What is Bitcoin ?
What is Bitcoin ? – Bitcoin is a decentralised virtual currency created by Satoshi Nakamoto in 2009. Satoshi Nakamoto wanted to create a monetary system that would allow peer to peer transactions without the need for a centralised institution. A censorship ressistant monetary system that would be independent of a central bank and government – Bitcoin has no owner, head office or CEO. Your Bitcoin account cannot be shut-down or frozen.
Satoshi published his whitepaper on the internet and later released his code for Bitcoin – the very first decentralised, trust less virtual money.
Traditional monetary systems all rely on centralisation. When you open an account at the bank – the bank keeps records of your name and the amount of money you have deposited in your account – a ledger in the centralised bank servers. When you decide to withdraw some of that money – the bank adds the withdrawal transaction and updates the ledger with the amount of money that is left in your account. We trust the banks to keep our money safe and the government to regulate the banks and keep them honest.
Satoshi Nakamoto proposed a system where there would be no need for a central institution to keep record of transactions. Bitcoins’ record keeping system relies on users of the network to update the ledger – how then do we keep these record keepers honest and ensure that the ledger is correct, furthermore why would anyone want to work updating the Bitcoin ledger? The answer is the blockchain – a record keeping system that bundles transactions in to a block, the size of the block determines how many transactions can be added. Once a block is full, it is verified by all the record keepers to be accurate and then sealed off or hashed and added to the blockchain creating a chain of blocks all full of transaction records – hence the name “blockchain”.
All the users who decide to participate in this verification process are called miners, each and every miner in the world has a copy of the blockchain. The miners have to agree that the transactions are valid before they are added to the mined block and once the block is completed and hashed – it can never be altered as new block are added on top of the old blocks creating the chain. The incentive given to the miners to keep mining – is the block reward and transaction fees from the individual transactions that are in the block. The ledger is tamper proof because it is public record, there are millions of copies stored on all the miners computers across the world and consensus must be reached between the miners before a transaction is added to the block. This also solves the challenge of double spending.
In order to store Bitcoins, you need a Bitcoin wallet. Each wallet has a public and private key that is randomly generated when you create the wallet. The public key can be shared with others to deposit Bitcoins in to your wallet. Once you generate a transaction from your wallet to send Bitcoins to another location – your wallet will sign off the transaction with your private key. You must not forget your private key as there is no method of retrieving it, you must also not share or distribute your private key as that will allow anyone to spend your Bitcoins. Once your transaction is signed – it will be broadcast on the network and the miners will pick it up and add it to the next block being mined. If it is confirmed by the miners, the transaction will be hashed with the block and funds transferred.
Once a block is mined – it cannot be reversed or undone. This is why Bitcoin transactions are irreversible and final. New blocks are added on top of the old blocks every 10 minutes – you would need to undo all the blocks added after your block in order to reverse your transaction or tamper with it. This is the blockchain technology that has contributed to the success of Bitcoins over the years. It is a reliable, predictable and mathematical system – governed by code that is open source, auditable and transparent. It is a trust less system that works.
Inflation currency versus Bitcoin – One cannot discuss Bitcoin without mentioning that Satoshi Nakamoto wrote in his code a mathematical limit that ensures only 21 millions of Bitcoins will ever be produced – we are at approximately 16million now. This means there is an extremely short supply of Bitcoins, as new users enter the market demand increases, but the supply is limited; as a result the price goes up. This is simple supply and demand economics – as Bitcoin has become more and more popular, adoption has increased, countries have started to recognise Bitcoin, the price has surged upwards in an exponential trend. Bitcoin is a currency that does not depreciate but appreciates in value over time – this is what has made Bitcoin unique and very attractive to investors.
There are many who believe that Bitcoin is a bubble that is bound to burst – this belief is driven by the fact that there is no intrinsic value for the currency or central institution that backs the currency. How is this different from current FIAT money? It is electronic money that is printed on paper – what gives it value is the fact that people recognise it and accept it as money. Money is what people say money is, if I can exchange my Bitcoins for services and goods – then it is money. Bitcoin is currently accepted as a form of currency by multiple service providers including takealot.com. You can exchange your Bitcoins for FIAT currency at any Bitcoin exchange at any time at the current market value.