The advancement of cryptocurrencies is often considered one of the most disruptive and interesting phenomena in recent memory. Cryptocurrencies can be defined as digital or virtual currencies secured by public-key cryptography. This entire phenomenon kickstarted in 2008 with the advent of Bitcoin (BTC). Today, let’s understand the history behind Bitcoin and how it works.
Bitcoin was created as a response to the 2008 financial crisis and the disillusionment prevailing with the existing financial system. People were unhappy with how big banks were handling their money. Bitcoin’s creator, Satoshi Nakamoto, wanted to give back people control over their funds and remove any need for intermediaries (banks), enabling individuals to transact with each other directly.
Bitcoin is based on blockchain technology – a digitally distributed, decentralized, public ledger that’s hosted by a network. Data related to transactions (such as buyer info, seller info, related metadata) is stored in blocks connected to each other cryptographically. There are three interesting properties that one must know about anything that runs on the blockchain:
Decentralization: The data inside the blockchain is not owned by a single individual but by the network that hosts it.
Transparency: Every member of the network owns a copy of the blockchain. As such, they can know the contents of each block.
Immutability: Once data enters the blockchain, it is impossible to tamper with it due to cryptography.
Bitcoin also has a total supply of 21,000,000, of which >90% have already been mined out.
The domain name “bitcoin.org” was registered in August 2008. This was shortly after the whitepaper was published by Satoshi Nakamoto, the pseudo-anonymous creator (or creators) of Bitcoin. Bitcoin’s whitepaper gave us the first glimpse at the concept of Bitcoin, a cryptocurrency that can be utilized for peer-to-peer transactions on the internet.
Cryptographers had been toying with the idea of cryptocurrencies much before bitcoin, with several attempts by individuals to create their own cryptocurrency. The most well-documented effort was by Nick Szabo, who devised Bit Gold. While never officially launched, it is often considered the precursor to Bitcoin.
There are two things that one must know to understand how Bitcoin works:
Bitcoin transactions don’t need to go through a financial intermediary. In the world of cryptocurrencies, you are your bank, as long as you have a Bitcoin wallet. Bitcoin wallets are digital wallets that contain your public address and private key. The public address is like your bank account that helps store your BTC. The private key is like your ATM pin and allows you to access your crypto. As the names suggest, you can share your public address with anyone, but you should keep your private key secret.
Here’s how transactions work:
If you want your friend to give you BTC, you send them your public address.
If you wish to send your friend your BTC, use your private key.
This is a gross oversimplification, but it helps simplify the concept.
Mining is a process that helps the Bitcoin network to release new bitcoins into circulation. So, how exactly does it work? There are users in the Bitcoin network with specialized hardware called “miners.” These miners continually solve cryptographically-hard puzzles using real-world computational resources. Upon successfully solving the puzzle, the miner gets to add a block full of pending transactions to the Bitcoin blockchain. This mining process is also known as “proof-of-work” (PoW).
In return for their services, the successful miner gets a “block reward.” During genesis, the block reward was worth 50 BTC. Since then, Bitcoin has gone through periodic “halving events” every four years, or 210,000 blocks. During a halving, the block reward gets slashed by half. This ensures that Bitcoin’s supply doesn’t run out while simultaneously creating a supply crunch within the system. Currently, the block reward is at 6.25 BTC.
Bitcoin has several use cases; here are some of the most popular ones:
Payment: Bitcoin is accepted as a legit form of payment by several retail merchants and countries. It was originally designed to be the internet’s money.
Store-of-Value: The most popular use case of BTC is as a store-of-value. Bitcoin is often called “digital gold” because of its scarcity, fungibility, decentralization, and portability.
Inflation Hedge: Due to its capability to store and grow wealth BTC is treated as a hedge against market fluctuations. This was particularly evident during the pandemic-related financial crisis.
Blueprint: The base Bitcoin blockchain has been “forked” or used as a blueprint to create several other cryptocurrencies like Zcash, Litecoin, etc.
There are several ways in which you can purchase Bitcoin. The easiest way you can get your hands on bitcoin is through a cryptocurrency exchange. If you are based in the Middle East, you can use Rain – a secure trading platform that's fully regulated by the Central Bank of Bahrain (CBB). You can create your account here and start trading.
The success of Bitcoin is pretty evident in the fact that it gave birth to the entire crypto space, which is currently worth $1.8T. Yup, it gave birth to a multi-trillion dollar industry! Over the last couple of years, we have seen BTC reach mainstream acceptance. Companies like MicroStrategy and Tesla have added it to the balance sheet, while countries like El Salvador and the Central African Republic have made Bitcoin legal tender. This is only the beginning, and the future potential of Bitcoin is extremely exciting.
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