Bitcoin is digital money. It lives on the internet. With Bitcoin, you can send money directly to anyone else in the world. Below, we at Nugget’s News do our best to explain Bitcoin to you in a way that you can understand.
Bitcoin: A New Take on Money
Don’t know much about Bitcoin? Think of it as a new type of money and payments system. Today’s money and payment systems rely on central parties—or middlemen—in order to function. Examples of these middlemen include banks and payment processors like PayPal.
When it comes to Bitcoin, there are no central parties. Why? Bitcoin is an open network. This means that anyone from anywhere in the world can become a user. These users are responsible for keeping Bitcoin working.
If someone wants to become a user, they simply download a piece of open-source software on their computer. With this software, they are able to connect to the Bitcoin network and help maintain it. (As for why people choose to do this, we’ll get into that some other time. This resource is less about how Bitcoin works and more about what Bitcoin is.)
Where Bitcoin Came From
Bitcoin entered the world thanks to Satoshi Nakamoto. To this day, the identity of Satoshi Nakamoto remains unknown. It could be a man, woman, or group of people.
The network itself launched on January 3, 2009. This is when Satoshi mined the genesis block—the very first block of the Bitcoin blockchain. (Everyone always wants to know if Satoshi is still around. The answer is ‘no’. Their most recent email in April 2011, they stated, “I’ve moved on to other things.”)
Why People Invest in Bitcoin
Before you came across this resource, chances are that one of the only things you knew about Bitcoin was that certain people had made a lot of money from investing in the bitcoin cryptocurrency.
But what makes people invest in bitcoin in the first place? It’s a good question to ask. In fact, “what gives bitcoin its value?” is one of the most frequent questions we get asked. Here’s the answer: The reason bitcoin has value is because the market says it does.
Let’s use an example to illustrate. You visit a crypto exchange and see the price of bitcoin is quoted at A$10,000. The reason bitcoin is quoted at $10,000 is because buyers and sellers have agreed to trade at this price.
In this example, there’s nothing stopping someone wanting to buy bitcoin from bidding $5,000. The problem for them is they won’t meet a seller. If they want to buy bitcoin at that point in time, they’re going to have to agree to a price of $10,000. (When someone looking to sell bitcoin knows they can do so at a price of $10,000, it’d make no sense at all to agree to $5,000.)
Similarly, there’s nothing stopping a prospective seller from submitting an order to sell bitcoin at $45,000. But, just like the prospective buyer who put in a bid at $5,000, this person will fail to match up with anyone. (If the market price is $10,000, why would someone want to buy bitcoin for a price of $45,000?)
Why Bitcoin Has Value
As we’ve covered, the answer to “why do people invest in bitcoin?” doesn’t really teach us anything about bitcoin. The better questions to ask are “what gives bitcoin its value?” or “why do buyers and sellers give bitcoin any value at all?”
Sticking with the above example, there has to be some reason why the market believes bitcoin is worth $10,000, right? What are they basing this valuation on? Bitcoin has value because it is scarce and useful.
Scarcity of bitcoin
Scarcity is one of the most important things about Bitcoin to understand. The amount of bitcoin is capped. A fixed supply of approximately 21 million is programmed into the protocol.
This is in stark contrast to the fiat currencies we use today. (Two examples of fiat currency are the U.S. dollar and Australian dollar.) Traditional money is created by governments in unlimited quantities. As more money gets created over time, its value falls.
Usefulness of Bitcoin
We’ve covered scarcity, but how is Bitcoin useful?
No one controls Bitcoin
One of the most exciting things about Bitcoin is the fact that it’s decentralised. (This just means that the Bitcoin network can’t be controlled by a central authority.) In a world where law-abiding industries are financially discriminated against, the decentralisation of Bitcoin is particularly useful.
Another big benefit of a decentralised form of money is the increased efficiencies. With no banks or other financial middlemen required, the process of sending and receiving money is a lot cheaper, faster, and easier.
There’s no fake Bitcoin
Every transaction is recorded on the Bitcoin blockchain. Anyone can look at any transaction that has ever occurred on Bitcoin. All the way back to when Bitcoin started in 2009.
As covered earlier, the Bitcoin blockchain network is maintained and secured by a peer-to-peer network of nodes. No single node can change the details of a previous transaction. For this reason, you’ll see people describe transactions on Bitcoin as ‘immutable’ or ‘irrevocable’ (i.e., unable to be changed).
We’ve only scratched the surface here. If there’s one takeaway from this section, it’s this: Bitcoin is useful in different ways for different people. One way we express how useful we find something is by giving it a monetary value. So long as there are people that find Bitcoin useful, bitcoin will have a monetary value.
Drawbacks of Bitcoin
Whilst it’s hard to fault Bitcoin as a technology, there are some drawbacks associated with Bitcoin. We say “associated with Bitcoin” because most of the perceived weaknesses are not even to do with Bitcoin itself.
A common example of this is when people talk about how easy it is for your bitcoin to be stolen by hackers. Yes, this is a significant problem in the crypto ecosystem, but it has nothing to do with what Bitcoin is and how it works. Instead, it has everything to do with people unfortunately not knowing about cryptocurrency wallets and storing their private keys on crypto hardware wallets.
Another drawback of Bitcoin is its age. Bitcoin is now in its second decade. This isn’t an overly long time, especially with a technology that’s challenging something as enormous as money.
Whilst there are full-time engineers and programmers contributing to and testing Bitcoin’s open-source code, there’s always a chance the code contains a vulnerability. If there is one and it’s discovered by a malicious actor, they could do some serious damage. Of course, this risk is not exclusive to Bitcoin, but it’s at least worth acknowledging.
To get more of a grasp on what the deal with Bitcoin is, watch the below interview between Nugget’s News founder Alex Saunders and the highly respected Bitcoin educator Andreas Antonopoulos. (Lots more content on the Nugget’s News YouTube channel.)