We have all heard about bitcoin. Over the years, perceptions of Bitcoin have evolved. While skeptics labeled it a scam, enthusiasts championed it as a store of value. Beyond these views, some embraced Bitcoin as a revolutionary platform, foreseeing its potential to transform industries through decentralized technologies. Others debated its role as a medium of exchange, questioning its scalability for everyday transactions. These diverse perspectives highlight the ongoing discourse surrounding Bitcoin’s nature and its multifaceted impact on the financial and technological landscape.
If it all seems so complicated that you don’t even know where to begin. let this be the first step into the wide and complex world of Bitcoin. After you have read this you will start to understand why Bitcoin is truly the future and why, just like before the Internet, people are quick to disregard it. For those interested, here is a video of people disregarding the internet
In short, Bitcoin is a decentralized cryptocurrency that operates on a peer-to-peer network by employing blockchain technology to ensure secure transactions, recorded on a public ledger, with validation and confirmation achieved through the mining process.
I know this sounds very complicated, so let’s break it down by starting from the beginning. The beginning of cryptocurrencies.
Decentralization
Bitcoin was the first-ever cryptocurrency and is considered the only true cryptocurrency. There is a big difference between other currencies and Bitcoin. For example, the second biggest cryptocurrency is Ethereum. Even though it claims to be decentralized, it is a completely different system that is much more centralized. Decentralization means that no one entity has any control over the system. For example, the US Dollar is centralized because the American government has full control over it and can exclusively print out more dollars at will. Bitcoin has no central authority and therefore is completely decentralized. In the crypto space, we also call it defi or decentralized finance.
Difference between Bitcoin and others
In 2016, the Ethereum system was hacked and a significant amount of energy was drained. This leads the creators of Ethereum to hard fork the system and reverse the transactions. To begin with, it should not even be possible to hack a proper cryptocurrency (like Bitcoin). and if something like that would happen, it should not even be possible for the founders to just change the rules. If they can change the rules, who says they will not do it for their individual financial gain in the future?
In Bitcoin, there is no centralized authority. Nobody controls the system except for the code. Nobody even knows who the creator is. You may have heard the phrase “code is law”. It is often a term used in the Bitcoin community that simply means that nobody except the code controls the system. this makes it completely trustworthy, as code can not be manipulated like humans can.
The Bitcoin solution for DeFi
But how is it even decentralized? Bitcoin achieves decentralization through a distributed network of nodes that maintain the blockchain. Nodes are computers that need very little computing power to operate, meaning that anyone can have one for very cheap. Each node in the network stores a copy of the entire transaction history and participates in the consensus process. The decentralized nature of Bitcoin enhances security and trust in the system.
You could argue that a currency with all the same features as Bitcoin could replace it. But all the currencies that have the same features are too small and unstable. Why would anyone choose a smaller more unstable copy of the original?
With these arguments, I think it is safe to say that Bitcoin is irreplaceable.
How Its Mined
There is a limit of 21 million bitcoins that can ever be created. In the crypto world, mining refers to the creation of new currency. an equivalent in today’s fiat system would be printing new paper money. But how does it differ from the government’s printing machines?
First of all, anyone can mine. It is, like all things Bitcoin, decentralized and also the exact opposite of centralized governments. Different cryptocurrencies have different mining systems, but the best and the only fraud-proof one is the Bitcoin mining system. it is what we call a proof of work system. I will explain what that means shortly.
What is Value?
For something to have value, it has to be costly. For example, a Lamborghini is more expensive than a Volkswagen because more time and energy are spent on it. Lamborghini sacrificed that time and energy on their cars and therefore it is more valuable. The price increase also reflects the different values of each car. This fundamental rule of sacrifice also applies to currencies and violating the rule is the reason for inflation.
Governments can create more money without any expense, without any sacrifice. So the “sacrifice” is that the value of the money printed is worth less. Before, you had the gold standard, which made it so that you had to physically mine a piece of gold to be able to create money. It was an okay system. But gold isn’t fundamentally valuable for our survival and therefore not the perfect base for a value system to create a currency on. With technology it is also more effective to get ahold of gold which makes it less valuable. so eventually money will be deflationary as gold becomes less valuable. Remember, You can never create value, only convert it.
The Bitcoins mining system is based on the cost of the most abundant but at the same time the most valuable resource we can ever have. Energy. Everyone needs energy for survival, It is always needed. We have abundant energy and it will never end, but at the same time, the conversion of energy to for example electricity is costly. These two factors make it so that energy is the most valuable and reliable resource.
Different Mining Systems
To mine bitcoin you have to burn electricity. How it works in practicality is that you have a computer, it can be any computer, but those specifically Bitcoin mining are much more effective. You start it up and make it do extremely hard mathematical problems. If it solves them, then it gets a Bitcoin reward. This system is called Proof of Works of PoW.
There is another common system that many cryptocurrencies use. It’s called Proof of Stake, or PoS for short. This system relies on you staking your money to mine. Essentially the more of your money you stake, the more you earn. Proof of Stake can face challenges related to potential wealth concentration, as participants with more cryptocurrency may have greater influence, leading to an unequal distribution of control within the network.
Another huge differentiator between bitcoin from other crypto currencies is that it is hard capped at 21 million. Meaning that there will never be more than 21 million bitcoins in the world. This takes away the possibility of inflation. As the system becomes naturally deflationary because bitcoins become more scarce.
Storage
To store money normally you have a wallet. With cryptocurrencies, it is the same, it’s just virtual. You can have your Bitcoin on an exchange, but for longer durations, it is not recommended due to security reasons. this post will only explain crypto wallets. If you are interested in different types of buying and storage methods for crypto, there will be or already is an article about it depending on when you read this.
There are two types of wallets, hot and cold. For now, we can summarize the difference by saying that a cold wallet is more secure but a bit more technical as it is an offline wallet and a hot wallet is an online wallet. If you are new to Bitcoin, I would recommend a hot wallet, as they are still really safe but easier to make/manage.
Hot wallets can be Google extensions, apps, or computer programs you can download to keep your Bitcoin safe. The system is quite complicated and therefore I will not deep-dive into how it works right now. The big benefit of having your Bitcoin stored on a wallet instead of an exchange is that you actually own your Bitcoin. With exchanges, you don’t really own your money because the exchange can do what they want with it. The only condition is that they promise you to give your money back to you whenever you want. But as we can see with many businesses and governments, corruption is always a possibility and you are not 100% guaranteed to get your money back.
Price Fluctuation
Many people say Bitcoin is unstable. But that is only compared to the dollar. The topic of bitcoin volatility is a more philosophical area of bitcoin and the general macro economy. We need to first define what even value is if we want to measure it.
I did say that value is made through sacrifice. But how do we even compare wort? We often measure worth in money like dollars. But dollars are not stable. Some compare it to gold, and some to basic human necessities. I have for quite some time tried to answer this question on how to measure value and compare it. But I think it is impossible to answer. The value of things goes up and down constantly. If you compare one thing to another over time, it is impossible to know if the first item went up in value or the second down.
Even though we can look more philosophically at this problem. There still is an undeniable practical fluctuation in bitcoin price even if you compare it to something with real value like food. The reason is that Bitcoin is still relatively small, and just like with all small currencies, it fluctuates. But the more it gets globally adopted the more it will be stable. And maybe in the future, it will be the base comparison item to value other things.
Closing Words
If you have come this far, congratulations, you should now have a basic understanding of what bitcoin is. For your best interest, I would highly recommend continuing on this journey to explore Bitcoin and prepare for the future. There are many great books, podcasts, and videos on Bitcoin. If you liked what you read, you are very welcome to explore other posts on this website. I write a lot about Bitcoin and how I think the future looks. Join this dedicated community and continue to learn, as it is the key to a bright future.