Bitcoin: Everything to Know

By  Beluga Research July 5, 2023

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Summary

  • Bitcoin was created in response to distrust of centralized institutions
  • It operates on a decentralized network and utilizes blockchain technology to keep a permanent record of transactions
  • The limited supply of 21 million bitcoins creates scarcity and value
  • Bitcoin can be purchased on all cryptocurrency exchanges

Overview

Bitcoin stands apart from traditional currencies as a decentralized form of money, not controlled by any government or financial institution. As a digital currency, it was first announced in 2008 by an anonymous individual or group called Satoshi Nakamoto .

Bitcoin's creation was prompted by a widespread lack of trust in centralized authorities, particularly during the Great Recession of 2008. The core innovations of Bitcoin lie in its blockchain technology and scarcity design, making it a highly sought-after asset in the financial world.

A Brief History

Bitcoin emerged as a response to the skepticism surrounding centralized institutions during the 2008 financial crisis. Its creator, Satoshi Nakamoto, aimed to provide an alternative to the traditional financial system by introducing a decentralized currency.

The headline in the code of the Bitcoin Genesis block emphasized this frustration with the bailouts and centralization of power within the global financial systems. This marked the birth of the live Bitcoin network on January 3, 2009.

Throughout its early years, Bitcoin achieved significant milestones. In 2010, the first documented real-world transaction occurred when Laszlo Hanyecz bought two pizzas for 10,000 BTC, highlighting Bitcoin's potential as a medium of exchange. Silk Road's acceptance of Bitcoin as a means of payment in 2011 further demonstrated its utility, although the marketplace was later shut down.

What is Bitcoin?

Bitcoin is a digital currency that operates on a decentralized network. It is the native coin of the Bitcoin network, often referred to as bitcoin or "BTC." Unlike physical money, Bitcoin exists solely in digital form and is stored in digital wallets accessible through computers, smartphones or other devices.

One of Bitcoin's defining features is its utilization of blockchain technology. A blockchain acts as a distributed accounting system, recording every transaction made on the Bitcoin network. This technology ensures the transparency and security of transactions, as each transaction is verified and stored on the blockchain, making it immutable and resistant to tampering.

Getting Started

  1. Investment . Bitcoin's limited supply and increasing demand has boosted its price over the years. This has made it an attractive investment opportunity for many individuals. Bitcoin has gained recognition as a store of value, similar to gold or other precious metals. Some investors see Bitcoin as a hedge against inflation and therefore a potential long-term investment.
  2. Transactions . Bitcoin can be used as a medium of exchange for goods and services with merchants who accept it as payment. Although widespread adoption by merchants is still limited, there are increasing numbers of businesses, both online and offline, that accept bitcoin. Some specific industries, such as technology and retail e-commerce, have been more open to adopting bitcoin as a payment method. The advantage of using Bitcoin for transactions is that it often can offer lower transaction fees than traditional banking systems, especially for cross-border payments.
  3. Mining . Mining plays a vital role in making the Bitcoin chain work. Miners use powerful computers to solve complex mathematical puzzles, verify transactions and add them to the blockchain. This competitive process rewards miners with newly minted bitcoin and network transaction fees. This ensures the decentralized nature of Bitcoin, preventing manipulation and maintaining the network's security.
  4. Cryptocurrency Exchanges . Bitcoin can be purchased and traded on cryptocurrency exchanges, where buyers and sellers come together to trade various cryptocurrencies. These exchanges provide a platform for users to buy, sell and store bitcoin.
  5. Secure Transactions . Bitcoin's blockchain technology ensures the security and transparency of transactions. Each transaction is recorded and can be verified by anyone on the network, minimizing the risk of fraud.

Unique Aspects

  • Decentralization. Unlike fiat currencies issued and controlled by governments, Bitcoin operates on a decentralized network of computers. This means that no single entity controls the network, ensuring that transactions are prohibited from censorship or interference.
  • Limited Supply . Bitcoin's scarcity design sets it apart from traditional currencies. There will only ever be 21 million bitcoins in existence. This limited supply contributes to its increasing value over time.

Advantages

  • Global Accessibility . Bitcoin is accessible to anyone with an internet connection, regardless of geographical location. This allows for financial inclusion, particularly in areas with limited banking infrastructure, where individuals can use bitcoin to store and transfer value.
  • Security . Bitcoin transactions are secured using cryptographic algorithms, making them highly secure and resistant to fraud or hacking. The decentralized nature of the blockchain technology on which the Bitcoin network operates adds an extra layer of security, as a network of participants verifies transactions.
  • Decentralization. Bitcoin operates on a decentralized network, meaning no central authority controls the currency. This feature provides transparency and eliminates the need for intermediaries such as banks, reducing transaction costs and potential censorship.
  • Privacy . While Bitcoin transactions are recorded on a public ledger called the blockchain, the parties' identities are pseudonymous. This offers a certain level of privacy, as users can transact without revealing personal information.

Disadvantages

  • Volatility . Bitcoin has exhibited significant price volatility throughout its history. Its value can experience rapid and unpredictable fluctuations, making it a high-risk investment. This volatility can deter some individuals from using bitcoin as a stable store of value or medium of exchange.
  • Scalability . Bitcoin's scalability has been a subject of debate and concern. As the number of transactions on the network increases, there may be limitations in processing speed and capacity, resulting in delays and higher transaction fees. This scalability challenge can hinder Bitcoin's ability to efficiently handle a large volume of transactions.
  • Energy Consumption . Bitcoin mining, the process by which new bitcoins are created, and transactions are validated, requires substantial computational power. This mining process can consume a significant amount of energy, which has raised environmental concerns and criticism regarding the carbon footprint associated with Bitcoin.
  • Regulatory Uncertainty . The regulatory landscape surrounding Bitcoin is still evolving, with different countries adopting various approaches to cryptocurrency regulation. The lack of clear and consistent regulations can create uncertainty for users and businesses, potentially impacting the adoption and integration of Bitcoin into mainstream financial systems.