Bitcoin: Back to the Basics

While Bitcoin has been in existence since January, 2009, general awareness and understanding of the first and most popular cryptocurrency, which started a modern monetary revolution, continues to grow steadily to this day. If you fall into the category of someone just learning or looking to brush up on the basics of Bitcoin, then the rest of this article should prove useful.

It all began with the release and implementation of the first cryptocurrency whitepaper titled “Bitcoin: A Peer to Peer Electronic Cash System” written by an anonymous author named ‘Satoshi Nakamoto.’ Published after the global financial crisis of 2008, many see the timing as significant; rather than continue on course with the failing banking/government controlled monetary system, people would now have the choice to store their value and transact in a network that does not require an intermediary, such as a bank, with a currency whose supply can not be manipulated overnight by unelected actors, such as the dollar can by the Federal Reserve.

Bitcoin, and other cryptocurrencies, are made possible through the use of blockchain technology which forms a digital ledger that supports and records economic activity with a distributed network of computers rather than a centralized third-party entity. This means that there now exists a borderless, decentralized, peer-to-peer method for transacting with the only requirement being an internet connection and a digital wallet. A person or business can now send value through cryptocurrencies, such as bitcoin, to anyone from anywhere without the need for an intermediary, such as Western Union. Minus a transaction fee and the minimal processing time (both of which are expected to lower even more with the implementation of SegWit which enables support for the  Lightning Network, a second layer built on-top of Bitcoin) it’s nearly incomparable the ease of sending value, domestically or internationally, with cryptocurrency than by traditional means. While there are numerous examples of large transactions recorded on the bitcoin blockchain (these transactions tend to make news as they seemingly validate the network and technology) a more recent example comes from litecoin, which recorded a $99 million transaction that took 2.5 minutes and $.40 cents in fees to clear.

Unlike fiat currencies, which can be printed or destroyed by central governments/unelected actors, or even commodities, where the supply could always change with the discovery of more of that scarce resource, there is a set amount of bitcoin that will ever exist. The total possible supply is 21 million with 16.9 million currently in circulation. Bitcoins are added to the circulating supply as they are “mined.” Mining or “proof of work” (the other method is “proof of stake,” which bitcoin does not use) is the process by which computers compete to solve complex calculations that are used to validate transactions made in a blockchain network. The computer that wins is rewarded with the release of new coins; and in the case of the Bitcoin blockchain, rewarded with new bitcoin. All bitcoin are predicted to be mined by 2140 (from there on out, miners will be paid through transaction fees alone).

It is important to remember that the number of miners in the network, beyond validating transactions and releasing more coins, is a sign of the networks strength. For Bitcoin, there are currently 10,468 nodes (the way the computers communicate in a blockchain) competing, recording, and processing transactions occurring in the network. Anyone can create a blockchain with a cryptocurrency but if there is not a strong network, meaning a significant number of active nodes, the possibility of a crash becomes much more likely. At this point, based on the volume of transactions and number of nodes supporting the network, the chances that bitcoin would collapse is extremely unlikely; potentially “too big to fail” as the popular saying goes.  This strong support makes bitcoin appealing, in comparison to other coins, for those who want to transact in the most secure of the decentralized networks.

Because of bitcoin, interactions that were formerly limited to holders and transactors of cash can now be replicated in digital form. This means you get all the ability of peer-to-peer transactions without the need to be face-to-face. The largest of all the blockchains, bitcoin users are able to interact on the most secure and stable of all the blockchain networks. Beyond the decentralized aspect of bitcoin, the element that makes bitcoin most unique in relation to traditional fiat currencies is its permanent scarcity. The total supply of bitcoin can not be altered by any direct decision by government or non-government actors. So what does bitcoin provide us? It provides the world with a new type of freedom; the freedom to interact with anyone, anywhere, with a currency powered by free market forces rather than government/banking entities.

What about the 1,500+ altcoins? That’s a whole other story that we will cover in another post.