Bitcoin is the largest cryptocurrency by market cap, and, for many, it is the only coin they think about when they hear the word “cryptocurrency.” In fact, Bitcoin has become shorthand for cryptocurrency in general due to its age, status, and commanding market presence.
Yet the details of the coin itself tend to get lost in generalities. Many just think of Bitcoin as “internet money,” and that’s good enough for the general public.
Bitcoin represents something far more important, however. To understand what that is, it’s helpful to understand what Bitcoin itself really is.
A Short Prehistory
Bitcoin was the first cryptocurrency to go mainstream, if cryptocurrency could ever be considered to be mainstream. Strictly speaking, however, it was not the very first cryptocurrency.
Let’s start with what that word actually means. The “crypto” in cryptocurrency shares the same root with “cryptic” and “cryptography” – that is, it means secret or coded.
A cryptocurrency, therefore, is created by a series of coded computer signatures, strung together to give each coin a unique identity. It’s helpful to think of them as serial numbers on U.S. dollar bills. We’ll talk more about the nuts and bolts of that process a little later.
Before Bitcoin, there was a slew of different internet currencies and credits. We won’t muddy the waters with them too much, but Nick Szabo’s bit gold is worth mentioning. Szabo wrote in 1998 that digital currencies could be improved greatly by incorporating cryptographic signatures that would make each coin unique and prevent problems like copying coins, double-spending, or otherwise stealing coins.
Read our Profile of Nick Szabo
Szabo concurrently developed the idea of a smart contract. A smart contract is a digital contract between two parties that can be executed with just the information contained in its code. You’re probably familiar with the analog version – a vending machine. The vending machine contains all the information it needs in its cogs and gears to execute a deal between you and the vending machine stockist. If you input the correct amount of change and hit the right codes, the vending machine automatically dispenses the candy bar or bag of chips of your choosing. Smart contracts work much the same way.
Satoshi Nakamoto Enters the Scene
It might surprise you to learn that the creator of Bitcoin is unknown. Even that is a tad misleading. In 2008, an entity calling itself Satoshi Nakamoto published a paper introducing the basics of Bitcoin. An internet domain name was registered for it, and shortly after, Nakamoto began producing Bitcoins.
What’s unclear is exactly who or what Nakamoto is, as the creator of Bitcoin has never made him-, her-, or itself public. Several individuals have been suspected of being Nakamoto – including Szabo – although it’s equally possible that Nakamoto was a group of individuals or even a corporate entity.
The important thing to remember is that Bitcoin was based on previous work in digital currencies and cryptography, but it combined them in an innovative and ultimately useful way.
One of the keys to understanding what Bitcoin is and why it has any value at all has to do with how new Bitcoins are created. This process is called proof-of-work mining, and it’s done by computers.
Each Bitcoin (and many other types of cryptocurrency) carries a unique digital signature. That signature is created by a computer solving large, complex mathematical problems. When a computer solves one of these problems, in a so-called block, a number of new Bitcoins are created. These Bitcoins are valuable because they represent a significant amount of computer work, time, and electricity spent solving a large math problem. This is why Bitcoins cannot simply be created by hitting “copy, paste” over and over.
In the early days of Bitcoin, solving the math problems was relatively easy and could be done on standard computers. As time goes on, these problems are designed to get harder and harder, so nowadays, Bitcoin is primarily generated by immensely powerful computers specifically made for the task. These computers are known as application-specific integrated circuits, or ASICs. This simply means that they were built with the express purpose of solving Bitcoin’s unique math problems. They are expensive – up to thousands of dollars apiece – and they consume a lot of electricity and generate a lot of heat.
Read more about Bitcoin Rewards and Halving
Bitcoin Makes It Big
This is why Bitcoin is a big deal; Bitcoin does not rely on a trusted third party, like traditional fiat currencies. When you spend a U.S. dollar bill, the bill itself is just paper and cloth. It doesn’t have any real value in and of itself. What makes it valuable is the U.S. government’s promise that it is worth whatever is printed on it.
Read about the problems with Fiat currency
Moreover, it’s hard to spend money of any kind without involving a third party – usually a bank or a payment processor. This verifies that transactions are valid, holds money in reserve, and allows it to be stored securely.
Bitcoin by design transcended this system. It allowed people to exchange money without a third party involved. In its purest form, a Bitcoin was worth exactly one Bitcoin whether it was spent in the U.S. or Japan. It did not require a bank or government’s stamp of approval.
This brings up another important facet of Bitcoin. Bitcoin exists on a decentralized blockchain. All that means is that the record of every Bitcoin transaction ever done is stored in a long string. That string is open, transparent, and verifiable. It is also decentralized, which means it is stored on the computers and servers of many different Bitcoin users. What this practically means is that it’s hard to shut the Bitcoin network down. A bank failing or a government outlawing Bitcoin would not ruin the network since it’s spread out over so many different computers.
And here’s another thing – Bitcoin is anonymous. That is different than private. Bitcoin’s transactions are open and available for viewing on the blockchain, but it’s difficult to tie a particular Bitcoin owner to a particular transaction.
This directly led to one of the first and biggest uses for Bitcoin – the so-called Silk Road black market.
Silk Road: Boom and Bust
Silk Road was an online marketplace for drugs, guns, and other illegal items. It was ultimately shut down by U.S. federal authorities. While it was in operation, however, Bitcoin was the currency of choice due to its relatively untraceable nature. Each Bitcoin, remember, carries a secret code that is difficult to link back to its owner. The Bitcoin network is also decentralized, so it’s hard to stop the flow of Bitcoin altogether.
The Silk Road no longer exists, but it was an early – and successful – use case for digital currency. Namely, it proved that Bitcoin could be used outside the traditional boundaries of banks and governments, and it held its value well despite the somewhat unsavory company it kept.
The Future of Bitcoin
This has been a brief introduction to Bitcoin. We’ve talked about its origins, how new Bitcoins are created, and its first big use case. The Bitcoin story is still unfolding, and it’s a rich story so far. Armed with these basic facts, you’re now ready to follow along.
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