Bitcoin is a decentralised digital currency that was created in 2008 in response to the financial crisis. It is based on a network of computers that use blockchain technology to securely and transparently record transactions.
Unlike traditional currencies, which are issued and controlled by central banks, Bitcoin is not backed by any government or institution. Instead, it relies on a network of users who contribute their computing power to process and verify transactions on the network. This decentralized structure allows for a high degree of security and immunity to censorship.
Bitcoin transactions are recorded on a public ledger, known as the blockchain, which allows for transparency and ensures that the currency cannot be counterfeited. The network is secured through a process called mining, in which users compete to solve complex mathematical problems in order to verify transactions and add new blocks to the blockchain.
Bitcoin can be used to buy goods and services online, as well as in a growing number of physical stores and businesses. It can also be exchanged for other currencies, such as the US dollar, at specialized online exchanges.
Overall, Bitcoin is a revolutionary technology that has the potential to disrupt the traditional financial system. Its decentralized nature and security features make it an attractive alternative to traditional currencies, and it has become a popular investment for many people.
A fantastic place to start when trying to gain an understanding of the technology underpinning Bitcoin is the the Bitcoin whitepaper. Written by Satoshi Nakamoto in 2008, the short document explains the inner workings of the Bitcoin technology, and planted the seeds for the large, growing crypto market that exists today.
When Bitcoin first arrived, nobody cared, the coins were worthless. Now fourteen years later, one Bitcoin is worth thousands of dollars. But where did Bitcoin come from? Did some wizard programmer just manufacture this winning code of his mind? Interestingly the development of Bitcoin began in the 80s, and came from an unlikely place. Before there was Bitcoin, there was Ransomware.
It began with a man named Joseph Popp, who in 1989, invented the “AIDS Trojan” computer virus. This virus was a an attempt to lock down the files on the victims computer cryptographically and render them unusable until a ransom had been paid, hence the term “ransomware”. The virus contained a bug that rendered it useless in terms of extorting money, but still it sparked the chain of events that eventually led to the creation of Bitcoin, the first successful digital currency. The virus inspired others to create their own malicious ransomware for personal gain, and the rise of ransomware caused the anti-virus community to innovate in order to protect against this new threat. Over the next two decades the science of cryptography was advanced significantly. During this time it was believed that a digital currency could be created, but actually creating the thing was a different matter. There were several failed attempts before the successful implementation of the Bitcoin protocol.
Initial attempts at digital currency included eCash, which was developed by Digicash in 1990, E-Gold developed in 1996, Bit Gold created by early Bitcoin adopter Nick Szabo, B-Money developed in 1998, and HashCash which was the most successful of the lot. You can read about these early efforts here.
The overarching reason for Bitcoin’s importance is the decentralization aspect of the technology. As Bitcoin is decentralised, it cannot be controlled by one central entity, and transactions can be performed trustlessly. This allows for fast transactions, carried out with small fees, to anywhere in the world with an internet connection. Straight away this innovation removes the need to deal with banks, removing the need to place our trust in a banking system which at different times in the past has failed outright.
Banks routinely carry out a practice known as “fractional reserve banking”, which basically means that they spend 90% of your hard earned cash as soon as you deposit it. Banks are only required to carry a fraction of what they claim to hold by law. Most of the time this is not an issue, however in extreme circumstances this can become an issue. Essentially if we all went to the bank in the morning and demanded what they owe us they wouldn’t have it. When this occurs it is known as a bank run. Bank runs tend to happen during periods of economic stress, as happened recently in Russia when citizens rushed to banks to withdraw their savings as sanctions were implemented.
In situations such as this, Bitcoin can act as a safe haven store of value. Fitting in the owners pocket on a storage device, bitcoin can be easily transported out of a dangerous situation, unlike a briefcase full of cash or a bunch of gold bars.
Bitcoin is lightweight, easily transferrable, and can easily held in the custody of the owner in a hardware wallet. There is no central bank inflating away the value of Bitcoin.
With all this in mind it’s fair to say that the future for Bitcoin looks bright, as the technology has a genuinely important use case. Whatever the current state of the market, Bitcoin is a true commodity.
