Cryptocurrencies
07
Mar
what is bitcoin

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What is Bitcoin (BTC)?

Bitcoin (BTC) is an open-source digital currency. The history of Bitcoin started on October 31, 2008, when Satoshi Nakamoto published the Bitcoin white paper on a cryptography mailing list. Bitcoin’s significant events since 2017 include the SegWit update, the Lightning Network, Michael Saylor, El Salvador, The 2022 bear market, Ordinals, and spot ETFs.

Bitcoin is a globally distributed network operated by thousands of computers called nodes. Blockchain is Bitcoin’s database. Bitcoin uses public-key cryptography in network transactions. Bitcoins are stored in a Bitcoin wallet. Buying Bitcoin is no more complicated than using an online banking service.

The future of Bitcoin looks bright!

What is Bitcoin (BTC)?

Bitcoin (BTC) is an open-source digital currency. Bitcoin is also the first cryptocurrency in history, which means a digital payment protocol using cryptography. Bitcoin uses blockchain as its decentralized data storage.

One of Bitcoin’s most important features is that it is outside the traditional banking system. The Bitcoin network is open to everyone, and no single entity can block transactions.

Bitcoin’s development is the responsibility of a globally distributed community. The Bitcoin software is open-source and free for everyone to use.

More than 100 million people have invested in Bitcoin globally.

Basic information about Bitcoin:

FeatureInfo
Category Currency
Ticker BTC
Circulating supply 19.3M Bitcoin
Max supply 21M Bitcoin
All-Time High (date) $69,000 (10-Nov-2021)
All-Time Low (date) $0.0041 (17-May-2010)

See the up-to-date price of Bitcoin from here: Bitcoin (BTC) price.

This article is a beginner’s guide to Bitcoin. It covers Bitcoin’s history and technology, how to buy your first BTC and its future.

The history of Bitcoin: The early years

The history of Bitcoin started on October 31, 2008, when Satoshi Nakamoto published the Bitcoin white paper on a cryptography mailing list. Satoshi Nakamoto is a pseudonym or an alias; his true identity remains unknown.

Satoshi started developing Bitcoin’s program code in 2007. However, he kept the project to himself, and no one else knew about Bitcoin before the publication of the white paper.

The Bitcoin blockchain was launched on January 3, 2009. That day is generally considered Bitcoin’s birthday. That’s when the Genesis block was created, which included the first-ever Bitcoin address.

The year 2009 was a tranquil time in Bitcoin’s history. Just a handful of people were interested in the project. One of them was Hal Finney, to whom Satoshi Nakamoto sent the first Bitcoin transaction: ten bitcoins.

Below is a tweet by Hal Finney that he wrote just over a week after the Bitcoin blockchain launched. It is the most famous tweet in Bitcoin history.

One of the first Bitcoin developers was Martti Malmi from Finland. In addition to editing the Bitcoin program code, he maintained the discussion forum and built the first Bitcoin trading platforms.

Bitcoin began to gain broader publicity in 2010. At that time, the discussion about Satoshi Nakamoto’s role also intensified. When the community grew to tens of thousands, more and more people questioned Nakamoto’s position as the “overlord” of Bitcoin. For example, Satoshi was the one person in charge of the code updates.

Satoshi Nakamoto left the Bitcoin community in 2011. Since then, Nakamoto has not committed himself to the development of Bitcoin, nor has he transferred nearly a million bitcoins of his assets. You can read more about the early years of Bitcoin and Satoshi’s role in this article: Satoshi Nakamoto and Bitcoin.

The history of Bitcoin since 2017

Bitcoin’s significant events since 2017 include the SegWit update, the Lightning Network, Michael Saylor, El Salvador, The 2022 bear market, Ordinals, and spot ETFs. Next, let’s go through these one by one.

SegWit (2017)

The August 2017 SegWit update is a significant milestone in Bitcoin’s history. With SegWit, the Bitcoin community and development work were irrevocably split.

The background was the years-long dispute about Bitcoin’s scaling. One side of the community wanted to increase Bitcoin’s block size, while the other side wanted to solve the scaling problem with a Layer 2 solution (Lightning Network)

The SegWit update was an important update for the functionality of the Lightning Network, but the group that demanded an increase in the block size did not want to do it. This led to the hard fork, i.e., the splitting of Bitcoin, at the beginning of August 2017. At the same time, the Bitcoin Cash cryptocurrency was born.

Lightning Network (2018)

Bitcoin’s scaling solution, Lightning Network, took its first significant steps in 2018. Although the network was still raw in size and functionality, it began to expand rapidly in the coming years. The image below shows the global distribution of Lightning nodes in 2024.

lightning nodes

Today, Lightning Network is already integrated into the largest cryptocurrency exchanges. Jack Mallers, the founder of the technology company Strike, is the most famous advocate of the technology. Mallers was also an essential part of El Salvador’s Bitcoin adoption

Michael Saylor (2020)

Michael Saylor became the first CEO of a publicly listed company to buy Bitcoin into his company’s balance sheet in August 2020. And it wasn’t a small purchase because Microstrategy bought Bitcoin for $250 million.

Saylor instantly became the most recognizable face in the Bitcoin industry. He has been one of Bitcoin’s most prominent advocates and has participated in thousands of conferences, podcasts, and TV interviews since 2020.

Microstrategy continues making Bitcoin purchases yearly, and the company is already billions of dollars in profit. Saylor has also significantly impacted other institutions’ interest in Bitcoin.

El Salvador (2021)

In 2021, El Salvador became the first country to make Bitcoin an official medium of exchange. The historic announcement was made by the aforementioned Jack Mallers at the Bitcoin 2021 conference in Miami. El Salvador adopted Bitcoin as a medium of exchange alongside the dollar in September 2021.

Since then, the country has also invested in Bitcoin mining with thermal energy obtained from volcanoes. Bukele has also bought Bitcoin for El Salvador’s balance sheet.

The Bitcoin strategy put the country and its president, Nayib Bukele, on the world map. Very few people knew anything about El Salvador before the 2021 news bomb.

The first bear market (2022)

In 2022, the stock market experienced the first large-scale bear market since the 2008 financial crisis. Since Bitcoin was born after the 2008 financial crisis, it had not experienced a significant stock market crash. Until 2022, Bitcoin investors could only guess what would happen to the price of Bitcoin if the stock market fell for a long time.

In 2022, the price of Bitcoin fell along with technology stocks. At the same time, other cryptocurrencies also collapsed by 90 percent (or more).

The year 2022 also saw an exceptional collapse of the Bitcoin ecosystem’s infrastructure when numerous exchanges and lending services went bankrupt. The collapse of the FTX exchange in November 2022 was the most famous of these.

Ordinals (2023)

Bitcoin maximalists got a real shock treatment in 2023 when NFTs rolled into the Bitcoin blockchain. This was due to the Ordinals protocol. It made it possible to use the metadata of a Bitcoin block in a completely new way.

Ordinals became possible after the 2021 Taproot update. An NFT market was born in the Bitcoin ecosystem, similar to platforms like Ethereum. Below are sample images of Bitcoin-NFT.

inscriptions

In addition, the BRC-20 standard was created, which made it possible to create tokens on the Bitcoin network, similar to those on the Ethereum platform.

Most Bitcoin investors have welcomed these updates, but some Bitcoin maximalists have even demanded a fix to the Bitcoin program code. They see NFTs as nothing more than spam. The negative side of the NFT boom is the drastically increased transaction costs.

Spot ETF (2024)

One of the most important days in the history of Bitcoin was seen in January 2024, when spot Bitcoin ETFs were approved in the United States after more than ten years of struggle. It was a massive win for the Bitcoin community and a step towards broader adoption.

Spot Bitcoin ETFs are ETF funds that hold bitcoins, so they directly impact Bitcoin demand and the spot price. Eleven spot ETF funds were approved. Blackrock’s iShares Bitcoin Trust was the best-known and largest, with the ticker IBIT.

Spot ETFs are vital because they enable Bitcoin purchases for many institutions that cannot hold bitcoin due to regulation. They also lower the threshold for small investors to buy bitcoin.

Bitcoin is a decentralized payment protocol

Bitcoin is a globally distributed network operated by thousands of computers called nodes. Each of these nodes runs the Bitcoin client software.

The Bitcoin network is open to everyone, and the software is freely downloadable. Anyone can run their node and join the Bitcoin network. The Bitcoin network has two types of nodes:

  1. A full node
  2. A lightweight node

A full node is a computer that stores the history of the entire Bitcoin blockchain, which is hundreds of gigabytes in size. A lightweight node is a lighter version that only downloads header information. It utilizes information stored by the full node using the SPV (Simple Payment Verification) method.

Nodes monitor transactions sent to the network. They ensure that the person performing a transaction has sufficient funds and the authority to complete the transfer. If appropriate, the transaction will be forwarded to the miners for processing. Miners are specially-made computers that add transactions to new blocks of the blockchain.

The image below shows the distribution of Bitcoin’s nodes around the world.

bitcoin nodes

The most nodes are in the following countries (situation in 2024):

  1. Unknown: 65%
  2. Germany: 8.6%
  3. USA: 8.5%
  4. France: 2.2%
  5. Netherlands: 1.8%
  6. Finland: 1.6%

You can view real-time data from nodes at bitnodes.io/nodes/live-map/.

The Bitcoin network nodes deliver new transactions to the mempool, like a virtual sorting center. It is a pool of tens or even hundreds of thousands of unprocessed transactions, from which miners extract them into new blocks.

Only limited information can fit into one block, so the block size bottlenecks the Bitcoin network’s transaction capacity.

Blockchain is the database of Bitcoin

Blockchain is Bitcoin’s database. As the name suggests, it consists of chained blocks. It is a distributed ledger in which each block stores individual data. A blockchain is like a set of files linked together.

Each full node of the network stores an identical copy of the blockchain. All nodes must accept each block before it is added to continue the previous ones. This consensus allows every network node always to have an identical copy of the blockchain.

Blockchain technology makes it possible to use a distributed data ledger. If Bitcoin utilized a centralized data repository, it would be vulnerable to hacks or government interventions. Instead, Bitcoin’s blockchain is copied to the hard drives of thousands of computers. No entity can simultaneously remove all nodes from the network, so the Bitcoin blockchain cannot be destroyed.

It is also essential to understand that Bitcoin cannot be separated from the blockchain into its currency. It cannot be printed as banknotes, either like euros or dollars. Bitcoin is both a digital payment protocol and a digital currency simultaneously.

Read this article to learn more about blockchain technology: What is blockchain?

Miners maintain Bitcoin’s blockchain

Miners are responsible for maintaining the blockchain by building new blocks every ten minutes. Mining is needed due to Bitcoin’s consensus algorithm, Proof of Work. This means miners must prove to the network that they have done enough calculation work before creating new blocks.

In practice, miners try to solve mathematical equations 24/7/365. These equations are not mathematically complicated, but they require a lot of computing power. You could say that miners try to guess the correct lottery numbers. When enough miners make millions of guesses every second, one of them finds the correct answer and gets to create a new block.

Miners are rewarded for their work with bitcoins. These are called block rewards. Miners also get to keep the transaction fees that the users of the network pay.

Anyone can start mining Bitcoins or other cryptocurrencies. However, mining requires enormous computing power, which means heavy electricity consumption. Bitcoin mining is done with specialized ASIC miners.

The picture below has ASIC miners produced by the Chinese Bitmain.

bitmain asic

Bitcoin mining has two essential tasks:

  1. To store new transactions to the blockchain
  2. To distribute new bitcoins through block rewards

If the miners stopped working, the Bitcoin network would shut down immediately.

Bitcoin’s Proof of Work consensus algorithm is considered old-fashioned by many. Its competing alternative is Proof of Stake (PoS), where no mining is required. However, Proof of Work gives the Bitcoin blockchain ultimate security by making it impossible to manipulate.

In 2021, a big change took place globally in Bitcoin mining. China, which previously dominated mining, banned Bitcoin mining, forcing mining farms to move to other countries. This has helped the transition to greener energy sources. The use of renewable energy in mining has become an important topic, especially for institutional investors.

Read more about Bitcoin mining and how to start your mining farm from our in-depth guide to Bitcoin mining.

Public-key cryptography

Bitcoin uses public-key cryptography in network transactions. This technology is crucial for Bitcoin and many other online protocols.

Bitcoins are linked to public addresses in the blockchain. The accounting in the Bitcoin blockchain accounting goes like this: “X bitcoins are sent from the public address A to the public address B.” You can view any transaction of any block on Blockchain.com’s Bitcoin Explorer. You can click on any Bitcoin address on this site to see its transaction history.

The balance of a Bitcoin address is the sum of the transactions related to it in the blockchain. The picture below shows transactions from the Bitcoin blockchain.

bitcoin transactions

As you can see, addresses are strings of numbers and letters. Each address starts with the number 1, the number 3, or the letters bc1. They are case sensitive, i.e., upper and lower case letters matter. Although accounting is public, you cannot associate an address with an individual.

A Bitcoin address is mathematically derived from a public key. Each public key is always paired with a private key. Funds in a public address can only be managed using a private key, which is impossible for an outsider to derive from the public key.

It is, therefore, an interesting combination of public and private accounting. Anyone can view transactions on the Bitcoin blockchain without knowing who the person behind the transactions is. We only see bitcoins moving from address X to address Y.

Public-key encryption has received little attention. However, Bitcoin’s entire functionality rests on this decades-old technology.

Bitcoins are stored in digital wallets

Bitcoins are stored in a Bitcoin wallet. A Bitcoin wallet can be a computer program, a mobile app, or a cold wallet similar to a USB stick. The most popular wallets support Bitcoin and thousands of other cryptocurrencies.

It is good for a beginner to understand that a Bitcoin wallet does not work like a traditional wallet. Bitcoin wallet does not have any bitcoins. All bitcoins are always entries in the blockchain. The blockchain contains up-to-date information about how many bitcoins are stored at a specific address.

The Bitcoin wallet acts as a GUI (graphical user interface) to the blockchain. When you want to send bitcoins from your wallet, the software announces the Bitcoin network you have access to to the funds of the Bitcoin address in question. This is done using public and private key encryption.

The Bitcoin wallet can also combine funds from several addresses into one balance. The Ledger Nano X shown in the picture is the most popular cold wallet on the market. It is a device similar to a USB stick connected to a computer or mobile device to confirm transactions.

ledger nano

A novice investor often keeps the bitcoins in exchange for purchasing them. Transferring bitcoins or managing a wallet can seem dangerous to newbies. Of course, self-storage has its risks, and there are no return functions or safety nets in Bitcoin transactions. If you lose your bitcoins for one reason or another, they are gone forever.

Mobile wallets have become very popular in recent years. They are easy to use and free to download. There are also several free Bitcoin wallets to be used on a computer. Read more about different Bitcoin wallets in this article: A beginner’s guide to Bitcoin wallet.

Buying Bitcoins is easy

Buying Bitcoin is no more complicated than using an online banking service. Several safe and trustworthy Bitcoin exchanges are newbie-friendly, too. You can start your Bitcoin journey from Coinbase. It is one of the biggest exchanges in the world and a publicly listed (Nasdaq) company.

Read more about Coinbase from our Coinbase beginner’s guide.

Below is a picture of Coinbase’s front page accessed with a mobile device.

coinbase front page

Buying bitcoins is done on a practical level as follows:

  1. Open an account on a Bitcoin exchange, such as Coinbase.
  2. Verify your identity.
  3. Deposit fiat (EUR, USD, etc.) with a credit card or bank transfer.
  4. Exchange fiat for bitcoins.
  5. Think about safe storage solutions.

Opening an account is a process that takes about a quarter of an hour. Identity is verified with a valid passport. A deposit can be made via your online bank.

Changing fiat into bitcoins takes place with a couple of mouse clicks. After that, you can think about the storage option that suits you. Finally, the most challenging task remains, i.e., holding bitcoins!

The biggest challenges are related to post-purchase events. The reason for this is the extreme volatility of Bitcoin. Bitcoin’s price has collapsed in historical cycles by 70-80 percent. Such a rollercoaster will make the faint of heart give up their coins.

The price rally that occurs every three to four years attracts new investors. Only a tiny percentage of these will be involved when the next boom starts. Many beginners get greedy, invest too much, and cannot withstand a fierce bear market.

We have written a comprehensive guide on Bitcoin investing. It provides valuable instructions for a beginner investor.

The Future of Bitcoin

The future of Bitcoin looks bright! After the 2017 boom, Bitcoin has become a global phenomenon and a new investment class for millions. In the future, Bitcoin will be of increasing interest to traditional stock investors, institutions, and state-level actors.

The Bitcoin movement has grown from a small experiment to a global community of tens of millions. Bitcoin-related services employ hundreds of thousands of employees globally. It is an important industry that every country and state must take seriously.

The decade starting in 2020 is all about regulation. The crypto industry is finally getting a framework in the US and the EU. This is a positive thing for the industry and enables even broader institutional participation. Approving the spot Bitcoin ETF in 2024 in the US was also a significant step.

We should also see more news about countries adopting Bitcoin as an official means of payment.

Bitcoin’s position seems stable inside the cryptocurrency market. Bitcoin’s market share has fallen in the last five years, but no clear competitor has emerged. It is an unparalleled combination of decentralization and technology and nothing like it can ever be created.

If you are ever interested in selling Bitcoin in the future, check out this article: How to sell Bitcoin?

Bitcoin halving

Bitcoin halving is the next significant event related to Bitcoin. The halving is a monetary policy event that takes place every four years or so and halves the block rewards of Bitcoin miners. In other words, the number of new bitcoins (Bitcoin inflation) will drop by 50 percent.

The next halving will take place in April 2024. This will be Bitcoin’s fourth halving.

Bitcoin halvings are always huge events. They are talked about months, even years, in advance. The media is heated about the effects of the halving, especially now that the price of Bitcoin has shown itself to be increasingly closely connected to the stock market.

We have published a separate Bitcoin Halving 2024 article covering the topic comprehensively. It gives you all the information about Bitcoin’s halving and its effects.

The use of Bitcoin as currency

The use of Bitcoin as a currency has not grown significantly in recent years. There are two major reasons for this:

  1. Taxation
  2. The nature of Bitcoin as an investment

Taxation is the biggest obstacle to using Bitcoin as a currency in almost every country. You create a taxable event if you pay for products or services with bitcoins. The tax office sees this as a sale of bitcoins for fiat, which is then used to pay for the product or service.

Perhaps an equally significant reason is the nature of Bitcoin as an investment. Bitcoin is seen as digital gold, i.e., a store of value and purchasing power. Sure, its price has also historically risen significantly more than analog gold, making it a speculative asset.

If you own bitcoins and fiat, why would you give up and leave depreciating fiat in your account? Using Bitcoin as a currency does not make sense in most countries.

Living 100 percent on Bitcoin would require a change in legislation, as we have seen in El Salvador. If you get paid in bitcoins and pay all living expenses and taxes in bitcoins, you could completely move away from fiat.

Antti Hyppänen

Antti Hyppänen is a Finnish cryptocurrency expert and financial analyst. He is the founder and editor-in-chief of <a href="https://bitcoinkeskus.com/">Bitcoinkeskus</a>., the largest crypto portal in Finland. Antti regularly shares his views on finances and investing at <a href="https://asialinja.com/">Asialinja.com</a>. Antti has followed the financial markets since 2010, focusing on the US markets. He has also had a particular interest in gold and silver. In 2017, he discovered Bitcoin and launched Bitcoinkeskus.com, now Finland’s biggest crypto website. Antti is considered one of the leading crypto experts in Finland.

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