What is Bitcoin?

What is Bitcoin?

Bitcoin is a digital currency that uses a virtual ledger to record transactions that take place on its network. Anyone can send, receive, and hold Bitcoin because its network does not need permission from governments or banks to function. Users only need a wallet to hold and send cryptocurrency, and not a bank account.

Bitcoin was invented in 2008 by an individual or group of individuals that used the pseudonym Satoshi Nakamoto. The technology was described in a now-famous whitepaper and was released to the public a year later. The core idea behind Bitcoin is that it can serve as an alternative to government-issued 'fiat' currency like dollars, pounds or euros that is under the control of central institutions and inherently inflationary. This is partly why Bitcoin has a fixed supply of 21 million coins - a hard limit that it is estimated to reach in the year 2140.

Bitcoin is borderless and can be used to make direct payments to any part of the world, including areas where large numbers of the population remain unbanked. This makes Bitcoin a peer-to-peer currency because it eliminates middlemen like banks when it is transferred between people.

Bitcoin can be used to buy anything from groceries to flight tickets and can even be used as

collateral to secure a mortgage in some parts of the USA. In other words, you can do a lot of the same things you can do with dollars, pounds, or euros with Bitcoin.

How does Bitcoin work?

Bitcoin can be sent from one wallet to another by entering a recipient's unique address. A wallet is like your very own bank account on the Bitcoin network and a unique address is like your bank account number.

The main difference here is that you can operate semi-anonymously since you don't have to reveal your identity when you set up a Bitcoin wallet if you don't want to.

But because Bitcoin keeps a transparent and permanent record of activity on its digital ledger, transactions between addresses can always be viewed by any member of the public.

Each Bitcoin transaction is simultaneously confirmed by tens of thousands of independent computer-users around the world called validators. They keep the network running at all hours of the day and night. Anyone can verify transactions on the Bitcoin network as long as they download the entire history of its blockchain and have the right computer hardware to do so.

Validators have the right to vote on changes to the way Bitcoin works. More than 50% of validators need to agree to a change before it is put in place.

Who created Bitcoin?

The identity of the creator of Bitcoin is perhaps the biggest mystery in the cryptoasset space.

In 2008, an individual using the pseudonym Satoshi Nakamoto released the seminal Bitcoin whitepaper that underlined the world's need for a peer-to-peer digital currency.

Three years later, Nakamoto would be heard from online for the last time after they wrote an email saying: "I've moved on to other things."

Since then, speculation has been rife that Hal Finney, a cryptographer and computer engineer, was the mind behind Bitcoin - a claim Finney denied until his death in 2014. Finney was the recipient of the first ever Bitcoin to be transferred by Nakamoto in 2009. The two apparently never met but corresponded with one another through a cryptography mailing list.

Over the years, a number of individuals on the same mailing list of developers and cryptocurrency enthusiasts have claimed to be Satoshi Nakamato but none of these claims have been definitively proven.

Nakamoto's wallet still has 1 million Bitcoin residing in it - almost 5% of the Bitcoin that will ever be created. It is highly likely that the true architect (or architects) of Bitcoin will have the private keys to this wallet.

What is proof of work?

Proof of work is a system committed to adding new blocks to a blockchain. It is characterised by miners using energy-intensive computers to solve complex mathematical equations with the incentive of gaining rewards in the native currency of the particular blockchain they are working on.

Proof of work (PoW) is central to recording transactions on the blockchains of cryptocurrencies like Bitcoin, Litecoin, and Monero. PoW is one of many consensus mechanisms used to regulate and maintain digital ledgers.

The concept of proof of work first appeared in the 1990s to tackle spam email through the use of distributed computing power. But the concept really took flight when its technology was first applied to Bitcoin in 2008.

What is a 51% attack?

A 51% attack is a type of malicious hack that uses hashing power, or mining power, to control and reorganise a Proof of Work blockchain and spend cryptocurrency illicitly.

51% attacks are only viable on blockchains that use Proof of Work consensus algorithms, such as Litecoin, Bitcoin Cash or Ethereum Classic.

If an individual or group owns more than 51% of the total hashing power for a blockchain, they could in theory use that majority power to alter how the blockchain works.

Specifically, they could spend coins they do not own, or spend the same coins multiple times. This is known as double spending.

For example, in January 2020, a newer fork of Bitcoin called Bitcoin Gold was 51% attacked, with the hackers able to double-spend coins they did not own. In August 2020, Ethereum Classic was 51% attacked three times.

Blockchains that have suffered a 51% attack can quickly lose investors and supporters.

The smaller the blockchain, and the lower the amount of hashing power required to keep it running, the more likely it is to be vulnerable to a 51% attack.

Could Bitcoin suffer a 51% attack?

As a Proof of Work blockchain, in theory, Bitcoin could suffer a 51% attack. But in practice it is impossible. Any such attack would have to be carried out by an extraordinarily well-funded group of hackers.

In general the incredibly high cost of acquiring enough hashing power to carry out a 51% attack on the Bitcoin blockchain prevents it from happening.

Some researchers estimate that it would cost more than $890,000 per hour to rent enough mining power to attack the Bitcoin blockchain in this way. Not only would this likely be an unprofitable venture, the global distribution of Bitcoin miners and mining machines mean it would be virtually impossible to get access to enough hashing power to carry out a 51% attack on Bitcoin.

The Bitcoin blockchain has never been successfully hacked by anyone since it was launched to the public in January 2009.

Why is the Bitcoin supply limited to 21 million coins?

Bitcoin is limited to a maximum supply of 21 million coins as a way to control the currency's inflation.

Because Bitcoin's supply is limited and known in advance, each unit of BTC tends to be worth more than it was against inflationary national currencies over time.

Bitcoin's supply limit of 21 million coins was set up in code when it was created in 2008 and cannot be changed unless 95% of the disparate groups that support it (miners, developers and users) all agree.

Government-issued currencies like the US dollar or the euro are the opposite. Central banks, which manage national currencies, can change their rules at any time and issue lots of new units, which dues the units already in existence.

The most prominent method used to issue new units of national currencies is called quantitative easing. This once-emergency measure taken by central banks in times of economic strife has become entirely commonplace. This is one reason why the value of Bitcoin has increased so rapidly over the past decade.

What is the Bitcoin halving?

Bitcoin halving is one of the most important features of the Bitcoin cryptocurrency. Bitcoin halving is when the supply of new Bitcoins that are created by mining is cut in half

Bitcoin's hard cap is 21 million units: so there will never be more than 21 million coins created.

By setting a hard cap or limit on the number of new coins that can be created, and halving the amount of new Bitcoin it is possible to create every four years or so, this acts as a deflationary measure to keep the value of each individual coin as high as possible. In general, the Bitcoin halving puts upwards pressure on the Bitcoin price.

Previous Bitcoin halvings that occurred in 2012, 2016 and 2020, have coincided with large upswings in the price of Bitcoin.

It is easy to compare this strategy to that of central banks, which regularly create new units of their currency (dollars, euros, or yen, for example). Creating new units of a currency is one of the main drivers behind inflation. Inflation cuts the value of the units of currency that already exist, making it relatively more expensive for people to buy goods and services in an economy.

How does Bitcoin halving work?

Each halving is written into the code of Bitcoin's software and happens automatically once a certain number of blocks have been mined.

New Bitcoins are created every time that a new block of Bitcoin transactions is added to the blockchain. As a reward for spending their computing power and energy to solve complex puzzles and confirm that blocks are valid, miners receive block rewards in new units of Bitcoin.

When Bitcoin was first released in January 2009, the block reward given to miners for processing blocks of transactions was 50 Bitcoin (BTC). Miners process Bitcoin blocks on average once every 10 minutes.

The first Bitcoin halving took place on 28 November 2012, after 210,000 blocks had been mined and 10.5 million BTC created. This predefined action halved the block reward from 50 BTC to 25 BTC.

The second Bitcoin halving took place on 9 June 2016 after miners had processed 420,000 blocks, and the Bitcoin block reward was cut in half again from 25 BTC to 12.5 BTC.

The third Bitcoin halving took place on 11 May 2020 when 630,000 Bitcoin blocks had been successfully mined, and the block reward was halved from 12.5 BTC to 6.25 BTC.

When in 2024 is the next Bitcoin halving?

The fourth Bitcoin halving is expected to take place in May 2024 when 840,00 Bitcoin blocks have been mined. At this point, the Bitcoin block reward given to miners will be automatically cut in half from 6.25 BTC to 3.125 BTC.

The final halving will happen in 2140, when the total number of Bitcoins in existence reaches the maximum supply of 21 million.

How has Bitcoin performed against the S&P 500, NASDAQ, and Gold over the last 5 years?

Bitcoin has strongly outperformed equities and physical commodities over the past five years.

During this period, Bitcoin's price has risen by 339% in contrast to the S&P 500 and NASDAQ that have appreciated by 60% and 85% respectively. The value of gold has only increased by 34% in the last half decade.

Taking a closer look at Bitcoin's price history, we can see that the price of the digital asset has increased by almost almost 195,000% since it was valued at roughly $10 in August 2012.

In November 2021, Bitcoin reached a new milestone by briefly claiming a $1.3 trillion market cap.

Institutional investors have viewed Bitcoin with apprehension for most of its history but are now beginning to give it more recognition. This has been demonstrated by more

Bitcoin-related investment products finding their way onto regulated US, European, and international stock exchanges.

Regulators are now paying close attention to Bitcoin and other cryptoassets that have captured extensive interest from institutional and retail investors around the world.

Where and how can I buy Bitcoin?

You can buy Bitcoin from a number of outlets that you can access online. Exchanges and brokers are the most common places to buy Bitcoin from.

You can sign up with marketplaces like this by sharing some form of ID, like a driver's licence, and your proof of residence. Some unregulated exchanges may let you skip these steps but this makes them inherently more risky.

Once you've signed up with an online exchange, you can deposit money to your account using payment methods like Visa, Mastercard, or PayPal.

However, cryptocurrency exchanges aren't always the most secure way to buy Bitcoin. In the past, exchanges have been susceptible to hackers or prone to fraud because of the lack of regulation in the sector.

Some investors find buying Bitcoin ETPs (exchange traded products) to be the best way to get their hands on Bitcoin. ETPs are regulated financial products that accurately track the price of an underlying asset and trade on regulated and recognised stock exchanges just like company shares.

ETPs allow investors to gain exposure to digital assets without taking on the risks associated with the use of unregulated exchanges or cryptoasset storage.

ETC Group offers a Bitcoin ETP that is listed on the largest stock exchanges across Europe. The product is 100% physically backed with Bitcoin which is stored securely in offline cold wallets with authorised custodians.

What can I buy with Bitcoin?

You can use Bitcoin to purchase a lot of the products and services you would otherwise pay for in cash.

Depending on where you are in the world, you can make hotel reservations, book flight tickets, and dine at restaurants by spending Bitcoin. Large holders can even buy sports cars from crypto-friendly dealerships.

In some countries you can also use Bitcoin (BTC) as collateral to secure a loan from a lender or use it to make a down payment on a house.

The first commercial transaction involving Bitcoin is widely recognised to have taken place in 2010 when American programmer Laszlo Hanyecz famously bought two pizzas for 10,000 BTC - amounting to $40 at the time.

One of the easiest ways to buy things with Bitcoin is by using a Bitcoin debit card. The card converts Bitcoin into fiat currency (such as dollars or euros) when it is swiped by the cashier. Alternatively, you can also use a web wallet to transfer Bitcoin and make everyday purchases.

Tens of thousands of businesses worldwide accept Bitcoin as a payment option, and the numbers are growing daily.

Is Bitcoin Cash the same as Bitcoin?

No, Bitcoin Cash (BCH) is not the same as Bitcoin (BTC). It is a separate cryptocurrency with its own blockchain and is the byproduct of a dispute among developers within the Bitcoin community.

Bitcoin Cash was created in 2017 by a group of Bitcoin developers who believed the original cryptocurrency should have moved in a different direction in order to increase its adoption and usage worldwide.

Bitcoin Cash was created by a 'hard fork': where developers made a modified version of Bitcoin's original code.

One of the things that makes Bitcoin Cash distinct to Bitcoin is the size of its blocks. Bitcoin Cash has larger blocks so it can store more transactions and have faster throughput – the rate at which transactions are confirmed.

Bitcoin Cash does retain some of the properties of Bitcoin, namely its scarcity and Proof of Work consensus model. Bitcoin Cash and Bitcoin both share a hard cap of 21 million units of currency that their respective miners compete for.