"I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party."
Satoshi Nakamoto (2008), Anonymous Bitcoin founder
You may be surprised to hear that explaining Bitcoin is not easy.
This is because Bitcoin (acts a little like the quantum mechanics idea in that it) can function both as a wave (system/network) and a particle (money).
In its monetary form Bitcoin:
- Is a digital coin
- Has a limited supply - there will only ever be 21 million bitcoin
- Has no central point of control/issuance ('de-centralized') - instead bitcoin is 'mined' across the World by a network of 'miners' (also referred to as 'nodes') who use specialised computer systems which solve complex computational puzzles, and the computers that crack the codes are rewarded with Bitcoin.
- Offers (almost) instant peer to peer (person to person) transactions across the World
- No requirement for third party authorization (to establish trust) - trust comes from a 'proof of work' model
In its' system/network form - Bitcoin:
- Is a blockchain - a system of data/transaction storage, in which all transactions are recorded to a 'block' (see image below), each block is linked to a network of blocks, or a 'chain of blocks' (blockchain). Each block holds the same information as all the other blocks, in essence they are all replica's of each other. And all of them are updated with any new transactions. This means all the transactions are distributed across the network.
- Transactions are irrefutable - when transactions are recorded on the Bitcoin blockchain, the transaction is sent to every block at the same time, and because it is a distributed network, once a transaction has been made (and is replicated across the whole system) it cannot be deleted or changed. If one block fails or is switched off all the others' retain the information and ensure the legitimacy of the transaction record (ledger).
- Is open-source - the Bitcoin code can be scrutinized by others'
- Is a public ledger (record) - transactions across the Bitcoin network are available for all to see
The domain name bitcoin.org was first registered in 2008 by an anonymous person or group who called themselves Satoshi Nakamoto.
In 2009 the first Bitcoin block was mined - block 0 - the 'genesis block' and bitcoin mining begins.
Now, although Bitcoin was originally created as a form of currency, for use as a form of payment, it is unfortunately highly volatile (price is constantly rising and falling) which makes it difficult for daily use, or for setting prices in Bitcoin. Further those who have Bitcoin tend to be loathe to part with it, seeing it as a perfect store of long-term value. And so instead many people borrow against their Bitcoin and receive USD ($) which they can then use to pay for goods and services.
There are also other coins (or altcoins), jumping on the success of Bitcoin, that can be used for payment as they are either not seen as being as valuable, or they are 'pegged' to the dollar which means their price doesn't fluctuate and they remain a stable store of value, which makes them a much better choice for spending or receiving.
A Few Answers to Commonly Asked Questions
- I can't afford to buy a whole Bitcoin.
You do not need to own a whole Bitcoin, you can literally purchase as little or as much of a Bitcoin as you would like, for example you could buy $10 of Bitcoin and this would simply appear in your wallet as a very small denomination of a whole Bitcoin, but it is still you owning Bitcoin.
- How is Bitcoin valued? And how do you know how much it is?
Bitcoin is valued by how many people are buying/selling it. When people sell the price is driven down, when people buy the price is driven up. There is no 'average' price of Bitcoin, it moves every single day, sometimes by significant levels.
Bitcoin is priced in dollar terms (in fact the whole crypto space uses the dollar as a way to articulate the value of a particular coin). To find out the price in any given moment you can got to 'Coingecko' however almost all of the places that you will hold your Bitcoin will show you the amount in dollars (or your national currency - you can usually change this to dollars in your settings in order to be using the same value metrics as the rest of the World).
- Is Bitcoin mostly used for criminal activities?
No, is the very short answer. At times it has certainly been used for black market goods, and there will be people that use it for criminal activities, as people have done with all forms of money throughout time. But the reason why it is not a good form of money to use for criminal activities is because ALL transactions on the Bitcoin blockchain are traceable - it is a public ledger. And so, what would be required would be an investment of detective work and the transactions could be traced.
Tansy Baigent is the founder and lead coach at The Crypto Ethic.
If you want to learn more about Bitcoin, the blockchain, or want to know how to get into the crypto space and use it with confidence then consider signing up to one of our courses or book some private coaching / mentoring.