Bitcoin Breakdown: What Is Bitcoin & Should You Buy?
Mike Harry
Jun 2023
8 min read
Fact checked
Introduction: By demystifying concepts like mining, consensus mechanisms, and smart contracts, this breakdown is an essential guide for anyone who wants a comprehensive understanding of Bitcoin and its revolutionary blockchain technology. Let's get to it!
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Bitcoin History
Bitcoin's inception dates back to 2008 when an anonymous person or group of people using the pseudonym Satoshi Nakamoto published a whitepaper titled "Bitcoin: A Peer-to-Peer Electronic Cash System".
Bitcoin.org website
This whitepaper outlined the principles and technologies behind Bitcoin and laid the foundation for the cryptocurrency revolution.
The first implementation of the Bitcoin software was released in January 2009, marking the official launch of the project. Nakamoto's vision was to create a currency that operated on a peer-to-peer network, independent of any central authority like banks or governments.
Bitcoin whitepaper
This meant that transactions would be verified by participants on the network through a process called mining, in which powerful computers solve complex mathematical problems.
Since its launch, Bitcoin has become the poster child of the cryptocurrency space, with a market capitalization that exceeds hundreds of billions of dollars.
Being a decentralized and open-source project, Bitcoin does not have a specific team in the traditional sense. However, several developers and enthusiasts have contributed to its development over the years.
Some notable figures who have made substantial contributions include Gavin Andresen, who was appointed by Nakamoto as the lead developer after his departure, and Hal Finney, one of the earliest adopters of Bitcoin.
Due to its decentralized nature, Bitcoin's value is determined by market forces and supply and demand dynamics.Investors in Bitcoin include a wide range of individuals and institutions. Some notable early investors in Bitcoin include venture capitalist Tim Draper, the Winklevoss twins and Michael Saylor.
What is Bitcoin?
Bitcoin is a decentralized cryptocurrency and payment system that was invented by someone using the pseudonym Satoshi Nakamoto in 2008.
The Bitcoin network operates using a peer-to-peer network of nodes that collectively maintain a shared public ledger, known as the blockchain.
This blockchain contains a record of all transactions made with Bitcoin, and it is constantly verified and updated by the network to prevent double-spending and ensure the integrity of the system.
At its core, it uses a decentralized consensus mechanism known as proof-of-work (PoW) to validate and confirm transactions.
This involves miners competing to solve complex mathematical puzzles, with the first miner to find a solution being rewarded with new Bitcoins and the right to add a new block of transactions to the blockchain.
One of the key features of Bitcoin is its virtual machine known as Bitcoin Script, which is a stack-based language that is designed to be simple and secure.
It allows users to define conditions under which funds can be spent, enabling the implementation of various transaction types and advanced features.
In terms of scalability, Bitcoin has faced challenges due to its limited transaction processing capacity.
With the current block size limit of 1MB, the network can process a maximum of around 7 transactions per second (TPS). This has led to congestion and higher fees during periods of high demand.
To address this issue, several scaling solutions have been proposed and implemented. One of the most well-known is the Lightning Network, which is a second-layer protocol that operates on top of the Bitcoin blockchain.
By conducting multiple transactions off-chain and settling the final result on the blockchain, the Lightning Network significantly increases the TPS of the Bitcoin network.
How does Bitcoin work?
Bitcoin can be used for various purposes, including online purchases, investments, and remittances. It is widely accepted as a form of payment by a growing number of merchants and businesses around the world. Some countries, such as El Salvador, have even adopted Bitcoin as legal tender.
Bitcoin transactions are pseudonymous, meaning that they are not directly linked to the identities of the individuals involved. However, the blockchain is a public ledger, which means that all transactions can be traced.
Bitcoin (BTC)
Bitcoin (BTC) was the first decentralized cryptocurrency in the world which means that it operates without a central authority or government.
One of the key features of Bitcoin is its scarcity. There will only ever be 21 million bitcoins in existence, which makes it a deflationary currency.
This scarcity, along with increasing demand, has contributed to the significant increase in the value of Bitcoin over the years.
To ensure the security of Bitcoin transactions, private keys and digital signatures are used to verify the authenticity of transactions and protect users funds.
It is important for users to store their private keys securely because if they lose them, it will likely result in permanent loss of access to their bitcoins.
Bitcoin's price is highly volatile, which means that its value can fluctuate greatly within short periods of time. Despite this, Bitcoin has gained traction as a store of value and a hedge against traditional financial markets.
Bitcoin Tokenomics
One of the most important features of Bitcoin's tokenomics is its limited supply. There will only ever be 21 million bitcoins in existence, and this scarcity is built into the protocol.
BTC tokenomics
Unlike traditional fiat currencies, which can be subject to inflationary measures, Bitcoin's supply is capped. This limited supply is one of the key factors contributing to its perceived value and has led to its reputation as "digital gold."
Bitcoin mining is the process by which new bitcoins are created and transactions are validated on the network. As time goes on, the mining difficulty increases, and the reward for mining decreases, following a predetermined schedule known as the "halving."
This tokenomic mechanism adds scarcity and predictability to the creation of new bitcoins over time. Many individuals view Bitcoin as a hedge against traditional fiat currencies and an alternative to traditional financial systems.
eToro USA LLC: Investments are subject to market risk. Including the possible loss of principal.
Author
Mike Harry
Mike is a passionate crypto enthusiast who bought his first Bitcoin in 2016. With a natural curiosity and a love for learning and tinkering, Mike is always trying out new DeFi applications. Mike excels at breaking down difficult concepts into easy-to-read guides for beginners.
