To define Bitcoin in a simple sentence might not be so easy. It’s not just a form of digital currency, but it’s also a political movement that tries to challenge the domination of fiat currencies. This article will try to explain what Bitcoin is and why it matters.
Brief History Of Bitcoin
To understand why Bitcoin matters and what exactly is Bitcoin, we also need to find out why decentralization matters. Bitcoin was created by a mysterious person (or a group of people) who called himself Satoshi Nakamoto. Satoshi invented the idea of Bitcoin because he felt the central banks and the fiat currencies had failed the people. In 2019, Satoshi wrote
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust”
For that reason, Satoshi believed there must be a new form of currency that is not fully controlled by any centralized entity. In other words, there has to be a way to “decentralize” the power from the central banks because being trustless is the best way to be trusted.
That’s where the idea of Bitcoin comes from. A peer-to-peer electronic cash system where people can transact with each other without third party (like banks). This idea was accepted by some libertarians, internet money supporters, and others at the time (back in 2009).
Many people say Satoshi Nakamoto invented Bitcoin due to the financial global crisis back in 2007-2008. Bitcoin was basically the response to the failing banking system at the time. When Bitcoin was introduced the first time through its white paper, it successfully gained a lot of attention.
Some of Bitcoin earliest supporters “bragged” how fast the currency transfer across the border was by utilizing Bitcoin. Back in Bitcoin’s earliest days, if you compare Bitcoin transfer to wire transfer from different countries, Bitcoin obviously won. The transfer fee was much cheaper, and the money arrived at a much faster pace as well.
Many Bitcoin optimists became the earliest adopters of the coin, and they also allocated the hash power of their computer to “mine” Bitcoin in order to support the network. People who consistently mined Bitcoin for years became very rich due to the rising price of Bitcoin from way below $1 to above $9,000 at the time this post was written.
How Does Bitcoin Work?
In layman’s term, Bitcoin is like a computer file that is stored in a “digital wallet” application on your computer, smartphone, or a special device. Individuals can send Bitcoins to other digital wallet accounts. Each of these transactions is recorded automatically on a distributed network called the blockchain.
The blockchain is the underlying technology that powers cryptocurrency such as Bitcoin. With the blockchain, all records that have been confirmed are stored permanently. People cannot undo transactions as they wish because the network is maintained by a decentralized network and not controlled by one single entity.
The analogy is like this. Imagine if you ask a location of a place to someone, and he tells you, “the place you are looking for is in that direction to the left.” If this someone is the only one with the map, you have to trust him without knowing whether he lies or not and without knowing whether he has changed the information on the map.
Now imagine if there are 1000 people that own the same map, and they all receive the same update every time there’s new information for the map. You can ask hundreds of different people out of this group to make sure the information is correct. And when there’s someone who tells you a different direction, you would know it’s incorrect, because other people with the map would tell you different information.
This analogy can be applied to blockchain technology as well. If there’s only one person with the map, that’s called centralization, just like how the central bank controls information and flow of money. Meanwhile, the analogy of 1000 people with the same map is like the blockchain. When someone tries to edit the record, others would tell you the record is falsified.
Everybody has to agree to the changes of rules on the blockchain. That’s why it’s called “decentralization” because there’s no one central entity that can edit everything; however he sees fit. And this blockchain technology is the core of Bitcoin. With the elimination of centralized power, Bitcoin believers hope that it is finally time for money to be controlled by the people who believe in it.
Bitcoin supporters often think that centralized currencies can be easily manipulated because average people often have no say in the monetary policies. Whenever central banks want to increase the supply of fiat currencies, they can just do it. With Bitcoin, you cannot do it as you wish.
Bitcoin is managed by a consensus algorithm that’s called Proof of Work. When you hear someone says “Bitcoin mining”, they refer to this Proof of Work (PoW) mechanism.
Bitcoin Mining
I won’t get into too many details into this, but basically Proof of Work is the algorithm where “miners” try to compete against each other to complete transactions inside the blockchain, and they are incentivized for it.
In Bitcoin blockchain, users can send each other bitcoins through their wallet applications, where the records are stored in the form of blocks. Nevertheless, transaction confirmations and block arrangements need to be taken very carefully. That’s why there is this process called “mining” where the miners have to solve complex mathematical puzzles with their computers.
After one miner successfully solves the next mathematical puzzle, he is allowed to form a new block and confirm the transactions in the blockchain. Once he has done all these tasks, he will be rewarded with a certain amount of Bitcoin. The mathematical puzzles get harder over time to increase the valuation of Bitcoin as the coin gets more popular.
There’s also a built-in rule where Bitcoin mining reward gets halved every (approximately) four years. That’s why Bitcoin mining rewards nowadays are much less rewarding compared to six or eight years ago.
One of the biggest critics about Bitcoin mining and Proof of Work is that it requires a huge amount of computing power. As Bitcoin gets more popular, there is also more hash power needed to maintain the entire network. It has become a big concern for environmentalists.
It’s Not Just About Technology, It’s A Political Movement
The way I see it, the majority of Bitcoin believers are not just techy people who believe in new technology. Bitcoin is also a political movement. Remember that Satoshi Nakamoto invented Bitcoin after the global financial crisis back in 2007-08. Bitcoin is basically a “hedge” against global financial instability.
Bitcoin hardcore supporters often think that the banks and governments have manipulated the economy for decades. They think it’s not fair how the banks can just print a new supply of money out of thin air without the agreement from the citizens. They also believe the banks are the ones who are responsible for the market crash more than a decade ago, and yet none of the big bankers were jailed for it.
With Bitcoin, it’s like a political statement by the people to show that money can be maintained and managed by individuals and different entities all around the world. You cannot create Bitcoin out of thin air due to the basic structure of the blockchain. Due to these narratives, many people see Bitcoin like “digital gold”, due to Bitcoin’s similarities to physical gold as the hedge against global financial stability as well as having a finite supply (again, just like physical gold).
If you go to cryptocurrency discussions all over the social network (such as on Telegram or reddit), you will see that the biggest crypto or Bitcoin supporters often criticize fiat currencies and central banks for regularly printing new supply of fiat currencies. Typically, the biggest Bitcoin believers are the same people who get disappointed by how centralized powers often go unchecked.
Conclusion
Bitcoin was the pioneer that introduced the concept of decentralized money and also the one that popularized the idea of blockchain technology. It was created as an alternative to fiat currencies, which (according to Bitcoin supporters) are already failing. Bitcoin was meant to be the peer-to-peer electronic cash, but now it’s also seen as a form of digital gold by the crypto community.
Whether Bitcoin will eventually go mainstream or not, nobody will know. That being said, it’s undebatable to say that Bitcoin has become much more popular more than a decade after it was created. If you are interested to purchase Bitcoin, you can try nordikcoin, coinbase, or kraken. They allow you to purchase Bitcoin without much restrictions.
