Lesson 2: What is Bitcoin ?

Lesson Learning objectives : What is Bitcoin ? Why and when it was created ? What are the main characteristics of Bitcoin ?  This lesson address these important topics in a simple and efficient way to allow the participant to understand quickly Bitcoin


What is Bitcoin

Released in 2009 by an anonymous developer called Satoshi Nakamoto (Bitcoin white paperin response to 2007-2008 financial crash, Bitcoin is at the same time a decentralized peer to peer payment network and a Cryptocurrency token with a value provided by the market (offer & demand). In order to understand Bitcoin properly, as previously mentioned, we can split it in two components;  the Cryptocurrency token and the Bitcoin Protocol, which is a network that maintains a ledger of balances of Bitcoin token which allows to be a decentralized peer to peer network.

Bitcoin as a Token 

Bitcoins on the surface work like digital money, the location of all the tokens (bitcoins) are recorded on a public ledger and individuals whom own the keys to the wallets containing said bitcoins can transact them to any other bitcoin wallet in the world. They can be used to settle purchases or held as a potential investment. Below we address the Bitcoin characteristics as a token.

Divisibility

Bitcoin is in fact divisible by 8,  the smallest unit is one hundred millionth of a bitcoin 0,00000001 and is known as a satoshi. Similer to how there are 100 cents in 1 doller, there are 100,000,000 satoshis in 1 bitcoin. This is why you do not need to send a whole bitcoin to make a transaction or investment. A $100 purchase of bitcoin at today’s price of ($10,543) would get you 0.00940000 Bitcoin, which at its peak ($20,000) would be worth $188 and at its 2019 low ($3,462) would be worth $32.

Limited supply

Unlike fiat currency (US Dollar, Euro etc.) Bitcoin as a limited supply of 21 000 000.  Every 10 minutes a Block containing all the transactions (e.i : I sent Bitcoin to my friend) made around the world process by the network (also named miners).  Every time a block is solved a small quantity of Bitcoins are created as reward for the miners which won the block increasing the current supply until the maximum is reached (21 M). As there is a limited supply, in theory if the demands grows and exceeds the offer the value of the token will increase.

Semi-Anonymity

In traditional financial systems payments sent from an individual to another are usually sent with an identification process before proceeding. Bitcoin payments which are sent from a Bitcoin wallet address to another have the following characteristic; Bitcoin wallet address are a sequence of letters and numbers. However, depending on the country laws, some wallet providers might require an formal identification process before opening a wallet account.

Bitcoin as a value 

As previously mentioned, as Bitcoin can not be issued on demand and have a limited supply the value of Bitcoin will tend to increase should the offer increases. In the image below shows Bitcoin price evolution over time.

Bitcoin as a Network

 

Bitcoin at the same time of being a Cryptocurrency token is a network that maintains a ledger of balances of Bitcoin to avoid double spending and allowing Bitcoin payment or exchanges from one wallet to another. Below we address the Bitcoin characteristics as a network.

 

Decentralization 

Bitcoin’s main characteristic is decentralization. Bitcoin is not governed by central authority. Bitcoin is maintained by a group of volunteer programmers, and run by an open network computers around the world called miners.

Bitcoin also addresses the potential problem of double spending. The way the network is build, with the mining process it avoids a Bitcoin to be a two places at the same time keeping the integrity of the Bitcoin ledger. Furthermore, Bitcoin ledger (chain) can not be reversed as Bitcoin is a decentralized network.

 

 

 

 

 

 

Back to: Course 1: What are Cryptocurrencies?
Lesson Details
Length
15 minutes
Complexity
Easy