TL:DR
Bitcoin, commonly known as BTC, is a digital currency that is designed to act as a medium of exchange. It is designed to do this outside the traditional financial system without intermediaries or any central authority. In order to do this Bitcoin requires miners who are rewarded with BTC for approving transactions. Bitcoin could either be purchased on various exchanges or obtained by mining.
Bitcoin was launched in 2009 by an anonymous creator or creators using the name of Satoshi Nakamoto. Since then it has remained the most popular cryptocurrency as well as having the highest market cap. Other crypto projects have emerged over the years trying to capture some of the magic that Bitcoin made.
In the following we will go over the technical aspect of Bitcoin, as well the as the history and its future plans.
Introduction
Bitcoin is a form of digital currency that exists on a blockchain. This is different from fiat currencies in that there is no central bank or authority controlling it. Bitcoin, instead, is decentralized relying on thousands of distributed ledgers that exist on computers around the world. You can participate in this ecosystem by downloading an open-source software.
Bitcoin was also the first mover, as it was the first cryptocurrency in existence. A person by the psuedonym, Satoshi Nakamoto, created this cryptocurrency which was announced in 2008 but launched in 2009. It serves as a medium of exchange between users, allowing them to send and receive money from anyone and anywhere at any time. Further, it has been an attractive option for many individuals since it can't be censored, nor can a user double-spent their digital BTC.
Further, it was the same year the Bitcoin’s famous whitepaper was published. In the whitepaper it states, “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” A peer-to-peer version of electronic cash would become the Magna Carta for how Bitcoin operates today.
Bitcoin is the next iteration of the financial system that exists solely on decentralized blockchain. It has gained popularity over the last couple of years due to mainstream adoption and instituional money that has been pouring in.
What is Bitcoin’s History?
Bitcoin’s history dates back to January 3rd, 2009 when the first Bitcoin block (block-0) was mined. This is commonly known as the Genesis block and contains the text “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
What is Bitcoin?
Bitcoin is part of the blockchain network required to power it. A blockchain is basically a distributed ledger. A distributed ledger in this sense is a shared database that stores data. The data itself is encrypted in order to make sure it's secured.
Whenever there is a transaction on the network, miners need to verify and approve the transaction. Once they are approved they are added onto the database which you can think of blocks. Each new block contains a specific hash of the previous block. Therefore, you know what took place before and after. This is also the reason why it is called blockchain, since it is a chain of blocks connected to each other.
Proof of Work
Proof of work is a consensus mechanism used in order to record and approve transactions on the blockchain. Though often thought of as complex, the problem is actually fairly simple and can be described as guestwork. Proof of Work requires miners to expend energy in order to guess for the answer.
How does Bitcoin mining work?
Bitcoin mining is the process by which new BTC enters circulation. Miners have special computer hardware that specialize in solving complex problems. The first miner to solve this problem is rewarded with Bitcoin. As of now the block reward for solving the problem is 6.25 BTC.
Further, mining is also incredibly important for confirming and recording transactions. Through mining, the system is secured.
How Long Does It Take To Mine 1 BTC?
On average, it takes about 10 minutes for the Bitcoin network to validate a block and create the reward. As of today, the Bitcoin reward for validating a block is 6.25 BTC. Thus, doing simple math, this is about 1 BTC mined every 100 seconds.
What is Bitcoin Halving?
After every 210,000 block or about every 4 years, the block reward given to the Bitcoin miners is cut in half. This event is called halving because it cuts in half the rate at which new Bitcoins enter circulation. This is also another way Bitcoin controls price inflation by releasing Bitcoins in a progressive way.
This reward system will continue until the year 2140 when all proposed 21 million Bitcoin will have been mined. From there, the system will move to a fee system, where miners will be incentivized to continue operating the network through transaction fees payed by the users. In this way, the miners will have an incentive to keep the network going.
In 2009, the reward for each block mined was 50 BTC. The first halving occurred in November 2012. From there the rewards were slashed to 25 BTC, then 12.5 and now 6.25 BTC per block as of May 11, 2020.
Further, theoretically speaking, if the demand for Bitcoin stays relatively the same but the supply of it decreases overtime, then the price increases. Another way to think of Bitcoin halving is by comparing it to gold. The supply of gold is scarce, meaning there is a limited amount of it. If every four years the amount of mined gold is cut in half then the price will increase. Bitcoin could be thought of as the same.
What are some implications for Bitcoin Halving?
Bitcoin halving reduces the rate of BTC entering circulation by half. The idea is if the demand stays the same but you control the available amount, then the price for this asset could be pushed higher.
Further, when it comes to Bitcoin halving, in the past this event has correlated with massive surges in the price of Bitcoin. The following were the dates of the Bitcoin Halving event and the price surges that occurred soon after:
Date | BTC Halving | Price | Highest Price |
Nove 28, 2012 | First Halving | $12 | $1,217 |
July 9, 2016 | Second Halving | $647 | $19,800 |
May 11, 2020 | Third Halving | $8,787 | $69,000 |
The Halving train of thought Explained
The patter seems to be consistent everytime the halving event takes place. Something like this occurs:
The reward is halved → lower available supply → higher demand → higher prices → miners incentive to keep mining is rewarded since although there are less Bitcoin rewarded, the price per Bitcoin increases substantially.
If the price of Bitcoin did not increase during halving then miners would not be incentivize to mine BTC since there will be less of a reward to do so. If for any reason this does not occur, then the difficulty to mine Bitcoin would decrease in order to incentivize the miners to keep mining.
How Is Bitcoin Used?
Bitcoin has many use cases and has only become more popular in the last couple of years.
Below are some of its more popular use cases.
Payment
In order to use Bitcoin you must have a crypto wallet. This wallet will hold your private keys along with your BTC. You will need it in order to send and receive transactions over the blockchain.
In the last couple of years, there has been more mainstream adoption of Bitcoin. As a result, there are many popular stores and places that accept this digital asset as a payment option. Users should research which stores and places accept Bitcoin as a payment option.
Investing and Speculating
Many investors and speculators became interested in the digital asset as it rose from $3k to $69k over a period of an year. Many investors see Bitcoin as a popular asset to invest due to its properties and the future outlook of the cryptocurrency.
It is important to do your own research before investing in any asset.
Store of Value
Although relatively new, Bitcoin has become a popular option for some investors as a store of value. The idea is to hold Bitcoin long enough since they believe it is a deflationary asset that will maintain its value. They have compared Bitcoin to digital gold in this sense.
Final Thoughts
Bitcoin is the first form of decentralized digital currency in existence. Many people use BTC as a payment system, a store of value, or for speculative reasons. Further, others may use it for its permisionaless nature, allowing anyone with an internet connection to transact over it.
You can think of this as cash but in digital form. Its nature to allow anyone to transact over it is what entices many users. In addition, due to the fact that it exists over the blockchain, many users can send money globally.
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