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Bitcoin is the first decentralized cryptocurrency, a digital asset that operates without central authority using public-key cryptography. Launched in 2009 by an anonymous programmer(s) known as Satoshi Nakamoto, it is a peer-to-peer payment system using the cryptocurrency, “bitcoin”, to transfer value or act as a store of value like gold and silver. Each bitcoin is comprised of 100 million satoshis, making it divisible up to 8 decimal places, allowing for fractional purchases with as little as one US dollar.
Bitcoin’s price is known for its high volatility, yet it has become the top-performing asset class (including stocks, commodities, and bonds) over the past decade, growing a staggering 9 million percent between 2010 and 2020. It was launched in early 2009 by Satoshi Nakamoto, who mined the first-ever Bitcoin block, putting 50 BTC into circulation at a price of $0.00. New bitcoins continued to enter circulation every 10 minutes through block rewards, until the first halving event in 2012, a programmed reduction in the amount of new BTC released every 210,000 blocks.
In 2011, the price of BTC reached parity with the US dollar for the first time, attracting new investors and reaching a peak of over $30 within months. Although it briefly rose above $1,000 in early 2013, the Mt Gox hack and China’s ban caused a bear market that lasted four years. Once it broke above $1,000 again, bitcoin’s price skyrocketed until a peak of $19,850 in 2017. The crypto market faced a bear market, known as “crypto winter”, in 2018. Bitcoin returned to test its previous all-time high in December 2020 and rose 239% over the next 119 days to reach a new high of $64,799.
Cryptocurrency, exemplified by Bitcoin, represents a new era in finance. Unlike traditional currencies, it operates on a digital platform, allowing for direct transfers between users without the need for intermediaries. Transactions are recorded on a transparent, immutable and decentralized ledger technology known as blockchain. Here are the key features of blockchain:
The process of unlocking blocks in crypto mining works as follows: Cryptographic hashing is used in crypto mining. It converts any input (such as messages, words, or data) into a fixed-length alphanumeric code, known as a hash. Every input produces a unique hash and it’s difficult to predict which inputs will result in specific hashes. Even a small change in the input will generate a completely different code. Each block has a target hash value. Miners compete to be the first to produce a hash that is lower or equal to the target hash. Since hashes are random, the miners continue trying until one of them succeeds.
This trial and error process, called proof-of-work, is designed to prevent malicious activities from spamming or disrupting the network. The miner who successfully unlocks the next block is awarded a set number of bitcoin (block rewards) and can add a number of transactions to the block. They also receive any transaction fees associated with the transactions they add. A new block is found roughly every 10 minutes.
Block rewards for bitcoin decrease over time. Every 210,000 blocks (about every 4 years), the number of bitcoin received as block rewards is halved. This gradually reduces the amount of bitcoin entering the market. As of 2021, miners receive 6.25 bitcoin for each block they mine. The next halving is expected in 2024, reducing the rewards to 3.125 bitcoin per block. As the supply of new bitcoin decreases, it will make buying bitcoin more competitive if demand remains high.
The security of the network is maintained through the process of block creation by network participants, but this security comes with a cost. In 2021, the Bitcoin network’s energy consumption reached 93 TWh per year, comparable to the energy consumed by the 34th largest country in the world. This high energy demand has drawn criticism for its impact on the environment from public figures such as Elon Musk and government entities like China’s State Council and the US Senate.
The Bitcoin network was developed by the pseudonymous Satoshi Nakamoto, possibly a single programmer or a group of programmers. In its early stages, other prominent figures in cryptography and software development joined the project, including Hal Finney, Wei Dai, Nick Szabo, Gavin Andresen, Pieter Wuille, and Peter Todd. These individuals contributed to the development of Bitcoin Core, the first client on the network, which allows network participants to run a node and connect to the blockchain.
The Bitcoin Foundation, an American nonprofit, was established in 2012 to promote the growth and adoption of the Bitcoin protocol. However, the foundation faced financial difficulties and was dissolved after three years. In 2014, Adam Back, inventor of Hashcash and a cypherpunk, co-founded Blockstream, a for-profit tech company that enhances the Bitcoin network through new infrastructure such as the Lightning Network and sidechains.
