It’s been called the currency of the future and a threat to the modern banking establishment, but what exactly is Bitcoin? Is it the same as blockchain? Do these words sound foreign and strange? Don’t worry, Bitcoin and blockchain technology may be complex, but that doesn’t mean you can’t understand the basics in a few minutes.
Pull back the curtain on the digital currency with this quick Bitcoin overview.
Bitcoin: A peer-to-peer electronic cash system
The headline of this section—Bitcoin: A Peer-to-Peer Electronic Cash System—is also the title of Bitcoin creator Satoshi Nakamoto’s white paper that first introduced the digital currency to the world in 2009.
The abstract of the white paper laid out what Nakamoto envisioned Bitcoin to be in its first sentence:
A purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution.
That’s what Bitcoin is on the surface—electronic cash (commonly referred to as cryptocurrency) that can be exchanged without third-party banking middlemen.
Nakamoto’s white paper went on to explain the Bitcoin and blockchain intricacies, detailing the complex mathematical equations that would/could be used to regulate and track transactions. Today, investors can buy and sell Bitcoin, and other cryptocurrencies, through dedicated marketplaces just like you would stock in a company.
Satoshi Nakamoto (a still-unknown person or group) released the open-source code and domains at the core of Bitcoin to others in the community in 2011 and disappeared.
What is the blockchain?
Blockchain is the technology that holds Bitcoin (and other cryptocurrencies) together. It’s the building-block foundation that records and organizes transactions into “blocks.” As explained by the Financial Industry Regulatory Authority (FINRA), “each block in a chain is comprised of a series of records secured by cryptography that describe preceding and current transaction data.” When new blocks are added, the chain grows.
The reason blockchain technology is preferred to the traditional/centralized banking method is that there is no government authority or financial institution that controls it. Additionally, since blockchain technology makes a record of transactions that can never be altered (in theory), the “chain” can be viewed and verified by anyone.
FINRA further explains the appeal of blockchain technology:
Blockchain is perceived to be innovative technology because of the transparency and permanency it can provide to recordkeeping. For instance, because a blockchain lists an entire history of transactions, anyone who wants to verify a specific transaction is theoretically able to do so. This can be done while maintaining privacy and without sharing details of the records to participants who are not entitled to view them. Additionally, because records on a blockchain cannot be altered, it is very difficult for a bad actor to falsify or alter transaction data.
Not surprisingly, the idea of creating records that can’t be altered and a structure of information organization that can easily be verified is appealing to other industries outside of cryptocurrency. Archiving health records, streamlining supply chain and shipping practices, and simplifying a broad spectrum of complex processes are all being done using blockchain technology today.
In fact, a World Economic Forum report from 2016 estimated over $1.4 billion had been invested in blockchain technology in the previous three years.
Mining for Bitcoin in a nutshell
While Bitcoin, like cash, doesn’t grow on trees, it is in a way pulled from thin air. At least that’s how it would seem to the uninitiated.
In truth, Bitcoin in “mined” by solving mathematical equations, verifying transactions, and creating new Bitcoin. This is done by Bitcoin miners (regular people) using powerful computers to process the equations.
These computers connect to the Bitcoin blockchain and solve complex mathematical problems (as outlined in Nakamoto’s white paper), and new transactional data is verified and stored on the blockchain when these problems are solved. When an equation is solved, new Bitcoin is created/given as a reward.
But, unlike cash, there is a finite amount of Bitcoin that can be mined/created. Ever. Nakamoto capped the number of Bitcoins at 21 million.
Is Bitcoin the only cryptocurrency?
No. Far from it. Bitcoin may be the largest cryptocurrency right now, but there are plenty of others competing for consumer investment. The Guardian highlighted nine Bitcoin alternatives way back in 2013, and Investopedia did the same with 10 different cryptocurrencies in early 2019.
There are a number of different cryptocurrencies and “coins” available for savvy investors to purchase and manage like they would an investment portfolio. It’s important to do your research before diving into the Bitcoin pool or any of the other pools in the cryptocurrency waterpark.
Bitcoin continues to inspire confidence and scare away traditionalists
This overview of Bitcoin and blockchain technology is really only scratching the surface. Nakamoto’s white paper is recommended reading for anyone wanting to understand the underlying principles and guidelines that support Bitcoin innovation, but that’s only a jumping-off point.
Today, consumers and companies are using Bitcoin just like you would cash—to purchase goods and services. Will it replace the traditional banking infrastructure? Only time will tell, but it’s definitely making waves in financial circles and beyond.