When people first hear about Bitcoin, they often assume it's something similar to fiat paper money, like a physical coin or paper Bitcoin in the form of a banknote. Indeed, the very name "Bitcoin" hints that this currency can be used for day-to-day payments, just like physical money issued by a central bank and backed by a country's government. In reality, however, bitcoin exists solely as a digital currency and uses cryptography to secure transactions.
But how is it even remotely possible to have an asset not backed by any central authority and reserves? If it's nothing more than numbers on the screen, and you can neither touch it nor feel it, why is it worth thousands of dollars? Read on to find out the answer to these questions and more!
What is Bitcoin?
Conceived in 2008 and launched in 2009, Bitcoin is the world's first and most recognized cryptocurrency. Unlike traditional government-issued currencies, Bitcoin is decentralized and operates independently of any central authority. Initially started as a cypherpunk experiment on the fringes of the internet, Bitcoin soon picked up stream among early adopters, turning into an increasingly mainstream phenomenon. Nowadays, bitcoin is widely used as an investment product and hedge against inflation by both rank-and-file investors and multi-billion asset managers.
As every bitcoin user knows, Bitcoin was created by a pseudonymous person or group known as Satoshi Nakamoto, who first introduced the concept in a whitepaper titled "Bitcoin: A Peer-to-Peer Electronic Cash System." Created in the backdrop of the 2008 financial crisis, Bitcoin was envisioned as an alternative, decentralized currency that would not be subject to the failures and corruptions of the traditional banking system. It is no coincidence that the first block of the Bitcoin blockchain, also known as the Genesis Block, contained a message inscribed by Satoshi, which reads as follows: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks".
While this message can be understood as a timestamp to verify the creation date of the Genesis Block, the more likely explanation is that it was meant as a cheeky comment on the state of the financial system at the time. This was during the global financial crisis when many banks were being bailed out by governments, and Bitcoin was proposed as a currency that provides a higher level of anonymity than traditional currencies, is secure from manipulation by governments, and can be transferred electronically with minimal transaction fees. This was a significant shift from traditional currencies and the way they are managed.
Before we delve into the technicalities of the first cryptocurrency, let me first explain why this article often uses both "Bitcoin" and "bitcoin." The thing is that these terms refer to different concepts within the network: when the "B" is capitalized, it represents the Bitcoin protocol or the overall concept of Bitcoin. For example, "Bitcoin was invented by an individual or group using the name Satoshi Nakamoto." Meanwhile, the lowercase "b" is used when we refer to the unit of currency that is used on the blockchain. For example, "I just purchased two bitcoins." Hope it will help you to avoid confusion!
How does Bitcoin work?
Bitcoin functions on a technology known as blockchain, an advanced and transformative system that underpins all cryptocurrencies. The blockchain is essentially a public, digital ledger that records all transaction data involving Bitcoin from anyone across the globe who uses it. These transactions are grouped into blocks. Once a block is filled with transactions, it is added to the chain in a linear, chronological order, hence the term 'blockchain'. Each block contains a reference to the previous block, forming a chain of blocks.
Bitcoin miners use powerful computers to solve complex algorithms to add new blocks to the blockchain. Once the algorithm is solved, the block is added to the chain, and the miner is rewarded with a certain number of Bitcoins. This process is known as bitcoin mining, which is a resource-intensive process requiring substantial computational power. This protocol design ensures the authenticity of transactions, preventing fraud and double-spending.
What does Bitcoin look like?
Because Bitcoin is a virtual currency, it doesn't have a physical appearance in the same way that a coin or a banknote does. A Bitcoin is basically a string of mathematically generated numbers stored in a digital wallet on a computer or smartphone. Each Bitcoin or fraction thereof (the smallest unit being a Satoshi) is associated with a unique Bitcoin address – a string of numbers and letters.
This is what a typical Bitcoin address looks like.
This was the first Bitcoin block.
This is the first-ever transaction on the Bitcoin network where Satoshi mined the Genesis Block and was rewarded with 50 bitcoin. Interestingly, these coins were excluded from the database, so any attempt to spend them would be rejected by the network. It's unclear whether this feature was intentional or not.
The Bitcoin symbol, which resembles the US dollar sign but with two vertical lines, is often used to represent Bitcoin, especially in graphic illustrations.
While physical Bitcoins do exist, they are usually commemorative coins or novelty items only and don't have any real value as a currency. Needless to say, these souvenir coins also have nothing to do with Bitcoin Cash and Bitcoin Gold, which are the forks of the Bitcoin protocol with their respective cryptocurrencies.
Does physical Bitcoin have actual value?
The physical tokens often associated with Bitcoin are typically novelty items. They are imprinted with the Bitcoin symbol but do not have any inherent monetary value as a Bitcoin. You can often see such coins sold from gift store aisles for a fraction of the real Bitcoin's price.
However, there are several projects that tried to birth the real "physical bitcoin" that would somehow tie digital keys to a physical coin. For instance, it can have an engraved QR code that would allow its owner to tap into a real Bitcoin wallet whenever they want.
However, the actual value of such a coin lies in the unique cryptographic key it contains. Should you lose it, you effectively lose your bitcoins. Hence, the value isn't in the physical object itself, but in the digital credentials it embodies.
While physical bitcoins look undeniably cool, they can be easily stolen or compromised, plus they aren't as practical as mobile or hardware wallets. For that reason, physical bitcoins never got real traction except maybe a narrow circle of dedicated crypto collectors and enthusiasts.
The most memorable attempt to issue a physical bitcoin was a Casascius coin created in 2013 by Bitcoin enthusiast Mike Caldwell. Crafted from metal, all Casascius coins held a specific Bitcoin value, secured by an embedded private key. The private key was concealed behind a tamper-evident hologram, and if peeled off, the hologram left a "VOID" pattern, indicating the potential compromise of the key. While bitcoin could still be moved to a digital wallet, the physical coin would lose its value as a secure cryptocurrency storage.
Caldwell designed Casascius coins as a tangible way to hold Bitcoin, secure as long as the hologram remained undisturbed. However, they were not meant to function like conventional physical currency. By late 2013, regulatory pressure from the U.S. Financial Crimes Enforcement Network (FinCEN) led to the cessation of loaded Casascius coin sales, as the operation could be construed as a money transmitter business requiring specific licensing. Unloaded coins, without Bitcoin value, remained available for a while after.
How to safely store bitcoin?
Bitcoins are stored in a digital Bitcoin wallet. These wallets can be online, offline, hardware-based, or even paper-based. Each wallet contains a pair of cryptographic keys – one public, one private. The public key is your bitcoin address, which other users can use to send you Bitcoins. The private key, however, is a secret number that allows Bitcoins to be spent. It's crucial to keep the private key safe because losing it means losing your Bitcoins. Similarly, if someone else gets hold of your private key, they can take your Bitcoins. To enhance security, many Bitcoin users use hardware wallets, which store the user's private keys offline, providing protection from online threats.
Read also: How to trace Bitcoin address owner?
Where can you buy Bitcoin?
Bitcoin can be purchased through a variety of platforms. Online cryptocurrency exchanges like Coinbase, Binance, and Kraken are popular places to buy and sell Bitcoin. These exchanges allow you to exchange traditional currency, like dollars or euros, or other cryptocurrencies for Bitcoin. Additionally, some services or goods providers accept Bitcoin as payment.
There are also Bitcoin ATMs, similar to regular cash ATMs, but for buying and selling Bitcoin. These machines are typically found in high-traffic areas and offer a convenient way to trade Bitcoin for cash and vice versa.
In essence, Bitcoin is more than a digital asset – it's a groundbreaking technology that's changing our understanding of currency. It's a system built on trust, privacy, and autonomy, offering new ways for people to manage and store wealth. While its physical manifestation may be misleading, Bitcoin's actual value lies not in its physical form but in the revolutionary blockchain technology that underpins it. This intricate system, coupled with Bitcoin's potential as a store of value, makes it a compelling addition to the modern financial landscape.