While bitcoin was one of the first examples of cryptocurrencies, it also shares characteristics with traditional currencies, just digital. A growing asset class with creation and ownership verification based on cryptography! However, Bitcoin can be categorised as the following:
Bitcoin, the protocol
Bitcoin is a distributed ledger, more like massive files that are stored on thousands of computers worldwide and maintain the balance of token trading.
The ledger records every transaction and then transmits it to the others on the network. Only when it agrees that the correct information is in the network, that is when it can permanently confirm the transaction.
Bitcoin, the token
Even though there is no physical currency, the term ‘token’ refers to the keys users own and trade. However, you can store bitcoins in a bitcoin wallet. You can identify these wallets by a chain of a good blend of numbers and letters.
And when someone wants to send you bitcoin, it gets sent to your public wallet address, and you can only access it with your private keys!
What is Bitcoin?
Bitcoin is currently the most renowned and successful cryptocurrency in existence. As of February 2021, its value has fluctuated between £30,000 and £40,000 per coin with a staggering total market cap exceeding $1 trillion. With an average daily trading volume of over $52 billion it is clear to see why so many people have developed an interest in this ground-breaking currency. The growth and influence of Bitcoin has more than surpassed the boundaries of the trading industry, its reach has been impacting global economies for years and will continue to do so for the foreseeable future.
Bitcoin is an open source peer to peer electronic cash system. Being open source means that Bitcoin is publicly accessible, there are no barriers to entry and anyone can participate in exchanging fiat currencies for Bitcoin. Fiat money is government issued currency, it is reproduceable and gives banks and financial establishments more control of the economy as it enables them to dictate how much is in circulation. As a result of this, governments and banks can therefore affect the value and purchasing power of money, in addition to inflation and interest rates.
Unlike fiat currency, Bitcoin is peer to peer and this means that only 2 parties are required when engaging in trade, the buyer and the seller. Bitcoin differentiates from all fiat currencies because there is no requirement for financial institutions, such as banks and governments, to manage and oversee transactions. As a result, this takes the power away from the establishments and places it among the people. This is arguably the most controversial aspect behind Bitcoin. This also means that because the circulation of Bitcoin cannot be restricted by governments and banks, it is not subject to inflationary pressure, like fiat currency is. The need for a medium of exchange that allowed for trade to occur in this manner is what caused Nakamoto to develop Bitcoin in the first place. This is the most significant factor that resulted in the birth of Bitcoin.
Why was Bitcoin created?
The dilemma of fiat currency being the worldwide domain of trade and exchange is what incentivised Nakamoto to create an alternative. The alternative that started off as complex cryptography and coding has evolved to become Bitcoin as we know it today. The issue with all cryptocurrencies prior to Bitcoin was that they all fell subject to the ‘double spending problem’. Put simply, double spending is the risk that a digital currency can be spent twice. For example, if an individual is able to replicate the coding behind a coin, they can then reproduce it and manipulate its value, as they have increased the amount in circulation.
This is similar to how governments and banks control fiat currency by printing more money and decreasing the overall value of a currency. A famous example of this is that of the Zimbabwean dollar which was essentially rendered worthless due to mass printing and replication by the Zimbabwean government. The value of their currency decreased so much that they even had to introduce $100,000,000,000,000 notes to save citizens carrying round kilograms of smaller value notes!
Following this, Nakamoto’s vision was to design a cryptocurrency that would eradicate the double spend problem and that is when Bitcoin was born. So, how did Bitcoin overcome the double spend problem, the overarching issue that no other cryptocurrency could surpass? Well, Bitcoin was able to overcome this problem through the complex blockchain system on which is based.
Bitcoin’s blockchain is an intricate system that records every transaction and documents all coin ownership. In essence, the blockchain has been programmed to act as a self-sufficient ledger, a new block is added to the chain whenever Bitcoin is bought, sold or exchanged. Every device that operates on the network stores a copy of the entire ledger and the ledger is updated on all devices whenever a transaction occurs. This means that the blockchain is fully transparent and available for everyone to view.
This blockchain structure was the first of its kind and it solved the double spend problem. The transparent ledger and foundational basis of the blockchain created a ‘trust-less’ system for all of its users. The system is designed to verify and document all transactions and therefore everyone is able to view the entire ledger. Not one individual or institution manages the ledger and because it is stored on every device that participates, it is impossible to hack. Due to the ‘trust-less’ system that the blockchain operates on, it allowed Bitcoin to claim the title of being the first ever secure decentralised currency.
In addition to this, Bitcoin’s blockchain does not require any of its user’s personal information, all you need is a Bitcoin wallet, which is a secure digital holding facility for your Bitcoin. Banks require your personal information (such as name, age, address etc). When sending or receiving money via bank transfers, the 2 parties involved in the transaction have to provide their personal information to each other, so that the financial institution can document who has sent and received a payment. However, this is not the case with Bitcoin. You do not need to provide your personal data to set up a wallet to send or receive Bitcoin, all you need is a wallet address.
A wallet address is just a long string of numbers and letters that signify an individual’s holding account (much like an account number or sort code without a name associated to it). This allows for Bitcoin transactions to be conducted with complete anonymity. In essence, Bitcoin’s blockchain allows for its ledger to be transparent while keeping all transactions anonymous. You can see how much Bitcoin one user sends to another; however, you will never be able to find out who the accounts relate to and who the individuals are.
In summary, Bitcoin’s blockchain allows for its users to conduct transactions with complete anonymity and complete transparency in parallel. This was a revolutionary development that no prior cryptocurrencies were able to accomplish and solved the double spend problem. Many developers have since embedded this philosophy into their programming and coding, meaning that it has and will continue to shape the future of cryptography.