Bitcoin explained: history, uses, and basics for beginners

Bitcoin has transformed the way we invest and think about money. Here, we will take a deeper look at Bitcoin and explain the technology, its history, and its uses.

History of Bitcoin Technology

Let’s first go back to 2008. The Global Financial Crisis is in full swing; huge banking juggernauts like the Lehman Brothers are going bankrupt, and millions in the USA and further afield are losing their jobs. It was on this backdrop that the origins of Bitcoin can be traced. A whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was published on October 31, 2008, by an individual or group named Satoshi Nakamoto. This groundbreaking paper laid the foundation for the entire cryptocurrency ecosystem. It outlined a digital currency that could operate without the need for intermediaries like banks or governments.

A few months later, on January 3, 2009, the very first Bitcoin block, known as the genesis block, was mined, and history was made. The early days of the Bitcoin network, sometimes referred to as the ‘Satoshi Era’, were primarily used by tech insiders and individuals who traded very small amounts. One Bitcoin was worth less than $0.20 until October 2010.

The first real-world transaction with Bitcoin took place on May 22, 2010, and has become legendary. An American programmer named Laszlo Hanyecz bought two pizzas for 10,000 BTC from Papa Johns’s. Hindsight is a wonderful thing, but had Mr Hanyecz held his Bitcoin it would be worth around $600 million today. Ouch.

As Bitcoin grew in popularity, it faced mounting challenges. The 2014 collapse of Mt. Gox, one of the earliest Bitcoin exchanges, and the bankruptcy of FTX in 2022 sent shockwaves through the community and damaged Bitcoin’s (and all of crypto) credibility among traditional finance (tradFi) investors.

But Bitcoin proved resilient and would continue to grow in price, gaining wider mainstream adoption and inspiring thousands of other blockchain networks and altcoins.

Bitcoin technology explained

Bitcoin is built on blockchain technology. Blockchains are decentralized distributed ledgers which record transactions across a network of computers. Using math and cryptography, blockchains provide an open, decentralized database of any transaction involving value: money, goods, property, work, or even votes. It creates a record where the entire community can verify the authenticity.

Bitcoin transactions are secured through cryptography. Every computer participating in the system also keeps a copy of the ledger (the blockchain). So, if you want to take down the system or hack the ledger, you’ll have to take down thousands of computers, keeping a copy and constantly updating it. Each user has a unique pair of keys: a public key, which serves as their Bitcoin address, and a private key, which is used to sign transactions. When a transaction is initiated, it is broadcast to the entire network. Miners use powerful computers to solve complex mathematical problems and validate and process these transactions.

Like most money today, Bitcoin is also digital. This means there’s nothing physical that you can touch. There are no actual coins; there are only rows of transactions and balances. When you “own” Bitcoin, you own the right to access a specific Bitcoin address record in the ledger and send funds from it to a different address.

The Bitcoin network is designed to be self-regulating and resistant to manipulation. The total supply of Bitcoin is capped at 21 million coins which helps to drive up the token’s value. As of March 2024, about 19.65 million bitcoins were in circulation, leaving just around 1.35 million to be released via mining rewards.

A line graph showing the dollar price of Bitcoin since its launch
Price history of BTC

Bitcoin Uses And Applications

With Bitcoin, no one has an insider advantage that they can use to create more of it for themselves and their associates. It’s not like fiat currencies, which governments can print more of if they want to. Governments have no real advantage when it comes to Bitcoin; they can only purchase it on the market or mine it like everyone else.

Digital asset for storing wealth

This makes Bitcoin useful as a digital asset for storing wealth. Bitcoin allows people to protect the purchasing power of their savings over time, be they individuals, families, corporations, central banks, or even nation-states (like El Salvador).

Free from government control

Furthermore, because Bitcoin is very easy to transport and store without third-party involvement, it is useful for those in countries with authoritarian or oppressive governments. The risk of confiscation is far lower than with other assets. It’s easy for a government to freeze a bank account, seize a property, or take over a brokerage account. Still, it’s virtually impossible to do that with Bitcoin on a large scale due to the decentralized nature of the network.

Easy to send and receive across borders

Sending or receiving Bitcoin is easy and can be done anywhere with a stable internet connection. No license or permission is needed; it is open to all, and its cross-border nature means holders can bypass banking fees and exchange rates.

Digital currency

The original vision for Bitcoin was its use as digital cash. Today, many businesses, both online and offline, accept it as a form of payment. However, other coins are better suited for fast, small digital transactions. Due to its limited supply, Bitcoin tends to be more popular as a store of value, like gold.

Bitcoin has also inspired the creation of thousands of other cryptocurrencies and has been the foundation on which the crypto sector has built.

Bitcoin Basics For Beginners

If you’re new to crypto, the good news is it’s easy to get started, and Bitcoin is arguably the best place to begin. First, create a Bitcoin wallet, a digital storage space for your bitcoins. There are multiple options here, from software wallets to cold wallets, where your Bitcoin is stored offline.

Once you have a wallet, you can acquire Bitcoin through several methods. The most common method is to buy Bitcoin on cryptocurrency exchanges like Binance, Coinbase, or OKX, but there are many exchanges to choose from.

When transacting with Bitcoin (or any crypto), you must know about and understand the concept of public and private keys.  You give public keys to senders so they can transfer your funds. The private key is used to access your wallet. Never share your private key details.

Introduction To Bitcoin Mining

How are new Bitcoins made? Through Bitcoin mining. Miners use powerful computers to solve mathematical problems, and in doing so, they will add new blocks to the blockchain. Miners compete for a fixed reward under a winner-takes-all format. The first miners to process a block of transactions on the Bitcoin blockchain get paid in Bitcoin. The reward for processing one block has dropped since the halving, down to 3.125 per block from the previous 6.25 BTC. The more computing power a miner has, the more likely it is to earn the reward.

We call the process ‘mining’ because it helps ‘mine’ new Bitcoins from the system. But really, the mining part is just a byproduct of the transaction verification process.

Sounds great, doesn’t it? Free money? But it’s not that easy. Satoshi Nakamoto, who invented Bitcoin, crafted the rules for mining so that the more mining power the network has, the harder it is to get the answer to the mining math problem. This means the difficulty of the mining process is self-adjusting to the accumulated mining power the network possesses. In other words, the more miners join, the harder it gets to solve the problem.
If some of them drop off, it will get easier.

And some very professional miners are already out there in the form of mining pools. Even if you buy the best possible miner out there, you are still at a considerable disadvantage compared to professional Bitcoin mining farms. The idea is simple – miners group to form a “pool”. This means that they combine their mining power to compete more effectively.

Chart showing the percentage of Bitcoin mined and by which mining pool
source: coindance
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