Bitcoin is explained as the first and most valuable cryptocurrency. In the last few weeks, it’s made the news again thanks to a surge in price and reaching a new all-time high. While the wild volatility might make for great headlines, it hardly makes it the best choice for investors looking for a stable store of value. But what is this mysterious currency, and how does it work? 

Let’s find out!

Bitcoin Explained

The domain name bitcoin.org was registered on August 18, 2008. On October 31, 2008, a link to Satoshi Nakamoto’s paper Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list. Nakamoto created the bitcoin software as open-source code and released it in January 2009.

The network was founded on January 3, 2009, when Nakamoto mined the first block of the chain, known as the “genesis block.” The text “The Times 03/Jan/2009 Chancellor on the Verge of a Second Bank Bailout” was embedded in this block. This note refers to a headline from The Times and has been interpreted as both a timestamp and a comment on the instability caused by fractional-reserve banking.

Hal Finney, who created the first reusable proof-of-work system (RPoW) in 2004, was the recipient of the first bitcoin transaction. Finney downloaded the bitcoin software on its release date and received ten bitcoins from Nakamoto on January 12, 2009. The image below shows the first Bitcoin tweet that was sent out 14 years ago by cryptographer Hal Finney.

For every 210,000 blocks, the reward for mining Bitcoin is halved. In 2009, for example, the block reward was 50 new bitcoins. The third halving occurred on May 11, 2020, reducing the reward for each block discovery to 6.25 bitcoins.

One bitcoin can be divided into eight decimal places, and the smallest unit is known as a satoshi. If necessary, and if the participating miners agree, Bitcoin could be made divisible to even more decimal places.

Bitcoin, as a form of digital currency, is not overly complicated to grasp. If you own bitcoin, for example, you can use your cryptocurrency wallet to send smaller amounts of it as payment for goods or services.

What is Bitcoin

Bitcoin (BTC) is a cryptocurrency, or virtual currency, designed to function as money and a form of payment independent of any single person, group, or entity, thereby eliminating the need for third-party involvement in financial transactions. It is given to blockchain miners in exchange for their efforts in verifying transactions and can be purchased on several exchanges.

Satoshi Nakamoto, an anonymous developer or group of developers, introduced Bitcoin to the public in 2009.

It has since become the world’s most well-known cryptocurrency. Its popularity has sparked the creation of numerous other cryptocurrencies. These rivals attempt to replace it as a payment system or are used as utility or security tokens in other blockchains and emerging financial technologies.

How Bitcoin works

Cryptocurrencies are part of the blockchain and the network required to power it. A blockchain is a distributed ledger, a shared database that stores data. Encryption methods secure data within the blockchain.

LEARN MORE: What is Blockchain

The bitcoin blockchain is a public ledger that keeps track of all bitcoin transactions. It is implemented as a chain of blocks, with each block containing a cryptographic hash of the previous block all the way up to the chain’s genesis block. The blockchain is maintained by a network of communicating nodes running bitcoin software.

Using widely available software applications, transactions are broadcast to this network. Transactions can be validated by network nodes, added to their copy of the ledger, and then broadcast to other nodes. Each network node stores its own copy of the blockchain in order to achieve independent verification of the chain of ownership.

A new group of accepted transactions called a block is created, added to the blockchain, and quickly published to all nodes at varying intervals of time, averaging every 10 minutes. This enables the bitcoin software to determine when a specific bitcoin was spent, which is necessary to avoid double-spending.

A conventional ledger records the transfers of actual bills or promissory notes that exist independently of it, but bitcoins only exist as a digital ledger because of the blockchain; they are represented by the unspent outputs of transactions. A blockchain explorer can examine individual blocks, public addresses, and transactions within blocks.

Bitcoin Mining

Mining is a record-keeping service performed using computer processing power. Miners maintain the blockchain’s consistency, completeness, and immutability by repeatedly grouping newly broadcast transactions into a block, which is then broadcast to the network and verified by recipient nodes. Each block contains a SHA-256 cryptographic hash of the previous block, which connects them and gives the blockchain its name.

A new block must include a proof-of-work in order to be accepted by the rest of the network (PoW). PoW requires miners to find a number known as a nonce (a number used only once), such that when the block content and the nonce are hashed together, the result is numerically less than the network’s difficulty target.

This PoW is simple for any node in the network to verify, but it takes a long time to generate. Miners must try many different nonce values (usually in ascending natural numbers: 0, 1, 2, 3,…) before a result is found that is less than the difficulty target. Because the difficulty target is so small in comparison to a typical SHA-256 hash, block hashes have a lot of leading zeros, as shown in this example block hash:

0000000000000000000590fc0f3eba193a278534220b2b37e9849e1a770ca839

The amount of work required to generate a block can be changed by adjusting this difficulty target. Nodes deterministically adjust the difficulty target based on the recent rate of block generation every 2,016 blocks (roughly 14 days given roughly 10 minutes per block), with the goal of keeping the average time between new blocks at ten minutes. As a result, the system adapts automatically to the total amount of mining power on the network.

Bitcoin Environmental Impact

It is a proof-of-work cryptocurrency, whereas other cryptocurrencies, such as Ethereum, are proof-of-stake, which consumes less electricity. 

One environmental impact of Bitcoin is that it worsens climate change. This is because bitcoins are made using electricity, which is partially generated by gas and coal-fired power plants. When burned, coal and natural gas emit greenhouse gases, which heat the earth and change the climate. 

BTC mining is expected to account for 0.1% of global greenhouse gas emissions by 2022. The air pollution caused by coal-fired electricity generation is a second environmental impact, and e-waste due to the short life expectancy of bitcoin mining equipment is a third.

Furthermore, the Cambridge Centre for Alternative Finance (CCAF) estimates that bitcoin consumes around 100 TWh per year and that bitcoin mining consumes roughly the same amount of electricity as Egypt. Bitcoin’s annual e-waste is expected to exceed 30,000 metric tons in 2021, which is comparable to the Netherlands’ small IT equipment waste. One bitcoin generates between 270 and 380 grams of e-waste. Bitcoin mining devices have an estimated lifespan of about 1.3 years.

It has proven difficult to reduce bitcoin’s environmental impact, but possible solutions include producing BTC only where or when clean electricity is abundant. Some policymakers have proposed additional restrictions or bans on bitcoin mining.

Bitcoin and El salvador

After the Legislative Assembly of El Salvador adopted Bitcoin as a legal tender in 2021, El Salvador became the first country in the world to do so. It was promoted by El Salvador’s president, Nayib Bukele, who claimed that it would improve the economy by making banking easier for Salvadorans and would encourage foreign investment.

Because of the volatility of bitcoin, its environmental impact, and a lack of transparency regarding the government’s fiscal policy, the adoption has been criticized both internationally and within El Salvador. El Salvador’s government began purchasing bitcoin in 2021. Between September 2021 and January 2022, it spent approximately $85.5 million on bitcoin.

Its value began to fall in November 2021 and had dropped by roughly 45% by January 2022. El Salvador’s national reserves are estimated to have lost $22 million as a result of this. During this period, the government continued to buy bitcoins, and as of January 2022, it had at least 1,801 bitcoins worth $66 million in its possession.

Bukele then declared that the government would mine Bitcoin using sustainable geothermal energy. As we all know, bitcoin mining consumes a lot of energy, which contributes to pollution if it is powered by fossil fuels. Bukele has stated that “Bitcoin City” will be built in November 2021.

The city would be built at the base of the Conchagua volcano and would be circular in shape, resembling a coin. The city’s location would allow it to mine bitcoins using geothermal energy. Bukele also stated that no income taxes would be collected in the city.

El Salvador’s foreign bonds fell in value. The government began drafting legislation in 2022 to create $1 billion in “Volcano Bonds.” Half of the bonds would be used to fund Bukele’s “Bitcoin City,” with the other half used to purchase bitcoin with a five-year lockup period. Following this, several other countries announced plans to legalize bitcoin.

Bitcoin vs Cryptocurrency

Cryptocurrencies are virtual currencies that operate independently of banks and governments but can be exchanged or speculated on in the same way that physical currencies can. Bitcoin, the first decentralized cryptocurrency, was introduced in 2009. Since then, thousands of new cryptocurrencies, known as “altcoins,” have appeared.

Conclusion

Bitcoin was the first cryptocurrency, and it is designed to be used as a form of payment other than legal tender. Since its inception in 2009, its popularity has skyrocketed and its applications have expanded, resulting in the creation of an array of new rival cryptocurrencies.

Though the process of generating Bitcoin is complex, investing in it is more straightforward. Investors and speculators can buy and sell Bitcoin on a crypto exchange like Coinbase, Kraken, or Gemini, amongst others. As with any investment, particularly one as new and volatile as Bitcoin, investors should carefully consider if it is the right investment for them.

Bitcoin FAQ