What is Bitcoin - Understanding the Basics

One of the benefits of computer software is the ability to create identical copies of programs almost instantaneously. Of course, companies like Microsoft that make the software protect  their software  from being copied by requiring security codes for each user. But copying a program like Microsoft Office is very simple once the security lock has been bypassed.

The idea of decentralized digital currency dates back decades, but programmers have always struggled to overcome the problem of double-spending, i.e., copying digital money to spend it again. To stop untrustworthy parties  from spending the same tokens repeatedly, Bitcoin came up with a creative solution to solve this problem.

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What is Bitcoin?

The basics of Bitcoin go back over a decade to a  white paper written by the pseudonymous Satoshi Nakamoto. Nakamoto envisioned a peer-to-peer transaction system that didn’t require a centralized third party to verify transactions. But to curtail the issue of double-spending, Satoshi developed the blockchain system to ensure the privacy and security of the Bitcoin network.

The blockchain is a digital ledger system that tracks data and transactions on a specific network. Thousands of computer nodes worldwide process data over the Bitcoin network, using blockchain to note transactions on the ledger correctly. These computer nodes, known as Bitcoin miners, solve math puzzles to mint new blocks containing transaction data and add them to the chain. Bitcoin tokens are rewarded to the miners who verify and add new blocks to the chain.

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Bitcoin Basics

Let’s go through a basic Bitcoin transaction as an example. If you want to purchase a slice of pizza with Bitcoin (don’t laugh, this was the first actual Bitcoin purchase), you’ll need to have some digital currency in a Bitcoin wallet. Likewise, the pizza vendor will also need a Bitcoin wallet to receive your tokens. Using a unique code, you send your tokens to the wallet of the pizza vendor and receive your food in return. This code, known as a key, is imprinted onto a block, along with the date, time, number of Bitcoins sent, and other data specific to that transaction.

Every 10 minutes, new blocks are verified and added to the chain. Each block goes in sequential order, and miners cannot alter older blocks without changing all other blocks that came after them. This process prevents hackers from manipulating the system since consensus is required to verify blocks, and a bad actor would need to control 51% of the network to make unauthorized changes.

Bitcoin mining is the process of solving cryptographic equations to mint new blocks on the Bitcoin digital ledger. Miners need powerful computers to decode  these first-come, first-solve riddles, and whoever finishes first is rewarded with Bitcoin tokens for their authentic block verification. Mining is how Bitcoin is created—the BTC tokens created as miner rewards can be sold, exchanged for other cryptocurrencies, or used for purchases. 

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What is Bitcoin’s Utility?

Right now, the future utility of Bitcoin is difficult to predict due to cloudy regulatory concerns. The SEC considers Bitcoin a capital asset on par with property like real estate or stocks, so using it as currency creates a taxable event. As a result, most Bitcoin owners use it to transact in digital goods or simply as a speculative asset in the risk-on section of their portfolio.

The basic vision of Bitcoin as a trustless peer-to-peer transaction network has yet to be fully realized, but certain use cases have already emerged. Sending money across borders without the need for expensive intermediaries would be a significant win, especially for people in emergencies where it needs to be received quickly. It’s easy to forget how new Bitcoin is compared to other asset classes (the NYSE is over 100 years old!) and what the future holds remains to be seen.