Bitcoin is a complete monetary system that provides ways to “mint” digital coins or tokens, transfer them from one owner to another and record such transfer in an immutable public ledger that anyone can read, but only a few randomly chosen can update every few minutes with the consent of the majority of network users.
You don’t have to be a geek or a finance expert to understand the basics of Bitcoin. Anyone can use it after learning 12 key concepts.
- Bitcoin is a communication and data recording system which allows the transfer of value or digital money from one person to another without the need of banks, government permission, and knowledge of the identity of the recipient.
- The transfer can be international and is almost instantaneous; it takes only 10 minutes to be fully confirmed.
- Internet is the network of choice, but other communication systems are also possible, including satellites.
- The transaction has a low cost and cannot be reversed, but it is publicly acknowledged by recording it in a distributed account ledger (blockchain) that anyone can read using the proper software. The digital tokens never move, they are simply assigned new ownership inside the ledger that keeps track of all exchanges since the very first one.
- The system is so secure that after more than ten years of operation, it has been violated only once, with no consequences, at the very beginning. No hacker has been able to crack it since. The only true weakness is in wallets that can be hacked, stealing the keys that give ownership to Bitcoin tokens. They are particularly vulnerable when stored online or when they are on a computer connected to the Internet.
- Bitcoin is legal in many countries, included the USA, and can be used to also transfer dollars or many other currencies after first converting them into Bitcoins and then back into dollars. The conversion happens through one of many exchanges that were born in the last few years and that operate 24/7.
- People can buy merchandise directly from the many vendors that already accept Bitcoin payments.
- The value of a Bitcoin has grown constantly since its origin, although with wild and rapid fluctuations. Many use Bitcoin just as an investment tool, some trade on it daily to speculate on its rapid value changes. Gains so made are considered “capital gains” and taxed by the IRS and other tax authorities around the world.
- There is a limited amount of Bitcoins available in the world, which makes them scarce and therefore, increasingly valuable. They are minted following a rigid mathematical formula that cannot be manipulated by any single entity. The Bitcoin monetary policy is set in stone inside the software that runs the system itself and can only be modified by a consensus of a majority of its users and developers.
- Changes and evolutions constantly happen in the direction of making it easier to use, capable of managing more transactions per minute, and cheaper. Yet its fundamentals remain unchanged since its inception.
- There are several “flavors” of Bitcoin, but the dominant one, by far, is Bitcoin Core (BTC), which has changed the least since the original genesis of the protocol.
- Bitcoin will maintain and increase its value to the degree more people believe in it and use it. Government restrictions, tax laws, social and technological phenomena will influence it, but its survival will only be assured by mass adoption. It is intrinsically unstoppable provided enough individuals to continue to support it.
Who invented Bitcoin?
Bitcoin was originally proposed in November 2008 by an anonymous developer known with the pseudonym of Satoshi Nakamoto. He figured out the combination of elements needed to create a Bitcoin network. Most of the discoveries were not new and came from scientists and researchers who had tried to develop a digital currency for three decades. Satoshi was able to brilliantly integrate all the components in a system that could work.
It is the most important change that happened in the financial and economic world since the invention of digital payment systems. It provides a practical way to transfer money and pay goods without having to depend on intermediaries or opening a bank account. It is censorship-resistant; therefore, you don’t need the permission of anyone to use it. After the huge financial crisis of 2008, Satoshi wanted to provide the world with an alternative to a corrupt banking monopoly.
He developed the majority of the initial official bitcoin software. The network came alive on January 3, 2009, with him creating (through the process of mining) the initial (genesis) block of the Bitcoin ledger. The first transaction happened a few days later, on January 12, 2009, and was performed again by Satoshi himself transferring 10 Bitcoins to Hal Finney, the first key co-developer who had downloaded the Bitcoin software the very day of its release, on January 9.
Satoshi Nakamoto stopped working on the project in the middle of 2010 and left the project altogether in April 2011, announcing he was “moving on to other things.”
Despite several investigations and multiple pretenders, his or her identity remained anonymous. He was replaced by several developers that kept building the code needed to perform all the required functions on a big scale. Some of the original developers are still working on the project, new have joined, and others have left to work on different cryptocurrency projects, some in direct competition with the original Bitcoin (BTC). None of the competitors has succeeded in replacing the original.
What is the double-spending problem?
Using a form of digital money like Bitcoin, one faces the issue of preventing forgeries and the duplication of “coins.” It is very easy to make a copy of a digital file, and therefore it is just as simple to spend the same electronic coin many times, defrauding the recipients.
Satoshi was the first one to solve this issue setting in motion a popular movement that today involves over 7 million active users with some 32 million wallets, with an overall market value of $ 183 billion, at the date of this writing.
It is virtually impossible to spend the same Bitcoin twice, provided you give enough time to the network to validate a transaction. The suggested waiting time is 10 minutes, with some also advising to wait 20 minutes.
The long wait time is needed to guarantee the safety of the system and preventing hackers from manipulating it. At the same time, it is one of the major hurdles which is preventing a wide-scale use of Bitcoin as a common payment tool. The Bitcoin development community is working on systems that will overcome this weakness by providing a faster and somewhat less secure process for smaller payments.
How many Bitcoin versions are there?
Currently, there are FIVE different versions of Bitcoin, at this time, with the main one being, by far, Bitcoin Core (BTC). It uses free and open software which derives directly from the original development by Satoshi Nakamoto. When installed on a computer, the Bitcoin Core creates a node of the Bitcoin network, with its wallet and the capability to send and receive money. The word core is therefore used, in this case, to distinguish it from the wider Bitcoin network and its protocols.
When Satoshi Nakamoto abandoned the Bitcoin project in 2011, he left behind a community of developers tasked with the duty of evolving the platform. Any changes would be possible only if accepted by the majority of the network players and developers. In such a way, no single individual or group would have been able to twist the system to their benefit.
The initial lead developer was the Gavin Andresen, from Massachusetts, who also started the Bitcoin Foundation, which is the organization currently charged with developing Bitcoin Core. In April 2014, Dutch Wladimir J. van der Laan, from Holland, replaced him as lead developer and still holds the position. Andresen initially tried to facilitate the expansion of Bitcoin Core as a whole but flip-flopped supporting antagonist projects in 2016 and was eventually banned from changing the BTC software that same year. In 2020 he announced his support for a completely different and competitive environment: Ethereum.
Gavin’s main complaint was that BTC didn’t evolve and change fast enough to meet its scalability challenges (the ability to process many more transactions per minute). But this is considered to be the actual strength of Bitcoin Core: a very conservative development approach that maintains as much as possible the original formula. Stability fosters trust and it shows in the huge market valuation of BTC.
Litecoin versus Bitcoin Core
The problem of being able to process only about 3,500 transactions every 10 minutes has generated infighting in the Bitcoin development group fairly rapidly. Some of them parted their way, evolving their version of Bitcoin. Such a mechanism is called “hard fork,” and it is similar to the forking of a railway. One train arrives at the hard fork and it splits into two separate convoys, each following a separate and diverging path.
The first departure from the original Bitcoin is called Litecoin, or LTC. Born as a friendly hard fork of the original project on October 13th, 2011, it is a complement to BTC for small payments. It uses the same open-source software, but validates a block of transactions in 2.5 minutes instead of 10 minutes, like BTC. Furthermore, Litecoin allows the production of a total of 84 million coins over its lifetime, versus the 21 million allowed for BTC. It is today the 6th cryptocurrency in value. His creator, Charlee Lee, is still active in developing it.
Bitcoin Cash versus BTC
Bitcoin Cash is an alternative version developed in August 2017. It aims at reducing transaction costs by increasing the amount of information processed in a single block, the digital container hosting all the information related to multiple transactions approved in one cycle. Bitcoin Cash, or BCH, uses blocks with a size of 8 MB versus the 1 MB allowed by Bitcoin Core and it allows for a maximum block size of 32 MB. It can record more transactions per minute, but it reduces security and introduces more centralization of control. Furthermore, it creates a huge database of previous transactions limiting the ability to have a truly decentralized network where many people can participate independently with their computer or smartphone.
BCH tried immediately to gain popularity as the complete alternative to BTC but never succeeded. Today it occupies the 4th position in the list of top cryptocurrencies. One of its key developers, Amuary Séchet, claimed at one point to the original Satoshi Nakamoto, without being able to prove it. Another key developer, the Californian Roger Ver, had been a strong proposer of the original Bitcoin and was one of the original five founders of the Bitcoin Foundation. Later he turned to Bitcoin Cash and developing a whole series of Bitcoin and crypto-related startups.
Bitcoin Gold versus BTC
On October 24, 2017, another hard fork took place on the main Bitcoin Core blockchain. The name of the new controversial project was Bitcoin Gold which aimed at facilitating the mining (minting) of new Bitcoins. The hard fork involved the issuance of tokens to the benefit of the group supposed to develop it which lowered the trust factor in the Bitcoin community. Today Bitcoin Gold (BTG) is 40th in the list of the overall market value of major cryptocurrencies. It is the worst-performing Bitcoin hard fork.
Bitcoin Satoshi Vision versus BCH
In August 2018, exactly one year after the birth of its parent, some Bitcoin Cash developers launched a hard fork called Bitcoin Satoshi Vision or BSV. It uses an even bigger block size, 128 MB, in an attempt to provide a global payment system. More recently, they seem to be willing to go back to the original block size of 1 MB. One of the founders of BVS, the Australian Craig Wright, also claimed to be Satoshi himself, but didn’t gain much credibility and has been involved in troubling judiciary problems. Like BCH, also BSV failed to replace BTC and today is 5th in the overall list of cryptocurrencies per value.