It’s gone from whitepaper to one of the most sought after assets of the digital age. So, what is Bitcoin and how did it get where it is today? Explaining Bitcoin requires taking a look under the hood at what makes this innovation tick, examining how it’s used, and how it fits in the world today.
Let’s take a look at the ins-and-outs of Bitcoin and how it came to be where it is today.
What is Bitcoin?
Bitcoin is a peer-to-peer currency backed by blockchain technology. Through decentralization, Bitcoin operates without any centralized entity controlling it and instead is managed by a network of developers, miners, and other network participants who collectively determine the best course of action for the cryptocurrency. The Bitcoin cryptocurrency is the network’s native asset that is transferred across the blockchain through transactions.
How Bitcoin works
Blockchain
The Bitcoin network is structured as a blockchain. In this type of distributed ledger, transactions are grouped together in blocks, which are then timestamped and added to a chain. Transactions are public for everyone on the network to verify and cannot be changed once added to the ledger.
You can learn more about blockchains, what they are, and how they work, in our complete blockchain guide here.
Transactions and how they work
A bitcoin transaction is simply any transfer of value across the Bitcoin network. All transactions are posted to the Bitcoin blockchain, which acts as a distributed, public ledger for all to see. Bitcoin transactions work as follows:
- The sender opens their bitcoin wallet
- The sender scans or copies the public key of the receiver’s wallet
- The sender completes the remaining transaction information, including the amount being sent and fees they are willing to pay to complete the transaction
- The sender signs the transaction using their private key
- The transaction is transmitted to the Bitcoin network
- MIners find the transaction along with a set of other transactions and group them into a block
- The fastest miner to successfully verify the block posts it to the blockchain and receives a mining reward
- Blockchain nodes verify the validity of the block and the transaction is confirmed
Consensus protocol
For the Bitcoin network to operate securely, network participants must reach a consensus of valid transactions to add to the blockchain. The way in which the Bitcoin blockchain is secured is known as its consensus protocol. Bitcoin utilizes a proof-of-work (PoW) consensus protocol which requires the use of energy to secure the blockchain network.
Mining
The PoW consensus protocol utilized by Bitcoin requires the help of miners. These miners use their computing power to solve complex mathematical problems which reveal a block of transactions to then be broadcasted to the rest of the network.
While entire companies are built to mine bitcoin and receive rewards, individuals can also mine themselves by sharing resources with other miners in a pool. Mining pools bring together computing power from multiple sources to be shared over a single network. Any rewards received by the mining pool are distributed between the miners within that pool.
Supply
Satoshi designed Bitcoin to be deflationary in nature, much like the supply of gold. This means as demand for Bitcoin grows and supply continues to shrink over time, the value of Bitcoin should increase as a result.
The total supply of Bitcoin to ever be minted is set at 21 million. At the blockchain’s current rate, it’s expected that the last bitcoin will be mined sometime in the year 2140.
Holding Bitcoin
Physical bitcoin does not exist, and instead, information for holding bitcoin can be found in a Bitcoin wallet. Transactions history and wallet balances are stored on the Bitcoin blockchain and can be retrieved using a Bitcoin wallet. Every Bitcoin wallet has a public key and private key which are used in transacting across the network:
- Public key – Used in receiving bitcoin, a public key can be shared with anyone without the fear of theft. In fact, a public key can be used to view all transactions to and from any Bitcoin wallet.
- Private key – Used in sending bitcoin, a private key should never be shared under any circumstances. A private key is what keeps a wallet secured.
A great place to hold your bitcoin is in the eToro wallet. With the eToro wallet your bitcoin is always accessible and secure. The wallet can be downloaded on any mobile device in the Apple app store or Google Play store. You can learn more about how to transfer funds to your eToro wallet in this video.
What was before Bitcoin?
In the 1990s, there were several attempts at creating a cryptocurrency for the masses. One notable attempt was a currency called bit gold created by Nick Szabo. Bit gold utilized a similar proof-of-work model used by Bitcoin today, but the project never gained much traction outside of hardcore enthusiasts. There was also Hashcash, proposed by programmer Adam Back in 1997. Back would eventually be a key player in the development of Bitcoin, but only after Hashcash fizzled out. While none of these projects ever got off the ground, they helped lay the foundation for what was to come.
Who created Bitcoin?
Building on previous cryptography and economic models of the past, the idea for Bitcoin was envisioned by a pseudonymous figure who called himself Satoshi Nakamoto. Satoshi outlined his vision for Bitcoin in a whitepaper titled, Bitcoin: A Peer-to-Peer Electronic Cash System. Some say that Satoshi knew that revealing his true identity would hurt the project, as having a figurehead would make it easier to claim the digital asset was not decentralized. Until this day, no one knows the true identity of Satoshi Nakamoto.
When was Bitcoin created?
The Bitcoin whitepaper was released on October 31, 2008. But it took a few months before Satoshi decided to put his idea into action. On January 3, 2009, the Bitcoin network came into existence with the first block of the Bitcoin blockchain, also known as the genesis block, was mined by Staoshi. For mining the genesis block Satoshi was rewarded with 50 bitcoins.
The network’s genesis block had a message encoded relating to the economic bailout provided to banks in Europe following the 2008 global financial crisis:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”
Bitcoin forks
Due to its decentralized nature, the Bitcoin community hasn’t always been in agreement on the best course of action for the network. Over the years this has created forks of the cryptocurrency which have resulted in new blockchains claiming they are the original Bitcoin. All told, it is estimated there are more than 20 forks of the Bitcoin network, creating new cryptocurrencies along the way. Here are a few of the most notable:
Bitcoin Cash
When Bitcoin advocates began to disagree about the size of each block on the network’s blockchain, it became clear no unilateral agreement could be reached. While the majority of miners and stakeholders agreed to maintain the block size limit of 1MB, a subsection of the community decided to increase the block size to 2MB. As a result, in 2017, the Bitcoin blockchain forked and Bitcoin Cash was created. Aside from the change in block size, Bitcoin Cash bears a striking resemblance to its predecessor. And Bitcoin Cash continues to operate as a cryptocurrency of its own today.
Bitcoin SV
The block size argument reared its head once again just a year after the Bitcoin Cash fork. The 32MB block size limit of Bitcoin Cash was called into question. So, in November 2018, a group led by Craig Wright and Calvin Ayre split from Bitcoin Cash and created Bitcoin SV with a 128MB block size limit.
Bitcoin uses
It’s clear from its original whitepaper that Bitcoin was intended to be the world’s first form of digital, peer-to-peer cash that could ultimately become the native form of currency for the internet. While Bitcoin has yet to attain mass adoption in this regard, it already has started to be utilized as currency in many ways.
Additionally, many investors view Bitcoin as a digital form of gold, making it a great long term store-of-value asset. Bitcoin investment by institutional investors has already seen tremendous growth.
Trading in Bitcoin
Transaction fees
Like other financial assets, a Bitcoin investment can come with its own set of transaction fees. Some cryptocurrency exchanges charge high trading fees which make it difficult for users to purchase bitcoin at a fair price. On the flipside, you can find some exchanges, like eToro, that don’t charge high transaction fees, and simply charge a spread or a small percentage difference between the bid and ask price, for using their services. You can learn more about eToro fees here.
Volatility
One of the big concerns about Bitcoin is its price volatility. However, cryptocurrency price swings occur not because they aren’t solid assets, but because the industry is still in its infancy. As much as investors hope Bitcoin becomes a replacement for fiat currency, it’s still a speculative asset and as such can see its price swing wildly day-to-day. Early investors have the opportunity to capture the future value of Bitcoin now, but also run the risk of Bitcoin continuing its high volatility for the near future.
Even with such volatility, Bitcoin charts show that over the long haul, the digital asset’s price has appreciated in value.
Current price
The Bitcoin price now will likely be different than the time in which you are reading this guide, thanks in large part due to the aforementioned Bitcoin volatility. Bitcoin grew in value significantly in late 2017, hitting almost $20,000 before falling below $5,000 just one year later. After it was written off by the mass media and much of the public, Bitcoin stormed back in 2020 and started to climb to new highs. In December 2020, Bitcoin broke through the $20,000 mark and continued to soar past $30,000 and even $40,000.
Bitcoin and government
Governments are still navigating their way through the Bitcoin landscape. Currently, the United States government treats Bitcoin as property and taxes the asset as such. The problem among US regulators is determining who should be in charge of managing Bitcoin and other related cryptocurrencies. Both the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have played ping-pong with Bitcoin, attempting to send the asset back and forth between one another.
Meanwhile, in other countries, Bitcoin regulation isn’t much more clear. The European Union is working on comprehensive cryptocurrency regulation to be put in place by 2024, but it remains unclear if the regulation will differentiate between cryptocurrencies like Bitcoin and other digital assets with vastly different functions.
In China, there is a common misconception that Bitcoin was banned entirely. This isn’t true, and instead the eastern power has banned ICOs (initial coin offerings) and digital asset businesses that attempt to evade the government. It is perfectly legal to hold and exchange bitcoin in China, although the country still does not acknowledge Bitcoin as a valid form of money.
Bitcoin criticisms
While many believe Bitcoin will ultimately be the native currency of the internet, it has come up against several criticisms of its design and network that it will have to overcome in order to ultimately succeed.
Energy consumption
Bitcoin only works because miners use exorbitant amounts of energy to secure the network. Bitcoin analysis shows that the Bitcoin blockchain already consumes more energy than many nations around the world, leading many to call into question whether such excessive energy consumption is worth the reward.
Some Bitcoin miners are beginning to move toward renewable energy sources to power their mining equipment, like solar and wind power, but it remains to be seen if this will reduce the carbon footprint of the Bitcoin network enough to make the blockchain environmentally friendly.
No intrinsic value
When people ask what is Bitcoin worth, the answer is that no one really knows. That’s because the Bitcoin system is brand new and nothing like it has ever existed before. While comparisons to gold are common, Bitcoin is different because it seemingly has no intrinsic value. Gold is a physical asset that can be used in jewelry making, electronics, and dentistry. Yet, bitcoin has no value in and of itself and instead only derives value from what others are willing to pay for it. Some believe that without intrinsic value, trading Bitcoin is a worthless endeavor.
Government regulation
Without the full acceptance of Bitcoin by the world’s governing bodies, it’s unlikely the asset will ever grow to mass adoption. Yes, the Bitcoin network itself may be decentralized and unable to be censored, but that doesn’t mean governments can’t make it difficult for users to access Bitcoin-related products and services. Governments can shutdown local Bitcoin businesses and ban foreign exchanges, among other things. These government crackdowns could halt Bitcoin investing in its tracks.
Trading Bitcoin on eToro
Trading bitcoin today is easier than ever thanks to exchanges like eToro. With eToro you can buy and sell bitcoin in just a few simple steps from any web-based device, even your mobile phone. Just register with eToro, transfer funds to your account, and place an order to buy bitcoin. It’s that simple. eToro has a wide variety of bitcoin trading pairs that not only let you sell your bitcoin for fiat currency, but also exchange it for any number of other digital assets.
The currency of the internet
Bitcoin has come a long way since its early days as a relatively unknown digital asset. Today, millions of people are talking about Bitcoin as the next evolution of money, specifically designed for the web. Buying Bitcoin today is easier than ever and the Bitcoin market is only to grow, as both consumers and businesses realize its potential. Yes, the cryptocurrency does have its fair share of question marks and issues to overcome. Doing so will propel Bitcoin to the mass adoption it is looking for.
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