Beginner’s guide to crypto: what is Bitcoin?

In a new series for Mouthy Money, we will be looking at some of the most popular cryptos, explaining what they do, how they work and whether they offer any utility in the ‘real world’.

First up, the world’s largest and most popular crypto: Bitcoin. 

• A quick note on grammar: when writing about crypto we use two different styles for Bitcoin. Usually, ‘Bitcoin’ refers to the technology behind the cryptoasset (such as the Bitcoin blockchain), and ‘bitcoin’ refers to the token itself. 

What is Bitcoin?

Bitcoin is a ‘decentralised’ digital currency. It was designed as a currency that works without a financial institution working as the mediator, which is what decentralised means. Digital means it has no physical coins or notes, such as pounds have. 

With normal money, if John Smith was to send money to Jane Doe, they would need to do so through a bank or financial mediator. Bitcoin would allow John and Jane to send and receive money (bitcoins) directly. For this reason, it is peer-to-peer, and does not rely on ‘trust’ between involved parties. 

Bitcoin was created by Satoshi Nakamoto. This name though is a pseudonym of either an individual or a team, who published the initial white paper for the technology in 2008. The technology was put into place officially in January 2009. 

How it works

First off, we must understand that bitcoin uses a ‘proof of work’ protocol. The Bitcoin protocol requires those taking part in the network infrastructure to demonstrate some level of work. This demonstration of work is ‘mining’.

This mining is the process in which bitcoin is created. Bitcoin mining involves incredibly powerful computers competing against each other to solve complicated mathematical equations. 

The computer that is successful in solving the puzzle, which requires both luck and computational power, is rewarded a set amount of bitcoin. Once the reward has been dished out, and that ‘block’ on the blockchain is considered ‘mined’, miners then move to the next puzzle for the next block. 

Currently, the reward for mining in the blockchain is 6.25 bitcoin ($343,750 at the time of writing, with bitcoin sitting at $55,000). However, the mining reward is halved every time 210,000 blocks have been mined. This scarcity by design is intended to make bitcoin inflation free. 

Bitcoin’s uses

Bitcoin was intended to be used as a major digital currency. But this has not come to pass. 

It has, however, become a mainstay in the investment portfolios of those looking to take on a bit of risk. Bitcoin’s massive rise over the past twelve months, from around $5,000 in March 2020 to near $56,000 at the time of writing, has attracted investors from all walks of life. 

On the Bitcoin blockchain, those people sending and receiving bitcoin are anonymous, and this anonymity can be a draw for a variety of groups. Online black market Silk Road famously used bitcoin for transactions, as buyers and sellers could buy illegal goods without the risk of banks and law enforcement involvement. 

In addition, multiple financial institutions, such as the Federal Reserve, have warned that money laundering and terrorist financing is made more accessible because of bitcoin. 

Conversely, Bitcoin’s anonymity means that protestors have used the cryptocurrency to carry out transactions free of government interference, or to fund pro-democracy protests. The #EndSARS protestors in Nigeria used bitcoin to fund the movement, whilst Kremlin critic Alexei Navalny also received large donations of bitcoin from anti-Kremlin protestors. 

Final takeaways

Bitcoin’s meteoric rise in price and use as an investment asset has not been matched by a rise in transactions carried out by the cryptocurrency. In the grand scheme of things, bitcoin remains a relatively new asset, one which we could see become more widespread if businesses take up the bitcoin mantle.

PayPal, for example, recently began offering bitcoin and other cryptocurrencies as a means of buying and paying for goods. 

Bitcoin’s real impact could be its progenitor role in creating a whole crypto ecosystem, which now consists of over 4,000 coins. Since its launch in 2009, thousands of cryptoassets with many different uses have come to the fore. Some are so different from one another it’s a wonder we group them all together. 

In this series I hope to shine a light on some of the most popular. Next up: Ethereum. 

Photo by Thought Catalog from Pexels