Bitcoin represents the first successful and decentralized iteration of digital currency. It’s also the first of 7,000+ coins that make up the broader cryptocurrency market. But what exactly is bitcoin, where did it come from, and how does it work?
- Bitcoin is a peer-to-peer digital currency used to store and transfer value.
- Similar to gold, bitcoin’s supply is limited with a ceiling of 21,000,000 BTC.
- Bitcoin was devised by an enigmatic and pseudonymous individual or group known as Satoshi Nakamoto.
- As the pioneering cryptocurrency, BTC stands as the prototype for the entire digital asset economy.
The ins and outs of bitcoin
In its simplest form, bitcoin is a peer-to-peer digital currency used by many to store and transfer value over the internet. BTC became a pioneer of the digital asset economy after managing to solve the double-spending issue while also forgoing the need for a central server or intermediary (i.e., bank or financial services provider)—a problem many of its predecessors failed to overcome.
Like gold, Bitcoin’s supply is finite. There will only ever be 21 million units in existence, a design choice that ensures against arbitrary inflation.
Transactions occur via the blockchain, a digital ledger that allows for the decentralized and irreversible storage of data, eliminating the need for a centralized bank or institution. Blockchain technology underpins both bitcoin and a myriad of other cryptocurrencies and is used to verify transactions and control the production of assets.
Because there is no central authority or administrator, bitcoin utilizes a consensus mechanism known as proof-of-work (PoW) to verify transactions.
Within bitcoin’s PoW consensus mechanism, users, or miners, as they’re known, compete against each other to solve a complicated equation—expending significant energy to do so. Solving these equations confirms transactions and places them into “blocks” grouped upon a “chain” (hence “blockchain”). In return for their service and energy expenditure, miners are rewarded with newly-minted bitcoin.
How do I buy bitcoin, and where do I store It?
Once new coins are generated, miners can choose to sell to brokers and exchanges, such as Binance and Coinbase, where they enter the crypto economy and can be bought and sold by almost anyone.
Contrary to popular belief, it is possible to buy less than one bitcoin. In fact, it’s possible to buy as little as one hundred millionth of a bitcoin or 0.00000001 BTC—better known as one Satoshi.
How much one should invest is up to individual risk appetite. However, many financial advisors have advocated for between 1-6% exposure to cryptocurrencies such as bitcoin as part of a well-diversified portfolio.
Similar to cash, bitcoin is stored in a wallet—only a digital one. Digital wallets come in the form of a hardware device, a service, or a piece of software. Their main purpose is to keep a user’s bitcoin protected, but they can also be used to send and receive BTC. Each wallet contains a private key—a string of numbers and letters that grant access to a user’s bitcoin.
Private keys should be just that: private. They shouldn’t be revealed to anyone except the owner of the bitcoin. These unique keys correspond to another, less secret key, known as a public key. By sharing their public key, users can transfer and request funds from others.
A brief history
The first mention of the pre-eminent cryptocurrency was within the bitcoin whitepaper published in 2008 by an unknown and enigmatic individual—or group of individuals—known as Satoshi Nakamoto.
The whitepaper, entitled Bitcoin: A Peer-to-Peer Electronic Cash System, spoke of a decentralized, peer-to-peer version of electronic cash allowing online payments to be sent directly from one person to another without going through a third-party.
Several months later, bitcoin moved from conception to completion with the very first bitcoin block, aptly dubbed the “Genesis Block,” being mined into existence. Nestled within the initial block, acting both as proof of bitcoin’s inception and a nod to the aftermath caused by the great recession, Nakamoto inscribed a message:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”
Since then, bitcoin has spawned a thriving ecosystem of cryptocurrencies, many of which have innovated off the back of the pioneer, offering novel and intriguing use cases to disrupt and enhance society, businesses, and the very way we transact.
Evai ratings share a similar ideal to bitcoin. Centralized credit rating agencies acted as one of the primary impetuses for the 2007 financial crash. These agencies dressed-up risky assets as AAA-rated securities, misleading underinformed investors, and exposing them to enormous risk.
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