June 11, 2024

What is bitcoin?

Bitcoin is a system for digital money.

David Waugh and Dave Birnbaum
David Waugh and Dave Birnbaum

What is bitcoin?

Table of contents

What is bitcoin?

The term "bitcoin" refers to digital currency units called bitcoins and the protocol for creating those units and transacting with them, the Bitcoin Network.

Where did bitcoin come from?

Bitcoin began in 2009, and was met with little fanfare when it started. Its anonymous creator, Satoshi Nakamoto, tested and improved the software alongside a tiny group of computer science enthusiasts.

Bitcoin did not just appear out of thin air. It was the fruit of decades of research and development, particularly from a group of technology enthusiasts known as cypherpunks. This group started working together informally during the internet's early days and consisted of physicists, cryptographers, and researchers who shared a common goal to create software to preserve freedom and privacy in the nascent digital age.

The group’s concern about censorship and surveillance, whether borne of governments or corporations, led them to develop and advocate for open-source privacy software.

In addition to expertise in privacy, the cypherpunks possessed a sophisticated understanding of economics. They knew that gold held many advantages over government-issued currencies, and that a digital version of gold would be necessary to preserve freedom in the internet era.

Several attempts at digital gold were attempted, including eCash, BitGold, b-Money, and HashCash. They all had critical design flaws that led to their failure. But the teams working on these projects learned from their experiences and kept what worked, while trying to find new solutions to fix what didn’t. Bitcoin wasn’t the first cryptocurrency, but it was the first one that stabilized and grew under its own momentum.

Following the cypherpunk ethos, Satoshi Nakamoto made bitcoin open-source, allowing anyone to see how it works under the hood. While Satoshi's identity remains a mystery, the invention of bitcoin kicked off a money revolution that is still playing out today.

Who sets the price of bitcoin?

After it was invented, the bitcoin token had no real-world value for many months, until the first priced transaction in October 2009 set it at $0.0010 per bitcoin.

The first purchase of real-world goods with bitcoin occurred in May 2010, when a computer scientist purchased two pizzas for 10,000 bitcoins.

Interest began to spread, and as bitcoins were traded among early enthusiasts, the price of one bitcoin rose to over $1,000 by the end of 2013.

Today, bitcoin is used by tens of millions of people across the planet, and a single bitcoin commands a price of tens of thousands of U.S. dollars. Bitcoin is useful in trade, and its price is set by those people who are engaging in trade and commerce. When we say that one bitcoin “costs” some number of dollars, what we mean is that, on the open market, you are likely to find someone who is willing to part with that many dollars in exchange for one bitcoin token.

Importantly, each bitcoin is divisible into 100 million units known as satoshis, each of which can also be exchanged for dollars. Bitcoin works fine in fractions, and most people who own and use bitcoin don’t have a whole one.

How does bitcoin work?

A common question newcomers have is, how do bitcoin transactions actually work? Here’s a breakdown of the steps, with some details skipped to keep the explanation easy to understand.

  1. A user can create a transaction and sign it using an uncrackable digital signature.
  2. The user's computer broadcasts the transaction on the internet, where it is seen and propagated by bitcoin nodes run by anyone on the network.
  3. Mining computers see this and many other transactions. About every 10 minutes, one ofthe miners successfully orders a set of transactions and adds them to the immutable, universal bitcoin ledger.
  4. The miner then broadcasts the valid “block” to all network participants, who update their local copies of the ledger.

Note that no banks, governments, credit card companies, or trusted third parties of any kind are present in this process.

What is a blockchain?

You have probably heard the word “blockchain” and understand that it is an important part of bitcoin. For our purposes, you can simply think of the blockchain as a ledger, or history of transactions. The ledger is transparent, meaning that anyone can read it, and it is unchangeable, in the sense that nobody can alter past transactions without having access to an unattainable amount of computing power.

Where are bitcoin’s servers located?

Bitcoin is unique among cryptocurrencies in that it is decentralized – its “nodes” (a rough equivalent to servers) are located in hundreds of jurisdictions across the globe, at almost every imaginable longitude and latitude. In fact, there are even bitcoin nodes broadcasting the blockchain from satellites in orbit! No single entity, government, or corporation controls bitcoin. The network has grown so large that, much like the internet, it can never be taken over or shut down by any one group.

How are bitcoins created?

Bitcoins are created through a process called "mining." Miners use computers to solve mathematical problems that order transactions and prepare them for broadcast. When miners “solve a block,” a new group of transactions is added to the ledger (blockchain), and the miner is rewarded with bitcoin. Because mining costs money, miners trade some of their freshly minted bitcoin for resources like electricity and hardware. This is how new bitcoins are introduced into circulation.

Importantly, bitcoin’s supply is limited. Only 21 million bitcoins can ever exist, ensuring its scarcity over time.

This combination of decentralization, transparency, and finite supply differentiates bitcoin from traditional fiat currencies and other cryptocurrencies that came after it.

Why does bitcoin matter?

Bitcoin is not a perfect form of money. However, when it is compared to others, it is clearly the most advanced money technology ever invented, because it was designed to maximize the properties of sound money. And, being digital, it is especially suited to an age of global internet commerce.

Bitcoin is viewed not only by those in rich countries, but also those in developing economies as an attractive alternative to gold and fiat.

Nearly 25% of the global population is unbanked. Even those who do have bank accounts in relatively developed nations routinely see their savings devastated by government policy – sometimes well-meaning, but often borne of corruption.

Bitcoin can provide secure and low-cost access to financial services to anyone on the planet, with no need to trust an issuing authority. This financial empowerment is improving the lives of millions of people by letting them access savings, investments, and business opportunities, fostering economic growth and development.

In the long term, a financial system that cannot be manipulated directly through violence and coercion will compel governments to become more accountable to their citizens and make public spending more transparent and efficient. The use of a global, universal language of value will break down barriers and foster greater understanding and cooperation among nations.

Bitcoin inspires a grand vision and a sense of boundless possibility. By using the bitcoin protocol to enact the principles of independence, truth, inclusion, and freedom, we take a meaningful step toward a bright future.

September 26, 2023

What is bitcoin?

Bitcoin is a system for digital money.

David Waugh and Dave Birnbaum
David Waugh and Dave Birnbaum

What is bitcoin?

The term "bitcoin" refers to digital currency units called bitcoins and the protocol for creating those units and transacting with them, the Bitcoin Network.

Where did bitcoin come from?

Bitcoin began in 2009, and was met with little fanfare when it started. Its anonymous creator, Satoshi Nakamoto, tested and improved the software alongside a tiny group of computer science enthusiasts.

Bitcoin did not just appear out of thin air. It was the fruit of decades of research and development, particularly from a group of technology enthusiasts known as cypherpunks. This group started working together informally during the internet's early days and consisted of physicists, cryptographers, and researchers who shared a common goal to create software to preserve freedom and privacy in the nascent digital age.

The group’s concern about censorship and surveillance, whether borne of governments or corporations, led them to develop and advocate for open-source privacy software.

In addition to expertise in privacy, the cypherpunks possessed a sophisticated understanding of economics. They knew that gold held many advantages over government-issued currencies, and that a digital version of gold would be necessary to preserve freedom in the internet era.

Several attempts at digital gold were attempted, including eCash, BitGold, b-Money, and HashCash. They all had critical design flaws that led to their failure. But the teams working on these projects learned from their experiences and kept what worked, while trying to find new solutions to fix what didn’t. Bitcoin wasn’t the first cryptocurrency, but it was the first one that stabilized and grew under its own momentum.

Following the cypherpunk ethos, Satoshi Nakamoto made bitcoin open-source, allowing anyone to see how it works under the hood. While Satoshi's identity remains a mystery, the invention of bitcoin kicked off a money revolution that is still playing out today.

Who sets the price of bitcoin?

After it was invented, the bitcoin token had no real-world value for many months, until the first priced transaction in October 2009 set it at $0.0010 per bitcoin.

The first purchase of real-world goods with bitcoin occurred in May 2010, when a computer scientist purchased two pizzas for 10,000 bitcoins.

Interest began to spread, and as bitcoins were traded among early enthusiasts, the price of one bitcoin rose to over $1,000 by the end of 2013.

Today, bitcoin is used by tens of millions of people across the planet, and a single bitcoin commands a price of tens of thousands of U.S. dollars. Bitcoin is useful in trade, and its price is set by those people who are engaging in trade and commerce. When we say that one bitcoin “costs” some number of dollars, what we mean is that, on the open market, you are likely to find someone who is willing to part with that many dollars in exchange for one bitcoin token.

Importantly, each bitcoin is divisible into 100 million units known as satoshis, each of which can also be exchanged for dollars. Bitcoin works fine in fractions, and most people who own and use bitcoin don’t have a whole one.

How does bitcoin work?

A common question newcomers have is, how do bitcoin transactions actually work? Here’s a breakdown of the steps, with some details skipped to keep the explanation easy to understand.

  1. A user can create a transaction and sign it using an uncrackable digital signature.
  2. The user's computer broadcasts the transaction on the internet, where it is seen and propagated by bitcoin nodes run by anyone on the network.
  3. Mining computers see this and many other transactions. About every 10 minutes, one ofthe miners successfully orders a set of transactions and adds them to the immutable, universal bitcoin ledger.
  4. The miner then broadcasts the valid “block” to all network participants, who update their local copies of the ledger.

Note that no banks, governments, credit card companies, or trusted third parties of any kind are present in this process.

What is a blockchain?

You have probably heard the word “blockchain” and understand that it is an important part of bitcoin. For our purposes, you can simply think of the blockchain as a ledger, or history of transactions. The ledger is transparent, meaning that anyone can read it, and it is unchangeable, in the sense that nobody can alter past transactions without having access to an unattainable amount of computing power.

Where are bitcoin’s servers located?

Bitcoin is unique among cryptocurrencies in that it is decentralized – its “nodes” (a rough equivalent to servers) are located in hundreds of jurisdictions across the globe, at almost every imaginable longitude and latitude. In fact, there are even bitcoin nodes broadcasting the blockchain from satellites in orbit! No single entity, government, or corporation controls bitcoin. The network has grown so large that, much like the internet, it can never be taken over or shut down by any one group.

How are bitcoins created?

Bitcoins are created through a process called "mining." Miners use computers to solve mathematical problems that order transactions and prepare them for broadcast. When miners “solve a block,” a new group of transactions is added to the ledger (blockchain), and the miner is rewarded with bitcoin. Because mining costs money, miners trade some of their freshly minted bitcoin for resources like electricity and hardware. This is how new bitcoins are introduced into circulation.

Importantly, bitcoin’s supply is limited. Only 21 million bitcoins can ever exist, ensuring its scarcity over time.

This combination of decentralization, transparency, and finite supply differentiates bitcoin from traditional fiat currencies and other cryptocurrencies that came after it.

Why does bitcoin matter?

Bitcoin is not a perfect form of money. However, when it is compared to others, it is clearly the most advanced money technology ever invented, because it was designed to maximize the properties of sound money. And, being digital, it is especially suited to an age of global internet commerce.

Bitcoin is viewed not only by those in rich countries, but also those in developing economies as an attractive alternative to gold and fiat.

Nearly 25% of the global population is unbanked. Even those who do have bank accounts in relatively developed nations routinely see their savings devastated by government policy – sometimes well-meaning, but often borne of corruption.

Bitcoin can provide secure and low-cost access to financial services to anyone on the planet, with no need to trust an issuing authority. This financial empowerment is improving the lives of millions of people by letting them access savings, investments, and business opportunities, fostering economic growth and development.

In the long term, a financial system that cannot be manipulated directly through violence and coercion will compel governments to become more accountable to their citizens and make public spending more transparent and efficient. The use of a global, universal language of value will break down barriers and foster greater understanding and cooperation among nations.

Bitcoin inspires a grand vision and a sense of boundless possibility. By using the bitcoin protocol to enact the principles of independence, truth, inclusion, and freedom, we take a meaningful step toward a bright future.

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