What is Bitcoin (BTC) cryptocurrency and how does Bitcoin work?

Today, it’s hard to find those who have not heard of Bitcoin - even the most beginner users start wondering what is cryptocurrency BTC. Bitcoin, with the native currency symbolized as BTC, is the pioneering decentralized asset. It operates on a peer-to-peer network where transactions are authenticated through cryptography and recorded on a public ledger known as the blockchain. Conceived by the mysterious entity Satoshi Nakamoto, Bitcoin allows direct transactions between users without the need for intermediaries like banks. In this article, we will explore the main question of what is Bitcoin, what is its value determined by, as well as talk about the years when was Bitcoin launched.

Key Takeaways

• Decentralized and transparent: Bitcoin operates without a central authority, with all transactions recorded on a public ledger, ensuring transparency and immutability.

• Limited supply: Bitcoin’s supply is capped at 21 million coins, with new coins introduced through a halving process every four years, potentially contributing to its value stability.

• Lower transaction fees and faster payments: compared to traditional banking systems, Bitcoin transactions typically incur lower fees and offer faster processing times, especially for international payments.

• Security and privacy: utilizing cryptographic methods, Bitcoin transactions are secure and provide a level of pseudonymity, protecting user identities while maintaining transparency.

• Environmental impact: Bitcoin mining consumes substantial energy, raising concerns about sustainability and its contribution to climate change.

What is Bitcoin (BTC)?

Bitcoin, with its native token BTC, is the first decentralized cryptocurrency. It functions on a peer-to-peer network where transactions are authenticated using cryptography and logged in a public ledger called the blockchain. This digital currency was created by an unidentified person or group known as Satoshi Nakamoto.

When answering the question of what is Bitcoin and how does it work, one needs to consider the holistic picture. Bitcoin transactions are conducted directly between parties without an intermediary, such as a bank. The network itself operates on a shared public ledger, the blockchain, which records all confirmed transactions. This system makes transactions difficult to reverse and counterfeit.

The currency’s value isn't supported by any government or central authority. Instead, it is established by collective agreement, similar to gold. Since its inception in 2009, BTC has experienced significant value fluctuations.

Bitcoin (BTC) price, supply and Market cap

Satoshi’s project functions on a decentralized database known as a blockchain, enabling secure peer-to-peer transactions over the internet. Unlike conventional payment systems, such transactions do not depend on the traditional financial infrastructure. Individuals worldwide can transact BTC directly with one another. If you’re interested in finding out how does Bitcoin work - every transaction is documented on the ledger, which is publicly available and holds all transaction information. Bitcoin functions independently of any government, bank, or regulatory agency, promoting transparency and reducing the control of a single authority over the process.

Bitcoin's Blockchain Technology

Bitcoin’s blockchain functions as a public ledger,  recording all Bitcoin activities. This is similar to how does cryptocurrency work in general; the ledger is made up of a chain of blocks linked by unique hashes containing transaction details, ensuring the chain's integrity. Cryptocurrency enthusiasts can participate in mining, which creates new coins, validates transactions, and secures the blockchain. This technology ensures transparency, immutability, and tamper resistance, making data manipulation challenging.

What is Proof-of-Work?

To fully understand what is BTC, one needs to start with the very basics. Proof of Work (PoW) is a widely used consensus mechanism in many cryptocurrencies, including BTC. It is a key method for validating transactions and adding new blocks to the blockchain. In PoW, miners must solve complex mathematical puzzles to authenticate transactions and generate new blocks. This process requires significant computational power, which helps maintain the network's integrity and prevent fraud. Miners are incentivized to support this decentralized network through rewards and transaction fees, which are paid in Bitcoin.

What Makes Bitcoin Unique?

When attempting to explain Bitcoin, it’s necessary to say that this pioneering currency stands out because of its network effects and various other aspects related to the way it operates. These characteristics distinguish it as a unique asset class.

Limited supply

The coin has a finite supply capped at 21 million, a limit encoded into its source code by its creator(s). This ceiling, unalterable by design, is enforced through a mechanism known as halving - keep on reading to find out more about this. The limited availability of BTC is a valuable attribute that could contribute to the stability of its value in the foreseeable future.

Transparency

Bitcoin functions with an unmatched level of transparency. Each transaction is openly accessible, traceable, and permanently logged within the network. However, the identities of the transaction participants remain undisclosed. Individuals can examine the BTC amount transferred in a transaction and the associated wallets. This transparency forms the foundation of the Bitcoin system, enabling users to confirm critical aspects like adherence to the 21 million coin limit and payment completion without relying on a central authority.

Lower transaction fees and faster payments

The pace of BTC transactions corresponds to the fee attached to each payment. Payments with higher fees are prioritized for inclusion in the upcoming block, resulting in quicker confirmation times. Conversely, transactions with lower fees may experience delays in confirmation. At the time of writing, the average BTC transaction fee stood at $7.148, up from 3.960 one year ago. 

Security and privacy

Bitcoin’s design philosophy prioritizes security and decentralization. It aims to create a trustless financial system that operates without intermediaries

History of Bitcoin

The history of Bitcoin begins in 2009, when was Bitcoin created. It started off as the inaugural cryptocurrency, originating from the enigmatic figure. Since its introduction, the currency has experienced phases of turbulence alongside remarkable expansion. Over time, it has evolved into a substantial asset for preserving value, gaining recognition both digitally and in physical transactions. Starting from the mid-2010s, certain enterprises started integrating BTC as a form of payment alongside conventional currencies.

The pre-Bitcoin years

Before Bitcoin, several digital cash innovations emerged, starting with David Chaum's ecash protocols in the 1980s. The idea that computational puzzles could have value was first proposed by cryptographers Cynthia Dwork and Moni Naor in 1992. Independently, Adam Back revisited this concept and created hashcash, a proof-of-work system designed to combat spam, in 1997.

Satoshi Nakamoto and Bitcoin

In 2008, Satoshi Nakamoto, an enigmatic individual or collective, introduced the currency and shed light onto how to use Bitcoin. Despite widespread speculation, their true identity remains undisclosed. Nakamoto's unveiling of the blockchain system, outlined in a 2008 white paper, laid the groundwork for the cryptocurrency market. The network officially commenced on January 3, 2009, as Nakamoto mined the inaugural BTC block, known as the genesis block or block number 0, with a reward of 50 bitcoins.

Bitcoin Mining Begins

Bitcoin mining involves validating transactions and adding them to the blockchain by solving complex mathematical problems. This relies on cryptographic hashing properties. Miners start with a nonce value of zero and increase it with each attempt until they find a hash and nonce combination that meets the specified criteria.

Early Transactions and growth

In May 2010, BTC saw its inaugural real-world transaction occur on a forum called bitcointalk.org. Laszlo Hanyecz, a resident of Florida, made history by offering 10,000 Bitcoins in exchange for two pizzas. At that time, BTC value was minimal, and it wasn't until February 2011 that it surpassed the one-dollar mark. During its early stages, Bitcoin transactions were scarce, and its worth was insignificant.

First regulatory actions

Initial regulatory measures centered on determining the legal standing of Bitcoin and outlining tax responsibilities - this was around the time when did Bitcoin come out. Certain nations, such as the United States, categorized this asset as a commodity rather than a currency, placing it under the oversight of particular regulatory agencies. The European Union set a global precedent by enacting comprehensive cryptocurrency regulations in May 2023, known as the Markets in Crypto-Assets Regulation (MiCA).

Bitcoin's first bull run

Bitcoin experienced its initial significant surge in 2011, marking a milestone as its value surpassed $1 and later peaked at approximately $318. Another notable bull run commenced in 2013, propelling the project from $13 to nearly $1,000 by the close of the year.

Bitcoin ETF Launch

In January 2024, the SEC granted approval for the trading of the initial 11 spot bitcoin ETFs on the U.S. market. These marked the debut of publicly traded investment funds authorized to directly include cryptocurrencies within their portfolio holdings.

The major stakeholders of Bitcoin

It’s difficult to answer who owns Bitcoin, as this asset functions as a game theoretical framework where various participant. These include developers, miners, large holders, and trading platforms - they are all motivated to act in favor of the network's success. Notably, significant entities like Tesla, Block, and Coinbase have acquired substantial amounts of the currency, collectively investing hundreds of millions of dollars in the cryptocurrency.

How Is Bitcoin (BTC) Different To

Bitcoin is different from other currencies in several ways - keep on reading to find out more.

Bitcoin vs Ethereum (ETH)

Bitcoin and Ethereum, though both falling under the cryptocurrency category, fulfill distinct roles and boast individual characteristics. The former functions as a digital currency, intended to operate autonomously without central oversight. Conversely, ETH serves as a platform facilitating the development and deployment of smart contracts and decentralized applications (dApps). 

Bitcoin vs Litecoin (LTC)

Although sharing similarities, these diverge in crucial aspects. BTC employs the SHA-256 hashing algorithm, contrasting with Litecoin's utilization of Scrypt. While Bitcoin's block generation time stands at roughly 10 minutes, Litecoin boasts a shorter interval of around 2.5 minutes, enabling quicker transaction confirmations. Additionally, BTC total supply limit is capped at 21 million, while Litecoin's extends to 84 million units.

Bitcoin vs Fiat 

Bitcoin stands apart from fiat currencies due to fundamental distinctions. While fiat currencies are governed and issued by central authorities within centralized banking systems, Satoshi’s currency operates on a decentralized model. Its supply is finite, and transactions occur peer-to-peer, validated through cryptographic methods and documented on a public ledger - or blockchain.

Advantages of Bitcoin

Functioning as a digital currency, it presents numerous distinct advantages that differentiate it from traditional fiat assets. These include:

• Transparency: the blockchain openly records all transactions, guaranteeing clarity.

• Lower transaction fees: although largely dependent on the types of Bitcoin, transactions generally result in lower fees compared to conventional electronic transfers.

• Faster payments: processes can be completed more quickly, particularly for international transactions, in contrast to standard bank transfers.

• Security: BTC transactions employ cryptographic techniques to ensure secure exchanges.

• Accessibility: it is available to anyone with internet access, broadening financial services to those without bank accounts.

• Pseudonymity: while transactions are visible, individual identities remain confidential.

• Divisibility: the currency is divisible, with the smallest unit, called a "Satoshi," representing one hundred millionth of a Bitcoin.

Understand the Risks of Bitcoin

After touching the subjects of positive sides and having explained what is Bitcoin used for, it’s time to come to terms with the currency's risks. Here are some of the key challenges associated with it:

• Price volatility: coin prices can experience extreme fluctuations. For instance, in 2022, the value of BTC plummeted from nearly £39,000 to approximately £17,000.

• Security concerns: although the technology is generally secure, it lacks complete anonymity and relies on password protection. Cybercriminals may exploit web trackers and cookies to glean transaction details, compromising user privacy and data security.

• Regulatory uncertainty: the regulatory landscape surrounding BTC remains fluid, with potential implications for its market value. Regulatory actions could impose restrictions on Bitcoin usage or adversely impact its price.

• Fraud and scams: the absence of a robust legal framework has led to an increase in cryptocurrency scams. Decreasing prices coupled with heightened vulnerability to criminal activities raise concerns about the security of Bitcoin holdings.

• Limited user protections: unlike traditional bank deposits insured by entities like the FDIC, BTC lacks insurance coverage. Consequently, users have no recourse to recover lost funds in the event of a digital wallet breach.

• Environmental impact: the process of mining utilizes substantial energy resources, prompting worries about environmental sustainability and adding to the issue of climate change.

• Technological changes: advancing technologies, like quantum computing, present potential risks to the security and operational reliability of BTC.

How Is The Bitcoin coin Secured? 

After the readers gained an understanding of what is BTC Bitcoin, it’s worth noting that the currency’s security is upheld through a blend of cryptographic methods and a PoW algorithm. It leverages blockchain technology to guarantee the authenticity of transactions between users. These transactions are appended to a comprehensive transaction history, referred to as a ledger, which is distributed across numerous computers known as nodes. These nodes play a crucial role in validating transactions, ensuring that BTC is not double-spent, and verifying compliance with protocol. Contrary to misconceptions, it's the nodes, rather than miners, that oversee adherence to network rules and retain records of all Bitcoin transactions since its inception.

Buying Bitcoin (BTC)

After exploring this asset, one might want to become an owner of the cryptocurrency. To do so, head to SimpleSwap and follow these instructions:

• For example, you want to swap ETH for BTC. Select the currency you want to exchange (e.g. ETH) in the first drop-down list. Then enter the amount you want to swap.

• Select BTC in the second drop-down list. You’ll see the estimated amount that you’ll get after the exchange.

• Click the Exchange button.

• Enter the Recipient's Address. BTC will be sent. Be careful and make sure you use the correct address.

• Create the exchange.

• You will see the Bitcoin deposit address. You need to transfer the necessary amount of BTC to this address to start the ETH to BTC exchange.

How to Mine Bitcoin (BTC)

Bitcoin mining entails solving intricate mathematical puzzles to authenticate transactions and append them to the blockchain. This process relies on the mathematical principles of cryptographic hashes. Miners iterate through an immense number of hashes per second until discovering one that meets a criterion known as "difficulty." Difficulty and hash values, both substantial numbers represented in bits, necessitate the hash to be lower than the difficulty. Difficulty undergoes recalibration roughly every 2016 Bitcoin blocks, or about every two weeks, to uphold a consistent block time. The hash produced by miners serves as a unique identifier for each block and comprises the data contained in the block header.

Halving

Many of those interested wonder what is Bitcoin halving - a significant occurrence wherein the reward given to miners for creating new blocks is cut in half, resulting in miners obtaining a reduced amount of bitcoins when they validate transactions. This event, referred to as Bitcoin Halving, entails a reduction in the quantity of bitcoins produced per block once a specific block height is reached. In the case of BTC, this occurs approximately every 210,000 blocks or around every four years. The subsequent halving is anticipated to happen in 2028, leading to a decrease in the block reward to 1.625 BTC.

Future of Bitcoin

The future trajectory of the BTC currency sparks diverse opinions and conjectures. While some anticipate Bitcoin emerging as the global singular currency, others speculate about its potential obsolescence. Here are several plausible scenarios envisioned for the future:

• Mainstream integration: proponents foresee BTC widespread acceptance as a method of payment for everyday items like beverages and snacks. They envision a scenario where products carry dual price tags— one denominated in fiat currency and another in Bitcoin.

• Bitcoin-integrated gaming: with over 3 billion gamers globally, some envision a future where these vast gaming communities earn rewards in BTC, facilitated by the rapid transactions enabled by the Lightning Network.

• Price projections: various experts forecast the prices potentially soaring to an impressive $1.48 million by 2030. However, amidst such optimistic projections, there also looms the possibility of significant price downturns.

• Regulatory developments: the regulatory landscape surrounding Bitcoin remains dynamic and could exert considerable influence on its future trajectory. Regulatory measures might either curtail Bitcoin's utility or adversely impact its market value.

The Bottom Line

In summary, after having the basics of Bitcoin explained, it’s safe to say that the asset has transformed the financial landscape as the pioneer of digital currencies. Its distinctive attributes, such as decentralization, capped supply, transparency, and reduced transaction costs, have positioned it as an attractive investment option. Nonetheless, it's crucial to acknowledge the accompanying risks and hurdles. These encompass price fluctuations, regulatory ambiguities, potential security vulnerabilities, and the environmental impact stemming from energy-intensive mining operations. Despite these obstacles, BTC remains dynamic, shaping the trajectory of digital finance. Prospective investors should meticulously assess these dynamics and undertake comprehensive research before delving into the market. While the future remains uncertain, it promises to be an intriguing journey to observe unfold.

SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.

FAQ

Do you still have a few questions unanswered? Have a look at the most popular ones amongst our readers.

How Many Bitcoins Are Left?

As of now, there are approximately 1.3 million Bitcoins left to be mined.

How Does Bitcoin Make Real Money?

Bitcoin can be converted into real money by selling it on a cryptocurrency exchange, such as SimpleSwap, Coinbase or Kraken. The value of Bitcoin in real money is determined by the current market price.

Is BTC an AI coin?

No, Bitcoin (BTC) is not an AI coin. It is a decentralized digital currency that operates on a peer-to-peer network

Can you convert Bitcoin into cash?

Yes, you can convert Bitcoin into cash. This can be done by selling your Bitcoin on a cryptocurrency exchange like SimpleSwap, using a Bitcoin ATM, or through peer-to-peer platforms.

What was the starting price of 1 Bitcoin in 2009?

The starting price of 1 Bitcoin in 2009 was $0.

What will happen when bitcoin is halving?

When Bitcoin undergoes a halving, the number of new Bitcoins that are made gets cut in half. This means there’s a 50% reduction in the reward miners receive for validating transactions and adding them to the blockchain.

Is Bitcoin on its own network?

Yes, Bitcoin operates on its own network, which is a decentralized peer-to-peer network.

Who owns most Bitcoin in the world?

The pseudonymous creator of Bitcoin, Satoshi Nakamoto, is believed to be the largest individual holder of Bitcoin, reportedly holding about 1.1 million BTC