Before buying your first Bitcoin, it is important to understand what Bitcoin is
What function does Bitcoin play? How is Bitcoin created and transacted? How do I create new Bitcoin? What is Bitcoin "mining"? Everything else you need to know about the fundamentals of Bitcoin.
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3. What Functions Do Bitcoin Play?
The Origins of Bitcoin
You may think Bitcoin was magic "internet money" that suddenly exploded into the scene in 2017.
Bitcoin was first launched in 2009 by an anonymous profile, under the pseudonym of Satoshi Nakamoto, who's true identity today remains unknown due to his desire and vision for Bitcoin to be a standalone and anonymous project without a central authority. However, while Bitcoin was created in 2009, the ideals and concepts behind a digital and decentralized global currency existed long before the advent of Bitcoin.
The first existence of a cryptographic and electronic monetary system spawned as early as in 1983, in the form of "ecash". Numerous other forms of cryptocurrencies soon followed after, with the creations of "B-Money" in 1998 and "Bitgold" in 2005; both of which have been directly quoted by Satoshi Nakamoto as part of the concepts of Bitcoin. While many of these earlier cryptocurrenies were conceptually sound, they did not materialize as the internet and its infrastructure back then was nowhere near as powerful, sophisticated and expansive as it is today.
Imagine setting up a video conferencing company like Zoom in the year 2000. While you would have ultimately been a visionary way ahead of your time, Zoom in 2000 would inevitably have failed due to slow internet speeds, poor webcam technology and internet infrastructure. The world and the internet in 2020 was just not ready for a Zoom. Fast forward to 2020 and it's a completely different story - That's where Bitcoin is today! In its infancy of something greater.
Before investing in Bitcoin and as a key part of understanding Bitcoin - I strongly encourage you to read the original Bitcoin whitepaper, published by Satoshi Nakamoto himself. It contains all the thoughts behind the concept of Bitcoin and Satoshi's vision for it's future. A highly compelling read that is not too complex and still relatively easy to understand.
What is a "Bitcoin"
Here we discuss certain properties that make Bitcoin unique versus fiat currency
In short, Bitcoin is a cryptocurrency that runs on a peer to peer network without a central point of authority (decentralized), but is instead, run and verified by users of the network (peer-to-peer).
There are many characteristics of bitcoin that further makes it unique and unprecedented in the history of money. Some of these characteristics are that bitcoin is.....
1. Limited in Supply (There will only ever be 21,000,000 bitcoins in circulation)
2. Decentralized (This makes bitcoin a safer and more secure type currency)
3. Borderless cheaper and faster (A bitcoin transaction in millions can be sent quickly anywhere in on earth for cents)
4. Immutable (Impossible to forge or falsify)
5. Transparent (Every transaction is recorded on the blockchain)
6. Private (Almost impossible for an outside person to identify the owner of a bitcoin wallet. This is a commonly misunderstood characteristic)
If you are interested in a more thorough article on bitcoin, this article (Everything You Need To Know About Bitcoin) expands on many of the points above in a clear and analogous way.
While the characteristics of bitcoin will by and large remain the same, an increasing number of uses and applications of bitcoin are being conceptualized at an exponential rate. Some functions and uses of bitcoin are described in the "What function does bitcoin play" article below.
What Functions do Bitcoin Play?
Since first conceived in 2009, the use of Bitcoin has undergone numerous "narratives" and known-uses. Broadly till the present moment in 2020, we can surmise that Bitcoin has at different times, functioned in more than 7 different use cases. Nic Carter and Hasufly describes this very astutely in his "Visions of Bitcoin" article in 2018.
The various use-cases since it's inception include (recognized chronologically):
1. E-cash proof of concept
2. Cheap P2P payments network (first obvious use case of Bitcoin to the general public, as well as the most prevalent)
3. Censorship-resistant digital gold
4. Private and anonymous darknet currency (gained notoriety for its use in illicit purchases on the silk road until 2013)
5. Reserve currency for the cryptocurrency industry (till today, Bitcoin remains the default currency for altcoin trading)
6. Programmable shared database
7. Uncorrelated financial asset (increasingly important and critical use-case in the face of volatile traditional market conditions and macro-economical health)
What is Bitcoin Mining?
Bitcoin Mining is not too different from Gold mining
This is quite a complex topic but thankfully, it can be broken down into a few key and simplified points which make the process of Bitcoin mining and purpose much easier to understand.
In summary as a starting point, Bitcoin miners serve the purpose of:
1) Verifying transactions on the blockchain to to ensure the integrity of transactions, and to prevent double-spending. *remember now that the blockchain is a decentralized network, so who controls and powers the blockchain and its transactions? Miners! It is the collective power of thousands of miners on the blockchain.
2) A Bitcoin is the reward given to a miner for being part of the network and verifying its transactions. The miner is the new owner of the Bitcoin, and they usually either hold it, or sell it in the open market to make up for their mining costs.
3) How much Bitcoin does a miner earn? At the moment - 6.25 Bitcoins for every block. However, every 210,000 blocks, the mining reward is halved (so 3.125 in ~2024). This is known as the Bitcoin Halving event, a significant event that happens roughly once every 4 years. As an investor, the more important implication is through supply and demand, as through the halving, the supply of Bitcoin drops by 50%, while demand generally remains the same. Bitcoin halving events have generally been very bullish events for price in the past.
4) How does mining actually work? This is where it gets extremely technical and that information goes beyond the knowledge of this website. I would encourage (for those of you interested) to read up more on Bitcoin mining here. I will not delve into this topic too deeply as I personally do not consider understanding the nuances of Bitcoin mining (other than discussed above) to be a crucial part of knowledge in investing in Bitcoin.