What is bitcoin (BTC)?
The price of one bitcoin (BTC) has 🚀 from around $1,000 USD on the 1st of January 2017 to $10,000 USD per BTC in the last few days. It’s probably a good time to understand what exactly is BTC, other than a cryptocurrency with a ~$165 Billion market cap.
In this article we’ll detail some of the factors that make bitcoin successful and why these interest us, and why they interest some heavy hitters such as Bill Gates:
“Bitcoin is exciting because it shows how cheap it can be. Bitcoin is better than currency in that you don’t have to be physically in the same place and, of course, for large transactions, currency can get pretty inconvenient.”
“Bitcoin is a technological tour de force.”
This post is intended for those new to the cryptocurrency space, and who are looking for a high-level explanation of bitcoin and associated technologies. For readers who are already familiar with the basics and want to know more about bitcoin and other cryptocurrencies, we’d recommend the Princeton Bitcoin Book or Blockchain at Berkeley to start.
If we simplify what bitcoin has accomplished to what is most relevant to us as consumers, it has:
- Allowed us to send money around the globe and settle a transaction within an hour as opposed to a couple of days; and
- Allowed us to transact directly with one another (peer-to-peer) without the need for a bank or third party. I can send you BTC directly to an electronic wallet on your phone or laptop. Imagine a world without crazy bank fees or excessive money transfer fees; and
- Become a store of value through its decentralisation and rising global acceptance as a means of payment.
Let’s compare bitcoin to our current paper money.
Paper money, or fiat currency, is represented by pieces of paper for convenience. It is accepted by people because we think it has value and the government requires it to be accepted to fulfil our financial obligations.
Bitcoin is progressing toward what paper money has taken centuries to accomplish, in a fraction of the time. It is becoming a shared representation of value, without the requirement for a physical manifestation (paper), or the excessive cost of a central authority and cumbersome banking system.
In the words of Milton Freidman, the Economist who received the 1976 Nobel Memorial Prize in Economic Sciences:
“I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed, is a reliable e-cash.”
So what makes bitcoin work?
Bitcoin is a currency that is represented by software, or code.
When we complete transactions with physical money and our bank accounts, our banks and other parties like VISA and Amex keep records of our transactions that are linked to our identities. These records are called a ledger. Bitcoin’s software builds a ledger of transactions using technology called blockchain.
The blockchain is what makes bitcoin and similar cryptocurrencies an alternative to traditional banks and payment facilities.
The bitcoin blockchain challenges banks and payments because it is:
- An Immutable Database
- Using Proof-of-Work to keep all parties in-sync.
Distributed (and Decentralised).
Unlike the traditional databases (ledgers) of banks and payment providers, the bitcoin blockchain can be accessed and the information within it can be queried by any computer in the world. Anyone anywhere can see the flow of funds, but they cannot see specific transactions — ala Jim just bought some socks. This transparency builds a system of trust.
I know what you’re thinking, and the following two points will detail why the decentralisation of the blockchain and involving multiple computers enhances security and trust.
Cryptographic (Secure Communications).
Cryptography allows the computers (miners) building the blockchain to work together in a system of mathematical trust. Each transaction in the bitcoin blockchain must be cryptographically verified by a number of miners working to confirm the transactions. No one person/computer can subjectively question the transactions; it’s just math, unlike disputes around Visa or Paypal transactions.
An Immutable Database using Proof-of-Work to keep all parties in-sync.
The blockchain of transactions is kinda like a fly getting trapped in amber (the scene from Jurassic park with the mosquito in the rock). The miners use cryptography to verify transactions globally, then the transaction is confirmed and recorded (secured) for all time on the bitcoin blockchain across the world. Once confirmed it is permanent and cannot be erased.
According to Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond — Proof-of-Work (PoW) uses the decentralised ledger, cryptography and an immutable database to link together and incentivise the miners to agree on which transactions will be confirmed in the blockchain.
The miners race to be the first to solve a mathematical problem to add a new block (group of transactions) to the chain of previous blocks — the blockchain. The miners get rewarded in bitcoin for correctly proving and adding blocks (the amount of bitcoin they receive is detailed here). The competition and financial reward for these proofs are what keeps the bitcoin blockchain secure.
The cryptographic links between blocks, of which each link takes a significant amount of work to establish (PoW), is the reason why no information in a past block can be changed without changing all blocks after it. As the miners compete, they also ensure any incorrect transactions that do not fit the blockchain are rejected, further securing the blockchain.
Yes the above is a crude explanation for the technocrats: For further detail on PoW — Click Here.
Want to deep dive with more information?
So we’ve provided a bit of an overview though for those of you who’s interest has been piqued — feel free to check out the original bitcoin white paper by Satoshi Nakamoto by clicking here.
Would you rather do what you do and have someone else invest spare change in Bitcoin?
Bamboo rounds up your spare change from the past month’s purchases and invests it in cryptocurrencies including Bitcoin, Ethereum, Litecoin and more.
If you’d like to know more about bitcoin, ethereum and litecoin, check out;