What is Bitcoin?
Bitcoin is the world’s first and most liquid form of digital money known as cryptocurrency. Cryptocurrency is a medium of exchange, created and stored electronically in the blockchain – a term used to describe the public network upon which cryptocurrencies are stored, sent and received. The blockchain is a decentralised ledger of all transactions across a peer-to-peer network that acts as an international network of payments and exchange with no need for any central certifying authority such as a bank or government.
How Does Bitcoin Work?
Bitcoin can be thought of as distributed ledger, publicly available on the Internet. When you buy Bitcoin, you buy into the ledger, by purchasing one of a fixed number of slots. When you sell Bitcoin, you sell out of the ledger by trading your Bitcoin to someone else who wants to buy into the ledger. With no approval needed, anyone in the world can buy into or sell out of the ledger any time they want – with near instantaneous speed and no or very small fees.
The video below provides a thorough analysis on how Bitcoin works on a technical level.
What Makes Bitcoin Unique?
Bitcoin transactions are encrypted cryptographically and cannot be brute forced or confiscated with proper key management.
Bitcoin can be sent to anywhere in the world, even to countries without traditional banking, as the Bitcoin ledger is globally distributed.
Bitcoin solved the longstanding computer science problem known as the Byzantine Generals Problem – which means nobody needs to trust anybody for it to work.
Bitcoin transactions are peer-to-peer, with no intermediary taking a cut.
Bitcoin is a finite resource – there will only ever be 21,000,000 Bitcoins created, and they are automatically issued in a predictable manner to reduce monetary inflation, as displayed here.
Bitcoin is globally distributed across thousands of nodes with no vulnerability to a single point of failure and therefore unable to be shut down.
Nobody can prevent an individual from interacting with the Bitcoin network, or censor, modify or obstruct transactions they disagree with.
Bitcoin’s public ledger is transparent – all transactions on the ledger are publicly visible to everyone.
Bitcoin is open-source – its code and design is public, nobody owns or controls Bitcoin and everyone can participate.
Transaction fees for Bitcoin can vary between a few cents to a few dollars depending on network demand and how much priority you wish to assign to the transaction. The current fee schedule for Bitcoin can be found here.
Depending on the need for confirmations, transaction times for Bitcoin can range from a few second to a few minutes, unlike banking transactions which can usually take several days.
The only personal identification on the Bitcoin network is your public address – a stringed mix of 26-35 alphanumeric characters.
Digital money is far easier to transport than physical cash or gold. One could even carry their entire net worth anywhere in the world, by creating and remembering a mnemonic recovery phrase.
Each Bitcoin is divisible down to 8 decimals. This means that Bitcoin can grow in value and simultaneously enable micro-transactions such as 0.00000001 Bitcoin. Standard dollars only allow for 2 decimal points e.g. $0.20.
Why is Bitcoin So Important?
The hype currently surrounding cryptocurrencies is nothing short of mania, yet it is not without merit. The blockchain technology upon which Bitcoin is built is undeniable, and will almost certainly revolutionize everything from banking, insurance, logistics, property ownership and the stock market, shaking up the processes we have perhaps become too comfortable with.
Bitcoin’s unique properties are expected to change the standard processes of several industrial landscapes in myriad ways. Some examples of current and future Bitcoin applications include:
International Money Transfers
Hundreds of millions of low-income individuals in foreign countries work hard every day to send money back to their families in their home countries. According to the World Bank, this amounts to an annual total of $400 billion. Every day, banks and payment processing companies extract staggering fees from these money transfers – up to 10 percent and sometimes even higher. Bitcoin presents an enormous opportunity for these individuals to circumvent the banking intermediaries and remit money directly to their families back home at a fraction of the cost and with lightning fast speed.
Banking the Unbanked
Bitcoin provides an opportunity for millions of people around the world to join the modern economic system. Of the 195 countries in the world today, only around 20 have what we would consider to be modern banking and payment systems. As Bitcoin is globally distributed, the remaining 175 countries now have an unprecedented ability to join the Bitcoin network and participate in the modern economy.
A fascinating opportunity Bitcoin allows is the ability to initiate micropayments. Unlike standard dollars, Bitcoin is divisible down to 8 decimal points, which means payments can be made for 0.00000001 Bitcoin. Micropayments present an incredible opportunity for content monetisation. For example, online media companies can now charge very small amounts of money per article or video play, something that was not previously possible using the limited divisibility of dollars and cents.
Bitcoin and blockchain technology could allow consumers to use the blockchain to manage fractional ownership in property such as real estate or autonomous cars.
In a Nutshell
The Bitcoin ledger (or blockchain) is the first payment system of its kind. Above all, Bitcoin is a technology, and currency is the first application. Bitcoin is what money would look like if we invented it today instead of thousands of years ago. It has the same properties as gold (it is scarce and fungible) and dollars (it is easy to transport, transfer and divide into units), yet it does these things in a far superior, more efficient way. Unlike every other form of currency, there is no central authority, intermediary or people controlling Bitcoin’s distribution or supply. As a technology, the invention of Bitcoin is comparable to the advent of the Internet itself, presenting endless opportunities for a range of different industries and paving the way for entirely new ones to be created.