About Bitcoin (BTC)

Bitcoin is the world's first cryptocurrency. Conceptually, it stems from several decades of efforts to use cryptography as a basis for digital money. In the 13 years since its creation in 2009, Bitcoin has gone from fascinating novelty among computer programmers and technology wonks to a recognized-around-the-world asset class, one that is highly liquid and, as of August 2022, possessed a market capitalization of nearly $500 billion, or big enough to rank among the ten largest capitalized companies in the world.

Beginners in crypto investing are encouraged to try to understand Bitcoin by thinking of it as just another form of software protocol, such as "http," which routes web content from servers to browsers. Really deep dives can get complicated in a hurry. But it helps to go back to the beginning.

In early January 2008, some unknown person or persons using the pseudonym Satoshi Nakamoto published a white paper, Bitcoin: A Peer-to-Peer Electronic Cash System, detailing a blockchain-based network for sending and receiving transactions in a permissionless, trustless manner, beyond the oversight of any central authority.

A blockchain is a decentralized, public ledger digitally distributed across a network. The Bitcoin blockchain was built via open-source software, meaning anyone in the world can audit, contribute and improve its code and/or documentation.

Roughly one year after the release of the research paper, the network launched with the mining (by Satoshi Nakamoto) of rewards block #0, also known as the "genesis block," comprising 50 BTCs. Although not physically represented in any form, a small but monumental supply of digital money had been created. It was done so seemingly out of thin air, until, that is, one considers measurable computational contributions.

The Bitcoin blockchain, after recording that first transaction, kept on recording them, forming a chain of blocks, each block containing a cryptographic hash connecting with previous blocks, back to the genesis block.

Maintaining the blockchain falls on a global network of communicating nodes (computers running Bitcoin software). Each network node stores its own copy of the blockchain so as to independently verify the chain of ownership. Approximately every 10 minutes, a new block of transactions is added by "miners" to the chain, shared with all nodes, sans central oversight.

Mining refers to the systematic, synchronized processing of transactions and secure the network by way of distributed computing power expenditure. Becoming a Bitcoin miner requires specialized hardware and mining software that picks up transactions broadcast through the peer-to-peer network and, to confirm them, performs appropriate tasks that are often likened to solving next-to-impossible math problems but are more akin to trying to guess a randomly generated lottery ticket number out of an astronomical number of possibilities, using sophisticated algorithms.

From a miner's perspective, the economics of Bitcoin – the equipment, energy-use and regulatory challenges – make for a complicated endeavor.

But from a user perspective, Bitcoin is “pretty much like cash for the Internet," said Bitcoin.org. "It can also be seen as the most prominent triple entry bookkeeping system in existence."

When was BTC created and how much was it worth?

Launched in 2009, BTC was initially worth zero and for several months swapped hands for fractions of one cent. In 2011, BTC's value crossed the $1 mark. In early 2017, BTC crossed the $1,000 mark. It has steadily climbed higher since then, despite some major pullbacks along the way.

How is the price of BTC determined?

The BTC price today is a byproduct of friction between two competing dynamics: supply and demand. BTC has a finite supply. Only 21 million BTC will ever exist.

Just like fiat currency, when demand for BTC increases, the price increases and vice versa.

On the supply side, BTC is "a unique asset in that its new supply schedule is completely immune to fluctuations in demand," River Financial said.

"When most goods, including fiat currency and gold, experience a rise in demand, producers react by increasing production and returning prices to an equilibrium,” River Financial said. “When demand for BTC rises, thanks to the difficulty adjustment, production of new BTC does not rise."

Why does BTC have value?

Just like physical cash, BTC worth owes to it representing a store of value that is commonly accepted.

As CryptoNews explained, "Bitcoin has value due to the same reason paper and digital cash do. It is used to transfer value and buy or sell things."

Yet, unlike dollars, whose value and legal status are enforced by the government, Bitcoin’s value comes from its code, infrastructure, adoption and scarcity.

As mentioned, ultimately, only 21 million BTC will exist. Unlike fiat currencies, Bitcoin’s inflation potential has a ceiling.

Is BTC secure?

One often-cited security feature is the BTC blockchain's reliance on cryptography, used by a global, decentralized legion of volunteers signing the hashes that validate transactions.

"This system makes it so transactions are generally irreversible, and the data security of Bitcoin is strong," AVG said in a blog.

And because BTC is open-source and public (which may not necessarily seem all that safe) this "ledger transparency means that all the transactions are available to the public even if the people involved are anonymous, which makes it very difficult to cheat or scam the system," AVG said.

What are the main benefits of BTC?

*It’s a better, digital version of gold, just as scarce but also highly divisible relative to the precious metal. Additionally, compared to physical gold held in bank vaults, BTC is much more transportable and harder to confiscate. "The world's top cryptocurrency has some unique characteristics that give it an edge over the precious metal," Motley Fool said. "BTC is just starting to scratch the surface as a legitimate store of value."

*Ubiquity. One of the biggest advantages of BTC is its accessibility/liquidity. It knows no borders.

*It can be an inflation hedge. History has shown numerous examples of centrally administered fiat currencies losing their value resulting in the loss of purchasing power, which is why BTC's creators capped its supply. Inflation has not been an issue in developed countries until only relatively recently, as of 2022. More time will be needed to see if inflation lingers and whether BTC's role as an inflation hedge is as viable as originally envisioned.

Independence: Bitcoin is decentralized. It’s not regulated by any particular government or central bank.

Partial anonymity: Although not entirely anonymous – a public address, for example, can be traced back to an IP address – BTC does allow for some degree of anonymity "in the sense that the components of Bitcoin, such as addresses, private and public keys and transactions, are all read in text strings, such as a public address, that in no way directly link to anyone’s personal identity,” as Bitcoin Magazine points out.

*Potential for high returns: Bitcoin was the best-performing asset of the past decade, according to data examined by SmartValor. The website looked at the 17 top-performing assets between 2011 and 2021. Since 2011, BTC’s cumulative gains have exceeded 20,000,000%. By comparison, U.S. large-cap stocks and the NASDAQ 100 recorded returns of $3,282 and 541%, respectively.

What do critics say about BTC?

• That it's way too volatile. While wild Bitcoin price fluctuations underscore the speculative nature of a relatively nascent digital currency market, the inherent volatility ultimately undermines BTC's role as a peer-to-peer version of electronic cash.
• It’s overly complicated. After more than a decade, sending, receiving and securing large amounts of BTC remains a thorny proposition for non-tech-savvy users, although third-party platforms and ever-more-intuitive interfaces are alleviating this issue.
• It’s slow and expensive. Bitcoin has unsolved scalability issues. And while Bitcoin's Lightning Network (LN) is a promising second layer (layer-2) network add-on enabling faster transactions done off-chain, LN "still has costs associated with it and can be susceptible to fraud or malicious attacks," according to Investopedia.
• It’s murky. BTC holders have endured controversial incidents, from the Mt. Gox exchange implosion to the Silk Road dark web scandal, all while still wrestling with thorny debates (often on Twitter) ranging from the role of digital money (inflation hedge? speculative asset?) to the mystery of who actually created BTC in the first place. "Despite being in existence for more than 10 years," noted MIT Sloan's Betsy Vereckey, "there are still many open questions surrounding Bitcoin."
• These include questions about the identities of its biggest investors ("whales") and intensifying scrutiny on the activities (energy use) of the miners underpinning the structure of the blockchain.
• And BTC is seen as risky. "There is a probability of Bitcoin price going to zero," CoinGecko said. "This can happen if the project fails, a critical software bug is found, or there are newer more innovative digital currencies that would take its place."