a public and transparent database. Each Bitcoin transaction is recorded on a block and linked to previous blocks to form a blockchain. This ensures immutability and transparency, two crucial factors for a payment system based on trust.

The transaction confirmation and addition to the blockchain are carried out by Bitcoin miners. To ensure validity, nodes on the network verify the origin and signature of the transaction. Miners use computational power to solve complex problems and are rewarded with a certain amount of Bitcoin upon success. This process not only ensures the integrity of the system but also prevents fraud and tampering with transaction history.

How Bitcoin Works
The explanation of how Bitcoin works

Characteristics of Bitcoin

Bitcoin (BTC) is a digital currency, so it doesn’t have a physical form. Bitcoin is similar to all fiat money like USD, EUR, etc., but it’s encoded electronically.

The factors that make Bitcoin different are:

BitcoinFiat Money
SupplyA fixed supply of 21 millionIssued by central banks at will
DecentralizationUncontrolledControlled by the government
SecurityHigh, secured by cryptographyLow, can be hacked
PseudonymityDo not need to reveal their real identities or personal informationNeed to reveal their real identities or personal information
TransparencyAll information is recorded on the blockchain ledgerIt is impossible to know exactly how many were released

Limited Supply

With the establishment of a maximum limit of 21 million Bitcoins, the innovation of Satoshi Nakamoto has created a disciplined and sustainable structure.

The limited quantity not only ensures scarcity but also increases the value of each Bitcoin over time. As a resource with a finite supply, Bitcoin becomes a special type of asset, distinct from the common practice of printing more money that we often see in traditional financial systems.

The rarity of Bitcoin not only makes it an attractive investment tool but also enhances trust and stability within the user community. The sense that no one can “print more” Bitcoin, and each coin is unique, creates an undeniable appeal in the financial world that is increasingly focused on sustainability and reducing inflationary pressures.

Decentralization

In the world of traditional finance, fiat currencies like USD or EUR are subject to the control of large institutions such as Central Banks or Governments. However, Bitcoin operates outside the grip of centralized authority.

Instead, for transactions to be executed and verified in the Bitcoin network, they require the consensus of numerous nodes. These nodes are controlled by various individuals/organizations, known as miners, located all around the globe. When over 50% of the nodes in the network agree on a transaction, creating a shared consensus, that transaction is deemed successful.

Additionally, even if part of the system crashes, Bitcoin continues to circulate.

Security

In theory, you could attempt to hack the Bitcoin network to reverse transactions or engage in malicious activities for personal gain. However, in reality, no one has been able to achieve this because Bitcoin boasts a highly secure system.

The security of Bitcoin is ensured by two factors:

  1. Decentralization: To compromise the Bitcoin network, you would need to control 51% of the network’s hash rate at that specific moment. However, this is deemed practically impossible due to the exorbitant cost associated with acquiring such computational power. According to estimates, the cost to attack Bitcoin for one hour exceeds $700,000, not accounting for other potential risks.
  2. SHA-256 Algorithm: This cryptographic hash function algorithm is used to create irreversible hash functions. According to calculations by experts from the University of Sussex, for a quantum computer to break Bitcoin in one hour, it would require 317 million qubits, while the most powerful computer currently available only has 127 qubits.

This is also why, once a transaction is executed, it becomes irreversible, and there’s no way to retrieve the funds. The information is recorded on the network, and no one can alter or modify it.

Pseudonymity

Almost all banks know everything about their customers: credit history, address, phone number, spending habits, and more. Bitcoin, on the other hand, is entirely the opposite, as wallets are not linked to any personal information.

Transparency

One of the most outstanding features of Bitcoin compared to other currencies is its transparency. In the case of the USD circulating in the market, we cannot precisely know the exact amount issued. All figures are only disclosed through the government, and there is also a discrepancy due to the inability to control the integrity of paper money after circulation.

However, for Bitcoin, all information is recorded on the ledger of the blockchain. This means anyone can become a miner, and anyone can read the network’s data. Therefore, when using the Bitcoin blockchain, all information is transparent.

How to Mine Bitcoin?

Mining is the process of verifying transactions and creating a new block on the blockchain. Mining is carried out by applications running on computers or specialized mining machines specifically designed for Bitcoin mining, known as ASIC.

Hash is a complex mathematical puzzle and serves as the centerpiece of mining programs. Mining machines will attempt to solve hashes as quickly as possible. The difficulty of the hash will vary based on the number of miners on the Bitcoin network; the more miners participating, the higher the difficulty of the hash. After a block is mined, a similar process will continue for the next blocks.

How Bitcoin Mining Works
The explanation of how Bitcoin mining works

Steps for Bitcoin mining:

  • Step 1: Build a mining rig. A mining rig is a computer designed specifically for cryptocurrency mining.
  • Step 2: Set up a Bitcoin wallet to store mined BTC.
  • Step 3: Install mining software.
  • Step 4: Join a Mining Pool. A Mining Pool is a group of miners combining their computing power to increase the chances of finding a block and earning rewards.
  • Step 5: Start mining Bitcoin.

How to Buy Bitcoin?

If you’re not interested in the complex process of mining Bitcoin, there is a simpler way to invest in this popular cryptocurrency – by buying and selling on exchanges. You can easily trade Bitcoin on reputable cryptocurrency exchanges like Binance, Coinbase, Kraken, Bybit, Kucoin, and many others available in the market.

To get started with buying Bitcoin, you simply need to create an account on one of the popular cryptocurrency exchanges and deposit funds into it. Once your account is sufficiently funded, you can select the amount of Bitcoin you wish to purchase. The transaction will be processed in the designated fiat currency, such as the US Dollar. This process is secure and swift, enabling you to enter the cryptocurrency market without the need to mine Bitcoin directly.

Where to Store Bitcoin?

There are various wallet applications available for Bitcoin users, which can be categorized into three main types:

  1. Hot Wallets: Users create online wallets and hold private keys. Popular options include Blockchain.com, Guarda, Exodus, and more.
  2. Cold Wallets: Cold wallets are Bitcoin storage devices that keep private keys offline for added security. Ledger and Trezor are popular cold wallet brands.
  3. Exchange Wallets: Exchanges provide non-custodial wallets where users don’t control the private key. Popular exchanges include Binance, Coinbase, Kraken, Bybit, Kucoin, and others.

Risk of Investing in Bitcoin

Due to the high value of Bitcoin, many people seek to invest in this cryptocurrency. However, investing in Bitcoin comes with many potential risks, including:

Volatile risk

The cryptocurrency market, including Bitcoin, is known for its high risks due to significant price fluctuations. The value of Bitcoin is influenced by market sentiment, which can be affected by news, social media, and other factors. This can lead to rapid and unpredictable price movements.

Price History of Bitcoin
Price history of Bitcoin

Security risk

Security is of utmost importance for the vast majority of Bitcoin holders. If an account is not appropriately secured, investors risk losing all of their holdings.

The most popular way to purchase Bitcoin is through well-known trading platforms such as Binance. However, these platforms can be vulnerable to exploitation and hacking. Additionally, many users choose to store their Bitcoin in non-custodial wallets, which require a private key – a combination of numbers and letters – to access. Losing or exposing the key means losing all of the assets in the wallet.

To reduce the risks associated with personal information, users should consider storing Bitcoin for the long term in hardware wallets or reputable exchanges.

Regulation Risk

Governments around the world are still figuring out how to regulate cryptocurrencies. Changes in regulations can impact the value and legality of Bitcoin.

The lack of regulatory oversight also means there’s less protection for investors. Scams and fraudulent activities are more prevalent in unregulated spaces.

Is Bitcoin legal?

The legal status of Bitcoin varies from country to country and is subject to ongoing regulatory developments.

  • Legal in Many Countries: In many countries, Bitcoin is legal and considered a legitimate form of digital currency. These countries recognize Bitcoin as a digital asset that individuals can buy, sell, hold, and use for various purposes, including investments and transactions.
  • Not Legal Tender: However, it’s important to note that in most cases, Bitcoin is not considered legal tender, meaning it’s not officially recognized as a government-issued currency that must be accepted as payment for goods and services.
  • Regulation and Taxation: Countries often regulate Bitcoin and other cryptocurrencies in various ways. This can include measures to prevent money laundering, fraud, and other illegal activities. Additionally, taxation policies for Bitcoin transactions and investments can vary widely.
  • Restricted or Banned: In some countries, Bitcoin and other cryptocurrencies face restrictions or are outright banned. These restrictions can range from limiting trading activities to imposing bans on financial institutions providing services related to cryptocurrencies.
  • Legal Gray Areas: The evolving nature of cryptocurrency and the global regulatory landscape can result in legal gray areas. Some countries are still in the process of developing regulations and policies for cryptocurrencies, leading to uncertainty about their legal status.

Individuals need to research and understand the legal status of Bitcoin in their respective jurisdictions. Regulatory changes can impact how Bitcoin can be bought, sold, and used, and individuals should comply with relevant laws and regulations.

Conclusion

Bitcoin is a highly sought-after asset due to its high volatility, which makes it an attractive investment channel for many. However, inexperienced investors must be cautious as it also poses significant risks. A proper understanding of Bitcoin and the crypto market is the best way to minimize those risks.

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Chi Do
Chi Do
Chi Do is a content writer at CoinMinutes, responsible for creating most of the content on the website, including news related to Bitcoin (BTC), Ethereum (ETH), Blockchain, Decentralized Finance (DeFi), and more. With a keen interest in cryptocurrencies since the 2020s, Chi has acquired extensive experience and knowledge in this field. Chi holds a Bachelor's degree in communication from Academy of Journalism and Communication in Vietnam.

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