What is Bitcoin?

Published in

On the Block

10 min readApr 9, 2019

Bitcoin is the original cryptocurrency, which was created in 2008 by someone under the code name Satoshi Nakamoto. It was designed to be a form of online money that wouldn’t require oversight from any bank or institution. Currently, it is by far the most popular currency and is valued at roughly $5,000.

One of the reasons why Bitcoin has so much appeal is that it is anonymous. Every user has an account that comes with a “private key” and a “public key”. The public key plays the role of a username, while the private key is like a password. When a user wants to send someone else money, they send it to their public key. However, the public key does not provide any personal information, it is just a random mix of letters and numbers. So, if you were to use Bitcoin to buy something online, you wouldn’t need to give your name to the person you are interacting with — you could just give them your public address.

How a Transaction Works

Since Bitcoin is decentralized — not controlled by any institution — the users of the network have to help run it. To do so, Bitcoin owners run a program on their computer which works with all the other members of the network to validate transactions. Every time there is a transaction, it is sent out to all the members of the network to be verified. The computer programs automatically check to see if the person who is attempting to send the Bitcoin actually has enough Bitcoin to do so. If they do, the transaction is added to a list of recent transactions known as a block. Every ten minutes, the most recent block is added to a chain of all the previous blocks on the network. This database is known as the blockchain.

The way in which the most recent block is added to the blockchain involves a process called mining. In this process, transactions are verified by the computer programs attempting to solve a complicated math problem, known as a “hash equation”. The computer that does this the fastest receives a small payment of Bitcoin. This payment does not come from any specific user, instead it is generated by the entire network. This is done to incentivize users to run the program that runs the network. The account that sends the transaction also has to pay a separate, small fee to the miner.

An Example Bitcoin Transaction

Alice wants to send her friend Bob some money she owes him for mowing her lawn.

After deciding on the amount of Bitcoin to spend, Alice enters Bob’s public key and then her own private key to submit the transaction.

This transaction is then sent out to the entire Bitcoin network. The computers on the network automatically check to see that Alice has enough Bitcoin to send to Bob.

This transaction is added to the list of recent transactions known as a block.

The computers on the network all race to solve the math equation in order to verify the transaction.

Once the first computer verifies the transaction, the most recent block is added to the blockchain, which holds the entire record of Bitcoin transactions.

Bob receives his Bitcoins. The computer that was first to solve the equation gets paid both the transaction fee from Alice and receives the new Bitcoins from the network.

Ideally, this process should take roughly 10 minutes to complete.

Why is Bitcoin better than what already exists?

There are a number of things that make Bitcoin attractive. Arguably the most important one is that it is secure and private. As mentioned earlier, using Bitcoin does not require any personal information such as your name, age, and address. Instead, you just need your public key. In contrast, when you use your credit card, your personal information is stored by the company you bought something from. Often, your information is sold off to other companies without your knowledge. Additionally, there is potential for both your personal info and your credit card info to be stolen. Back in 2013, 40 million credit/debit card accounts which were stored by Target were hacked and stolen. If a retailer were to accept payments in Bitcoin, this kind of hack would not be possible as they would only have the public keys of their customers — not the private keys needed to send a payment.

Another benefit of Bitcoin is that it is fast. Ideally, Bitcoin transactions are supposed to only take 10 minutes. However, as the network has grown, the speed has slowed down. Currently, it takes about an hour for a user to receive their Bitcoin from a transaction. While this is slow in comparison to most cryptocurrencies, it is faster than the more mainstream ways to pay for things. Typically, credit card transactions take 1–3 business days to go through. Other forms of electronic payments such as Venmo and PayPal also take 1–3 business days to process. Both for larger and international payments, wire transfers are often used. Wire transfers within the US often take 1–2 business days, while sending money internationally can take up to 5 business days to complete. With Bitcoin, regardless of where you send your money, it should only take around an hour for it to arrive.

Bitcoin is also typically cheaper to use than other payment systems. The average cost of a Bitcoin transaction is currently around $0.30 — the fee is not impacted by the price of the transaction. In contrast, credit cards, PayPal, and Venmo (Venmo only charges fees for using a credit card) charge roughly 3% per transaction, while wire transfers typically cost around $30. While it would be more expensive to use Bitcoin as opposed to a credit card for something small, like a $2-dollar soda, it would be much cheaper for larger purchases as the flat will always remain around $0.30.

Bitcoin could also be extremely impactful in countries without a stable government and currency. A good example for this is in Argentina. Their currency, the Peso, is worth one forty-seven trillionth of what it was worth in 1940 when compared to the US dollar. That means that if you live in Argentina, your life savings are pretty much worthless due to inflation. One possible solution would be to store your money in a different country’s currency, like in the US dollar. However, due to the currency controls put into place by the Argentine government it is extremely expensive to do so. Additionally, you would not be able to use that money for daily purchases because it is from another country. On the other hand, using Bitcoin could be a much better solution. Since Bitcoin is both online and decentralized, the Argentine government is not able to control who uses it. Furthermore, it is becoming a popular way to pay for things there with the Argentine public transport system now accepting Bitcoin. Argentinians who use Bitcoin no longer have to fear that their money will become worthless due to the incompetence of their government.

Will we actually all use Bitcoin in the future?

While there are lots of things that make Bitcoin great, there are also lots of problems with it. For a start, there are not many things that can actually be bought with Bitcoin at the moment. The hope is that as Bitcoin becomes more popular, companies will start accepting it as a payment method. Until then, Bitcoin will just be something to invest in and use for niche purchases.

One of the main reasons stores have not begun accepting Bitcoin is because the price is incredibly unstable. Since the start of 2017, the price of one Bitcoin has jumped from around $1,000 to nearly $20,000, back down to $3,400 and is now around $5,000. Clearly, it is very risky to store money in Bitcoin because of the potential for the price to fluctuate. However, Bitcoin’s volatility could result in large profits for investors over the long run if it were to return to its former heights.

Anyone can buy or sell Bitcoin — one of the easiest sites to purchase it on is coinbase.com.

Being decentralized is one of the main strengths of Bitcoin, but it can also be a problem. Once a transaction is submitted, there is no way to undo it or get your money back. This means that if you accidentally send money to the wrong account, unless the account holder is very nice, your money is gone forever. Additionally, if someone were to gain access to your private keys and use it to purchase things, there won’t be a credit card company that will refund you.

Another potential issue for Bitcoin is its scalability. At the moment, Bitcoin can only handle around 7 transactions per second. In comparison, Visa does around 24,000 transactions per second. At the moment, this isn’t much of an issue because comparatively there aren’t that many people regularly sending Bitcoin — roughly only 5% of Americans own some Bitcoin. However, if Bitcoin were to replace currencies around the world, the amount of new users would significantly slow down the network to a point that no one would want to use it. Additionally, transaction fees would likely become far more expensive. Back in January of 2018, when Bitcoin was at its peak, transaction fees reached as high as $30 dollars due to the strain on the network. Even then, there were only a couple hundred thousand daily transactions. Developers are working to try and create ways to fix Bitcoin’s scalability issue — ex: the Lightning Network and Segregated Witnesses — but it is not yet clear if they will have enough of an impact.

As of now, it seems that Bitcoin will end up being far more like gold than a currency. The scalability problems mentioned earlier means that Bitcoin can’t realistically be a currency. But that doesn’t mean it is worthless. In fact, it could be a very good store of value. A store of value is something that is valuable and can be stored to be sold in the future. The most common example of this is gold. There are a few reasons why Bitcoin would be a good store of value. First, it is something that can easily be stored for long periods of time. Second, like gold, Bitcoin is scarce. The current supply of Bitcoin around 17 million and the maximum amount it will reach is 21 million. Third, even if Bitcoin doesn’t become more scalable, it would still be useful both for large payments and international ones. This means that there will be people who will want to buy Bitcoin in the future, providing it with value. As a result, Bitcoin could end up being the online version of gold — a safe place to store money — assuming that the price eventually becomes more stable.

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