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What is Bitcoin?

Bitcoin is a digital currency secured by encryption software (a.k.a. ‘cryptocurrency’) operating within the ‘Bitcoin Network,’ the first iteration of decentralized blockchain technology. Bitcoin was designed to be sent peer-to-peer within the network without the need for a separate intermediate such as a bank or government.

Who created Bitcoin?

The original ‘Bitcoin Whitepaper,’ which outlined the fundamentals of the network and the purpose of the currency, was published anonymously via a cryptography forum on October 31, 2008, by a person or group of people with the pseudonymous moniker ‘Satoshi Nakamoto.’

The network did not go live with its first transaction until early January 2009. Tech-minded individuals quickly began downloading the open-source, public blockchain software and mining and transacting on the network.

How does Bitcoin ‘Work’?

Bitcoin operates using blockchain technology. A blockchain is, in most simple terms, a form of electronic ledger and database.

What distinguishes it from other electronic ledgers/databases is that no central server houses the ledger, but rather it is distributed in its exact form to every node which runs on the network simultaneously. Because all copies must match up with each other, it is impossible for any one operator to adjust his ledger to perform a fraudulent transaction or fraudulent creation of new Bitcoin.

Bitcoin software is open source and transparent, meaning anyone in the world with network access can download it, run it, and see its code.

The Bitcoin network is comprised of thousands of separate computers across the world, all running the software and communicating with each other across the internet. The computers on the network are not all performing the same function—some are completing “mining” or the creation of new Bitcoin, some are “nodes” which store a full history of the transactions on the ledger, and most are software programs which are used as “wallets” by Bitcoin holders and users.

Within the blockchain are huge numbers of “addresses,” or long unique numbers that are associated with access to a person’s Bitcoin. If person A wants to send Bitcoin to person B, he can essentially send a message to the blockchain saying he wants to transfer an amount of Bitcoin from his address to the address of person B. To access one’s Bitcoin and send transactions, a person must have their ‘private key,’ which can be thought of as a long PIN associated with one’s public address which proves the person is the holder of the account.

What is Bitcoin Mining?

Bitcoin mining is quite simply the rewarding of new Bitcoin on the network in exchange for the processing and verification of transactions on the network by those who run the software.

Miners running the Bitcoin processors compete against each other to solve complex math problems and ‘win’ the right to establish a new transaction block, receiving both a reward of new Bitcoin and a transaction fee from network senders. The more processing power (‘hash power’) a miner has, the more likely they are to win the rewards.

The computational problem that is solved is part of a “Proof of Work” system in which the answer it solves for is shared as “proof” of its efforts.

What gives Bitcoin Value?

Since the early days of Bitcoin, it has been difficult for traditional financially minded people to understand any value proposition behind a digital currency. Many consider only tangible, physical assets or currencies ‘backed’ by physical assets to have true value.
But in looking at currencies or assets, there are three main factors that generally give people a sense of value: Trust, supply, and utility.

To begin, one must understand that 90 percent of the currencies in the world do not have a physical coin or bill in circulation to represent them. They are quite literally in existence with nothing more than ones and zeros in government and bank databases.

The important things then become the trackability, the trust in its stability/utility, and the belief in the value. And for traditional currency, that trust and belief can be eroded if there is a central counterparty (i.e., an issuing government) who can affect confidence in the asset through either national turmoil or wanton printing of new currency leading to inflation.

For Bitcoin, there is no one central counterparty controlling or issuing the coin. The distributed computer network and transparent, rule-based software determines how transactions are verified and how new Bitcoin are introduced. The code locks in the supply and it cannot be increased by any single actor, with 21 million Bitcoin being the verifiable total supply that will ever exist. Therefore, unlike fiat currencies, Bitcoin is considered a ‘deflationary’ asset.

For traditional fiat currencies, one must use long-established banking, government, or financial rails to process payments and send and receive money. While it works ‘well enough’ in some ways, it also creates regular problems in which people and businesses are waiting too long for their money, experience errors in payments, or can only send and receive during particular time periods (business days).

Bitcoin is a network that operates 24/7 and does not need the permission of a financial institution to send or receive a payment. Anyone in the world with access to the network can utilize it to make their transactions at any time. This unique utility with Bitcoin–and many other decentralized cryptocurrencies–adds to its overall value proposition.

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What are Bitcoin Forks?

Since the protocol is open source, when a developer makes a radical change to the code, he/she is making a new branch or “fork” of the network. The new fork can operate on its own new network, while the original version continues in its previous form.
Throughout the history of Bitcoin, many different protocol forks have been created and have gained their own popularity and usage, including Litecoin, Bitcoin Cash, and Bitcoin Gold.

What are the Problems with Bitcoin?

While Bitcoin has been a revolution in payments technology with laudable innovation and progress, there have been many problems identified with the network over the past decade.

First, Bitcoin’s Proof of Work algorithm processing requires a great deal of energy consumption, with the network using more electricity annually than some small countries. This results in miners being forced to consolidate in areas in which they can acquire cheap power, bringing into question the quality of its decentralization.

Second, though it was initially conceived as a peer-to-peer payments network, Bitcoin has observably not succeeded as a means of payment for the average person. Network speed and fees, particularly during high times of traffic, have been sub-optimal. This has caused people to attempt to build ‘Layer 2’ solutions such as the ‘Lightning Network,’ but thus far none have improved the protocol enough to make it a cheap and reliable network for everyday payments.

Finally, while Bitcoin has been an extremely profitable asset to hold for over a decade, the shifted narrative that it is now mainly a ‘store of value’ becomes more questionable as time passes. Name recognition and global liquidity for Bitcoin still dwarf most other cryptocurrencies, but as other projects show superior functionality and utility over the pater of blockchain, many question the long-term staying power of its value perception, harkening to previous seemingly unshakeable tech/internet giants as AOL and Yahoo.


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Newton & Kepler

Introducing Newton & Kepler, our expert authors who bring you the latest in crypto education and finance. We chose these names as a tribute to two of the greatest minds in science and mathematics: Isaac Newton and Johannes Kepler. These pioneers made groundbreaking contributions in their respective fields and laid the foundation for much of the modern knowledge we have today. Just as Newton and Kepler searched for truth and knowledge, our authors strive to educate and enlighten our readers about the ever-evolving world of crypto and finance. By honoring these historical figures, we aim to inspire our readers to seek out their own understanding and wisdom in this exciting and complex arena.
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