Created in 2009 by an enigmatic figure known as Satoshi Nakamoto, Bitcoin has since become the most popular and valuable digital currency in the world.
Whether you’re a complete beginner or an experienced investor, this guide aims to provide you with a comprehensive understanding its role in finance.
What is Bitcoin?
Bitcoin is a digital currency that facilitates the transfer of funds directly between users, eliminating the need for an intermediary such as a bank or government to oversee its transactions.
Bitcoin transactions are recorded on a public ledger called the blockchain, which is accessible to anyone with a computer and internet connection.
You can view any Bitcoin transaction using a blockchain explorer, available on blockchain.com/explorer.
Who is Satoshi Nakamoto?
Satoshi Nakamoto is the pseudonym used by the person or group who created Bitcoin and authored the original Bitcoin white paper in 2008.
The identity of Satoshi Nakamoto has been the subject of much speculation, with various individuals being named as the possible creator(s) of Bitcoin. However, no concrete evidence has been found to confirm his identity, and likely, his true identity may never be known.
Satoshi Nakamoto is also believed to have mined the first bitcoins and is estimated to have around one million bitcoins worth billions of dollars at current market prices.
Why Was Bitcoin Created?
The original Bitcoin white paper, authored by Satoshi Nakamoto, describes the creation of a decentralized electronic cash system as a solution to the double-spending problem.
In traditional electronic payment systems, this problem is solved by a central authority, such as a bank, that keeps a record of all transactions and ensures that the same money is not spent more than once.
The Double-Spending Problem
The double-spending problem is a potential issue in digital currencies where the same digital token can be spent more than once. Since digital assets can be easily copied, a digital currency must have a way to prevent the same token from being spent multiple times.
Bitcoin solves this problem with the creation of blockchain technology.
In this way, Bitcoin intended to provide a new financial system that is independent of centralized institutions and allows for secure, transparent, and efficient transactions.
A More Equitable Financial System
Some experts also believe that Satoshi Nakamoto may have been motivated by a desire to create a more equitable financial system to allow people to control their own money and transact freely without intermediaries or needing to rely on centralized institutions.
As it undermines the control of intermediaries, Bitcoin is a real threat to the current financial system.
How are Bitcoins Created?
The creation of new bitcoins is based on a process called mining, in which powerful computers perform cryptographic calculations to validate and record transactions on the blockchain.
As miners validate and record transactions on the blockchain, a pre-determined amount of Bitcoins is created and given to miners as a reward, a form of payment for their work in the network.
As of 2023, the current mining reward sits at 6.25 Bitcoins per block
In theory, anyone can participate in the process of mining Bitcoin to validate and record transactions on the blockchain. However, in practice, Bitcoin mining has become an activity requiring significant investments in specialized equipment and low-cost electricity to be profitable.
The last Bitcoin to be ever created through the process of mining will be on September 29, 2140. After that, miners will be rewarded with a percentage of transactions as payment for their work.
This guide will not cover the process of mining Bitcoin, but you can find more about it here.
What is the Bitcoin Halving?
The Bitcoin halving is a pre-determined event that occurs approximately every four years where the rate at which new Bitcoins are created and added to the total supply is cut in half.
This reduction in the supply of new Bitcoins is built into the Bitcoin algorithm to control inflation and maintain the scarcity of the currency. The first Bitcoin halving occurred in 2012, the second in 2016, and the third in 2020. The next halving is expected to happen in 2024.
The scarcity of Bitcoin is what gives it the nickname “digital gold”.
The halving event has a direct impact on the mining rewards, which are given to the miners who validate and add transactions to the blockchain, the underlying technology of Bitcoin.
As the reward gets halved, the miners’ revenue also gets cut in half. This could lead unprofitable miners to shut down their operations, which could affect the security and stability of the network, but also lead to an increase in Bitcoin price as the scarcity of new coins increases its demand.
What is the Bitcoin Hash Rate?
The hash rate is a crucial indicator of the security and strength of a blockchain network.
It is calculated by measuring the number of hashes processed in a specific timeframe, usually measured per second. A higher hash rate means the network is more secure against a 51% attack, and a lower hash rate exposes the network due to lowering costs to attack it.
Overall, a higher hash rate is better for the overall security and stability of the blockchain network as its means there are more miners, and more time is needed to take over the network
What is a 51% Attack?
A 51% attack in the context of Bitcoin refers to an attack on the Bitcoin network in which an attacker or a group of attackers control more than 51% of the total mining power (hash rate) of the network.
At this level of control, an attacker could manipulate the network by selectively reversing or preventing certain transactions from being recorded in the blockchain and potentially double-spend coins. This type of attack can cause severe damage to the network’s integrity and undermine the trust in the system.
In order to protect from such attacks, Bitcoin runs in a decentralized network, making it highly unlikely that any single miner or group of miners could ever achieve 51% control.
The current distribution of hash rate can be found at blockchain.com/explorer/charts/pools.
Bitcoin Economics
Bitcoin is a decentralized digital currency based on a limited supply of 21 million coins. This limit, known as the hard cap, is encoded in Bitcoin’s source code and is enforced by the network.
This pre-determined scarcity gives Bitcoin the nickname “digital gold”.
The value of Bitcoin is determined by supply and demand on various online exchanges, where individuals can buy and sell the currency. Due to its limited supply and increasing global demand, many experts believe that the value of Bitcoin will continue to increase over time.
Some experts claim Bitcoin will reach a value of one million dollars per coin by 2030.
The future of Bitcoin value is still uncertain. It can be significantly affected by factors such as government regulations, adoption, and competition from other cryptocurrencies.
The Network Social Consensus
The network social consensus is the tacit understanding between Bitcoin miners that while it is technically possible to increase Bitcoin’s total supply, there is no interest in making it so.
This would be a typical lose-lose situation for everyone invested in the Bitcoin network.
Hypothetically, if more than 51% of network participants were to agree to modify the Bitcoin algorithm and increase its max supply, it would immediately lead to a cascade event where most users would liquidate their positions, fearing further changes in the future.
As a matter of fact, after this change, it would no longer be Bitcoin, but an altcoin.
Many other coins, such as Litecoin and Dogecoin, were clones of Bitcoin with alterations to the original Bitcoin code. Litecoin has a total supply of 42 million tokens, and Dogecoin supply increases by 5 billion coins every year.
How does Bitcoin Work?
Bitcoin is a decentralized digital currency that uses blockchain technology to record and verify transactions made between its users without the need for intermediaries such as banks.
When a user initiates a transaction, the transaction is broadcast to the network and collected into a block, along with other transactions that have occurred in the past 10 minutes. These blocks are then verified by a network of computers, called nodes, through a process called mining.
Mining involves using specialized software and hardware to solve complex mathematical equations, also called cryptographic puzzles. The first miner to solve a puzzle and validate the block is rewarded with newly created bitcoins, as well as transaction fees.
Once a block is mined and added to the blockchain, the transaction is considered confirmed.
Buying & Selling Bitcoin
The most common way to buy and sell Bitcoin is through a cryptocurrency exchange.
These online platforms allow users to buy and sell Bitcoin and other cryptocurrencies using fiat currency or other cryptocurrencies. In order to use an exchange, you need to create an account and complete a verification process. Once your account is verified, you can deposit funds using a bank transfer or credit/debit card and then buy and sell Bitcoin at the current market price.
Another way to buy Bitcoin is through peer-to-peer marketplaces. These platforms connect buyers and sellers directly, allowing for more flexibility in the buying process. Some popular peer-to-peer marketplaces include LocalBitcoins and Paxful.
Bitcoin ATMs are another option for buying Bitcoin, but they are less common and tend to have higher fees than other methods. These ATMs work similarly to traditional ATMs, allowing users to deposit cash and receive Bitcoin in return.
To keep your bitcoins safe, it is recommended to use a hardware wallet, which is a physical device that stores your private keys offline. This makes it much more difficult for hackers to access your bitcoins. It’s also essential to practice safe security habits, such as using strong and unique passwords, enabling two-factor authentication, and avoiding phishing scams.
Additionally, keeping your bitcoins in a small percentage of your overall investment portfolio and diversifying your investments is always a good practice.
The Bitcoin Market
The price of Bitcoin is determined by supply and demand on various cryptocurrency exchanges. When more people want to buy it, the price goes up, and when more people want to sell it, the price goes down.
The price of Bitcoin can also be affected by various external factors, such as government regulations, security breaches, and overall market sentiment.
One way to track and analyze the Bitcoin market is through market data and tools, such as the fear-and-greed index. The fear-and-greed index is a tool that uses market data and sentiment analysis to measure the emotions and sentiments of market participants. The index ranges from 0 to 100, with 0 indicating “extreme fear” and 100 “extreme greed.” A high fear-and-greed index can indicate a market top, while a low one can point to a market bottom.
Another tool that can be used to track the market is CoinMarketCap, which provides real-time data on the price, market capitalization, trading volume, and other key metrics of the top cryptocurrency markets.
Websites like CoinMarketCap or CoinGecko can be used to track the historical price of Bitcoin, as well as volume, market capitalization and other metrics.
Technical analysts use charts and various indicators to identify patterns and trends indicating future price movements. Popular indicators include moving averages, relative strength index (RSI), and the Fibonacci retracement levels.
It’s also important to keep an eye on news and developments in the crypto world, such as new technological developments, regulations, and public adoption.
Bitcoin Regulations
The regulations around Bitcoin vary by country. In some countries, Bitcoin is completely banned, while in others it is legal but heavily regulated.
In the United States, the regulatory framework for Bitcoin is still evolving and the most significant regulatory body for Bitcoin in the US is the Securities and Exchange Commission (SEC), which has classified Bitcoin as a commodity.
The Financial Crimes Enforcement Network (FinCEN) has also issued guidance stating that cryptocurrency exchanges and other businesses that handle Bitcoin transactions are considered money services businesses and are subject to the same regulations as traditional money services businesses.
Regarding taxes, the IRS (Internal Revenue Service) in the US, has issued guidance stating that Bitcoin should be treated as property for tax purposes, which means that capital gains taxes apply to any profits on Bitcoin.
In the United Kingdom, Bitcoin is not considered legal tender, but it is not illegal either. The Financial Conduct Authority (FCA) regulates cryptocurrencies, including Bitcoin. The FCA requires businesses involved in crypto assets to comply with AML regulations and register with them. For tax purposes, Bitcoin is treated as a private money and profits are subject to capital gain tax.
The regulatory landscape for Bitcoin is more unified under the European Union (EU), but it still varies by country. The EU has implemented the Fifth Anti-Money Laundering Directive (AMLD5), which requires cryptocurrency exchanges and custodial wallet providers to register with national authorities and comply with strict know-your-customer (KYC) and anti-money laundering (AML) regulations.
There is a potential for future developments in regulation for Bitcoin as governments and regulatory bodies continue to grapple with how to handle the emergence of decentralized digital currencies. Some experts predict that governments will work to find a balance between protecting consumers and encouraging innovation. In contrast, others believe that regulations will become more strict to control the use of Bitcoin and other cryptocurrencies.
The regulatory environment for Bitcoin and other cryptocurrencies is generally complex and constantly changing. Individuals and businesses must stay informed about their respective jurisdictions’ laws and regulations.
Bitcoin in the Real World
Bitcoin can be used in the real world for various purposes, including online shopping, paying bills, and buying gift cards. There are also Bitcoin debit cards that allow user to spend it at any establishment that accepts regular cards.
In the financial industry, Bitcoin and other cryptocurrencies have the potential to disrupt traditional financial systems by enabling fast, inexpensive and borderless transactions without the need for intermediaries.
Bitcoin can be used as a store of value, and as much as its physical counterpart, it’s increasingly being used by investors as a hedge against inflation.
Bitcoin can also be used in remittances, benefiting people in countries with unstable currencies or limited access to traditional banking services.
Overall, Bitcoin and other cryptocurrencies have the potential to permanently change the way we conduct transactions and interact with money.
It’s important to note that the technology is still in its early stages, and its potential use cases may continue to evolve as the technology matures.
Conclusion
Bitcoin is a decentralized digital currency that uses blockchain technology to record and verify transactions. It was created as a solution to the problem of double-spending and as a means of creating a more equitable financial system.
Bitcoin transactions are fast, inexpensive and borderless, and the total supply of bitcoins is limited to 21 million. The price of Bitcoin is determined by supply and demand, and it can be affected by a variety of external factors.
There are different ways to buy and sell Bitcoin, but whatever you do, it is incumbent on the user to learn how to keep Bitcoins safe.
The regulations around Bitcoin vary by country, and they are constantly evolving. Bitcoin can be used in the real world to shop online, and in the financial sector, and it has the potential to change the way we interact with money.
The future of Bitcoin is uncertain but it is interesting to see how it evolves.