Intro Guide

Bitcoin Explained : A Beginner's Guide To Understanding Bitcoin ($BTC)

A short but comprehensive introduction to everything you need to know about Bitcoin and why it is valuable.
Average read time:
5
minutes
Key Takeaways
  • Bitcoin was created by a person under the pseudonym of Satoshi Nakamoto. It was this person who wrote the original whitepaper, developed Bitcoin, and deployed the original reference implementation.
  • Bitcoin operates on a decentralized network - instead of one party holding custody of the ledger, such as a bank, every computer that helps operate the Bitcoin network has a copy of every single transaction that has ever occurred on the network.
  • Bitcoin accounts for nearly half of the entire crypto market, a market that tends to rise and fall with the price of BTC at the lead.

The History of Bitcoin and the Blockchain

Bitcoin has seen an astonishing surge in popularity over the last decade, with most people having heard about this revolutionary asset class referred to as ‘digital gold’. However, despite extensive coverage in the media, not many are actually aware of the origins of Bitcoin and how the world’s most famous blockchain came into existence.

In 2008, an author named Satoshi Nakamoto published a whitepaper (a technical paper describing a new idea) about a peer-to-peer form of digital currency. As of today, no one knows who Satoshi Nakamoto really is, but the ideas put forth in his white paper have exploded into an entirely new form of technology.

So, how does Bitcoin work? In January of 2009, Satoshi made Bitcoin a reality by launching a network that, unlike almost every other network in existence, wasn’t housed in a central server. Take the internet as an example of a centralized network - when a user wants to get information from a website, their computer sends a request to a central server, and the server replies directly with an answer. Satoshi Nakamoto’s idea for the Bitcoin network was revolutionary, because it used a decentralized network that could be used to create a digital form of money in a secure way.

With the invention of the blockchain came the invention of a form of digital currency that could be trusted - with multiple records of transactions being recorded across a decentralized network, it’s almost impossible to change or alter data. Once people began understanding Bitcoin and the importance of this innovation, the value of this digital currency began increasing at an unprecedented rate.

How Do Blockchains Work?

A blockchain is a type of ledger and a way of accounting for transactions. Since there is no centralised server for recording this ledger, blockchains are referred to as a distributed ledger technology, or DLT.

Instead of one party holding custody of the ledger, such as a bank, every computer that helps operate the Bitcoin network has a log of every single transaction that has ever occurred on the network.

Someone could theoretically hack into a bank’s main computer and modify transaction history logs. However, since a blockchain has records stored on thousands of different computers, changing records on one computer dishonestly would not impact the logs on the others.

Each computer that helps to run a blockchain network is randomly chosen to add new information to the books. This ensures that multiple parties cannot work together to add false information. Remember, every participant in the Bitcoin network is verifying if the information is correct, so if the majority of participants agree that something is correct, then that is the consensus.

Crypto Tokens Explained

If information is added correctly and honestly to a blockchain network, something that other computers can verify, then the party that added the information is rewarded with something called a token. Crypto tokens are a piece of computer code created each time information is added to a blockchain.

As previously mentioned, the computers operating the Bitcoin network that add information to a blockchain are randomly chosen, and this is coordinated by solving complex mathematical problems. The problems are so complex that it takes a huge amount of electricity from computers to find a solution, so the person or organisation who owns that computer has to pay a hefty energy bill to participate in the network.

If someone adds false information to the blockchain, their contribution is rejected, and they don’t receive any tokens as a reward. They would still have to settle the bill for all the computing energy required to solve the mathematical problems, something that incentives good behavior. Simply put: no cooperation = no tokens.

Now, the whole purpose of a blockchain like Bitcoin is to keep track of who owns tokens, and it is so efficient at keeping track of ownership that the network allows people to securely send tokens to each other. Basically, the entire Bitcoin network is designed to create, distribute, and account for little pieces of code.

Why is Bitcoin Valuable?

When the Bitcoin network launched, BTC was essentially worthless. Bitcoin was a project launched by a small group of technically inclined users who interacted with each other over the internet, and many even joked about it on forums like Reddit.

Interestingly, the first time BTC was used to pay for something, it was used to pay for a pizza delivery. A man in Florida offered anyone 10,000 BTC to order him a pizza, and someone online accepted his offer. Today, that pizza would be worth around 200 million dollars.

Over time, people began sending BTC to each other for different transactions. Other blockchains began copying the Bitcoin network, and soon there were more tokens than just BTC that could be sent via blockchain networks.

People began understanding that BTC was rare because there were only so many tokens in existence. As people began to notice there was a digital asset that could not be copied and was in limited supply, more people began looking at BTC in the same way we look at gold.

There can only be 20 million bitcoins ever “mined” into existence by the computers solving problems on its vast network. Every four years, the number of bitcoins that can be produced is cut in half to ensure that BTC remains rare, and this “halving” combined with the growing complexity of the problems to be solved means that all 20 million BTC will not be mined until around 200 years from now.

So, why is Bitcoin valuable? Think of how much money is spent on mining gold and other precious metals, and think about what gives these metals their value. These same principles apply to BTC, and once financially minded individuals began paying attention to bitcoin, it quickly stopped being a joke.

Bitcoin Today

Bitcoin accounts for around half a trillion dollars in value today. Other blockchains that were developed after Bitcoin have introduced their own crypto tokens to the market, and BTC’s market dominance is slowly eroding as a plethora of competing tokens have emerged for trade.

Even with intense competition, bitcoin accounts for nearly half of the entire crypto market, a market that tends to rise and fall with the price of BTC at the lead. The rise of blockchain technology has led to the creation of a whole new financial sector, now known as decentralized finance (DeFi).

IMPORTANT INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the author and the comments, opinions and analyses are rendered as of the publication date and may change without notice. There is no guarantee that any forecasts or predictions made will come to pass. The information provided in this material is not intended as a complete analysis of all material facts or circumstances regarding any country, region or market. All investments involve risks, including possible loss of principal.

Risk management does not imply elimination of risks, and not all investments are suitable for all investors. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by MANTRA to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Data from third party sources has not independently verified, validated or audited. MANTRA accepts no liability whatsoever for any loss arising from use of this information; reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

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