In a few words, Bitcoin is a peer-to-peer cryptographic digital form of money that has no central authority (decentralized) and all the transactions are stored on a public ledger that is called blockchain. It allows people to send money to each other without intermediaries. All the computational power needed to process the transactions and secure the data is provided by the miners who use ASIC machines.
Bitcoin is a collection of concepts and technologies that form the basis of a digital money ecosystem. In this guide we will cover the following:
The History of Bitcoin
Bitcoin: A decentralized peer-to-peer network. Why is it important?
A public transaction ledger (the blockchain)
The Bitcoin Whitepaper – Who created Bitcoin?
The idea of a cryptographic form of internet money existed decades before Bitcoin, by a movement called Cypherpunks.
Prior to the release of bitcoin there were a number of digital cash technologies starting with the issuer based ecash protocols of David Chaum and Stefan Brands. Adam Back developed hashcash, a proof-of-work scheme for spam control. The first proposals for distributed digital scarcity based cryptocurrencies were Wei Dai’s b-money and Nick Szabo’s bit gold. Hal Finney developed reusable proof of work (RPOW) using hashcash as its proof of work algorithm.
In the early days, Nakamoto is estimated to have mined 1 million bitcoins. Before disappearing from any involvement in bitcoin, Nakamoto in a sense handed over the reins to developer Gavin Andresen, who then became the bitcoin lead developer at the Bitcoin Foundation.
The value of the first bitcoin transactions were negotiated by individuals on the bitcoin forum with one notable transaction of 10,000 BTC used to indirectly purchase two pizzas.
On 3 January the bitcoin network came into existence with Satoshi Nakamoto mining the genesis block of bitcoin.
Bitcoin takes parity with US dollar (1$ price).
In June 2011, WikiLeaks and other organizations began to accept bitcoins for donations.
January: Bitcoin was featured as the main subject within a fictionalized trial on the CBS legal drama The Good Wife in the third-season episode “Bitcoin for Dummies”.
September: The Bitcoin Foundation was launched to “accelerate the global growth of bitcoin through standardization, protection, and promotion of the open source protocol”. The founders were Gavin Andresen, Jon Matonis, Patrick Murck, Charlie Shrem, and Peter Vessenes.
October: BitPay reported having over 1,000 merchants accepting bitcoin under its payment processing service. In November WordPress had started accepting bitcoins.
June: It was reported that the US Drug Enforcement Administration listed 11 bitcoins as a seized asset, this was the first time a government agency claimed to have seized bitcoin.
October: The FBI seized roughly 26,000 BTC from website Silk Road during the arrest of alleged owner Ross Ulbricht. Also the world’s first Bitcoin ATM started operating in Canada.
January: Overstock.com started accepting bitcoin for payments.
February: One of the largest bitcoin exchanges, Mt. Gox, suspended withdrawals citing technical issues. By the end of the month, Mt. Gox had filed for bankruptcy protection in Japan amid reports that 744,000 bitcoins had been stolen.
January: Coinbase raised 75 million USD as part of a Series C funding round.
February: the number of merchants accepting bitcoin exceeded 100,000.
October: A proposal was submitted to the Unicode Consortium to add a code point for the bitcoin symbol.
March: The Cabinet of Japan recognized virtual currencies like bitcoin as having a function similar to real money.
April: Steam started accepting bitcoin as payment for video games and other online media. (It no longer accepts btc)
August: A major bitcoin exchange, Bitfinex, was hacked and nearly 120,000 BTC (around $60m) was stolen.
September: The number of bitcoin ATMs had doubled over the last 18 months and reached 771 ATMs worldwide.
The number of businesses accepting bitcoin continued to increase. Bitcoin gains more legitimacy among lawmakers and legacy financial companies. For example, Japan passed a law to accept bitcoin as a legal payment method.
March: The number of GitHub projects related to bitcoin passed 10,000.
August: Bitcoin split into two derivative digital currencies, the bitcoin (BTC) chain with 1 MB blocksize limit and the Bitcoin Cash (BCH) chain with 8 MB blocksize limit.
December: The software marketplace Steam announced that it would no longer accept bitcoin as payment for its products.
Bitcoin reached an all-time-high with a price of $19,783.06 per 1 bitcoin.
On January South Korea brought in a regulation that requires all the bitcoin traders to reveal their identity, thus putting a ban on anonymous trading of bitcoins.
2018 marked the 10 years anniversary since the creation of bitcoin.
Why is it important?
Bitcoin offers an alternative to the traditional banking system. Users can send money to anyone across the world without the need of someone’s permission. The network is hosted on people’s computers and the transactions are secured by cryptography with the help of miners. Bitcoin is sent directly from person to person, instead of from person to company to person. This is known as a peer-to-peer system (P2P). It means there is no central control.
- Bitcoin is run over a peer-to-peer (P2P) network of computers, called nodes.
- Nodes are responsible for processing transactions and maintaining all records of ownership.
- Anyone can download the free open-source Bitcoin software and become a node.
- All nodes are treated equally, and no single node is trusted. However, the system is based on the assumption that the majority of computing power (i.e. at least 51%) will come from honest nodes.
- Ownership records are replicated on every node.
- Bitcoin users possess digital keys that allow control over bitcoins recorded in a public ledger (the blockchain).
- The public ledger records transactions transferring ownership of a quantity of bitcoins from one owner to the another, like a double-entry book keeping ledger.
A digital currency controlled by the community
Bitcoin is a new universal form of money that’s completely digital. It can be used by anyone, anywhere in the world.
Unlike traditional forms of money, there are no physical bitcoins. Users store their bitcoins in wallets on their phones or computers.
Bitcoin is not controlled by any person, company, or government. It’s run by the community of its users.
Bitcoin users are located all around the world and use the internet to help send and receive payments.
The Bitcoin community users do not need to know each other for this system to work. You can send and receive bitcoin online, fast & cheap, without needing to meet or even trust the other person.
Benefit 1 – Decentralized
Traditional money is controlled by banks and governments – which makes it a “centralized” currency. Bitcoin is not controlled or regulated by any single entity like a bank – which makes it a “decentralized” currency.
Not having banks involved means nobody can deny your application, nobody can close your account, and nobody can charge you outrageous fees. Over 2 billion people worldwide can’t even get access to bank accounts! Anyone with a smartphone and internet connection is welcome!
Benefit 2 – Limited Supply
Bitcoin’s supply is limited to 21 million coins. There can never be more! Why? It’s designed to be scarce so that it increases in value over time. A constantly increasing supply of money creates something called inflation. This means that the money you are holding is worth a little less every day. Bitcoin’s limited supply creates the opposite effect, called deflation.
This means the value of each Bitcoin is designed to increase over time. Old fashioned money can use up to 2 decimal places, while Bitcoin can be spent in much smaller amounts, called Satoshis (all the way up to 8 decimal places).
Benefit 3 – Security
Bitcoin uses cryptography to securely send payments. That’s why it is called a cryptocurrency. The code is so strong that tampering is virtually impossible. Bitcoin has never been hacked. The bitcoin network is secure (as long as more than 50% of nodes are trustworthy) and reliable (transaction ledgers are massively replicated by all network nodes). Bitcoin generation is self-regulated and based on a mathematical algorithm.
In simple terms, cryptography is a technology that protects information through complex math functions. Bitcoin uses strong cryptography to protect your account and let you securely send money. It’s designed so that nobody can hack your account, and it prevents the wrong person from receiving your money.
In Bitcoin, a transaction is a record informing the network of a transfer of bitcoins from one owner to another owner. Technically a blockchain is a database, a kind of notebook that contains information.
- You may think of a transaction as the equivalent of a single line in a notebook page
- You may think of a block as the equivalent of a page on that notebook
- You may think of blockchain as the equivalent of the whole notebook
- All the users are able to read, write and get updated on that notebook
- Ownership of bitcoins is established through digital keys, Bitcoin addresses, and digital signatures.
The Bitcoin protocol relies on the following cryptographic techniques:
Cryptographic Hash functions (i.e. SHA-256, RIPEMD-160)
Public Key Cryptography (i.e. ECDSA – the Elliptic Curve Digital Signature Algorithm)
Double spend problem
Bitcoin’s breakthrough is that it’s the first to solve the Double Spend Problem.
This is how the Double Spend Problem works:
Digital money is just like a computer file, so it would be easy for somebody to just “counterfeit” it by copy and pasting. Before Bitcoin, the solution was for banks to keep track of the money in everybody’s accounts, so that nobody could spend money twice.
Bitcoin solves the Double Spend Problem differently. It makes all accounts and transactions public – but without revealing private details like your name. Since account balances are public, it would be obvious if someone used the same money twice.
This allows bitcoin to be sent directly from one person to another, without using ANY third party like a bank. Not needing a third party (like a bank) to handle accounts and transactions has a lot of benefits. Transactions can be faster and cheaper since there is no middleman.
Extra Bitcoin facts
Note that Bitcoin payments are irreversible. A Bitcoin transaction cannot be reversed, it can only be refunded by the person receiving the funds.
Also, Bitcoin is not anonymous. Some effort is required to protect your privacy with Bitcoin. All Bitcoin transactions are stored publicly and permanently on the network, which means anyone can see the balance and transactions of any Bitcoin address. However, the identity of the user behind an address remains unknown until information is revealed during a purchase or in other circumstances. This is one reason why Bitcoin addresses should only be used once. Always remember that it is your responsibility to adopt good practices in order to protect your privacy. I’ll write a guide about privacy in the near future.
The Bitcoin Whitepaper – Who created Bitcoin?
Bitcoin was created by an anonymous person, or a group of people, called Satoshi Nakamoto. He wrote the Bitcoin code and released the whitepaper on October 31, 2008. A link to the whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list. This paper detailed methods of using a peer-to-peer network to generate what was described as “a system for electronic transactions without relying on trust”.
On 3 January 2009, the bitcoin network came into existence with Satoshi Nakamoto mining the genesis block of bitcoin (block number 0) and signing the message: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.
Some people associated with Bitcoin in the early days were Nick Szabo, Hal Finney and Gavin Andersen. Satoshi Nakamoto’s identity remains a mystery to this day. You can read the Bitcoin whitepaper here.
Wallet Guide: How to use and store your Bitcoin & altcoins
The next guide explains how to create a bitcoin/altcoin wallet in order to make transactions and securely store your bitcoins or other cryptocurrencies: