Bitcoin (BTC) is the first and most secure peer-to-peer electronic cash system, underpinned by blockchain technology.
Bitcoin (BTC) is the first implementation of a cryptocurrency, acting as a decentralized digital currency without a central bank or single administrator. It can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded on a public distributed ledger called a blockchain.
Created in 2009 by an anonymous entity known as Satoshi Nakamoto, Bitcoin was introduced in a whitepaper titled "Bitcoin: A Peer-to-Peer Electronic Cash System." This revolutionary concept aimed to create a form of money that could be transferred electronically in a secure, verifiable, and immutable way without relying on traditional financial institutions.
When Alice sends 1 BTC to Bob, this transaction is broadcast to the network, verified by miners, and then permanently recorded on the Bitcoin blockchain, allowing both parties to confirm the transfer without needing to trust a third party.
Bitcoin is known for its high security and hash power, making it a reliable store of digital value. The security of Bitcoin is maintained by a distributed network of miners who validate transactions and add them to the blockchain. This decentralized nature of Bitcoin makes it resistant to censorship and control.
The network secures itself through a consensus mechanism called Proof of Work (PoW), where miners compete to solve complex mathematical puzzles. The first miner to solve the puzzle gets to add a new block to the blockchain and receive a reward in newly created bitcoin plus transaction fees. This process, known as mining, requires significant computational power and energy.
As of 2023, Bitcoin has never been successfully hacked at the protocol level, though exchanges and wallets holding bitcoin have experienced security breaches. The longer Bitcoin's blockchain grows, the more secure it becomes due to the computational work accumulated in its chain.
To successfully attack the Bitcoin network, a malicious actor would need to control more than 50% of the total mining hashpower—an endeavor that would cost billions of dollars and yield diminishing returns as such an attack would likely devalue Bitcoin itself.
The Bitcoin network aims to balance scalability and security. By keeping the blockchain ledger size as small as reasonable, it ensures that anyone can run, verify, and help secure the blockchain without trusting any third parties. This approach makes the Bitcoin network extremely difficult to censor and control, as the data requirements are small enough to get through any barriers or censorship.
However, Bitcoin's focus on security and decentralization has created scalability challenges. The original Bitcoin protocol limits block sizes to approximately 1MB, which constrains transaction throughput to about 7 transactions per second. This limitation has led to congestion during peak usage periods, resulting in higher transaction fees and longer confirmation times.
Several solutions have been proposed to address these scalability issues, including the Lightning Network (a second-layer solution for smaller transactions) and various protocol upgrades. Another approach was taken by Bitcoin Cash (BCH), which forked from Bitcoin in 2017 with larger block sizes to enable more transactions per block while maintaining compatibility with much of the original Bitcoin ecosystem.
During periods of high network activity, Bitcoin transaction fees have sometimes risen to tens or even hundreds of dollars, making smaller everyday transactions economically unfeasible on the main chain and driving interest in scalability solutions.
Bitcoin is not only a store of value but also a medium of exchange. Many merchants worldwide accept Bitcoin as a form of payment. Additionally, some payment points of sale that accept Bitcoin may also accept other cryptocurrencies such as Bitcoin Cash (BCH), Ethereum (ETH), Litecoin (LTC), and others. It's worth trying them all out to learn the differences and experience using cryptocurrency as a form of currency.
Beyond payments, Bitcoin has gained prominence as "digital gold" or a hedge against inflation and currency devaluation. Institutional investors have begun allocating portions of their portfolios to Bitcoin as an alternative asset class. Countries experiencing economic instability have sometimes seen increased Bitcoin adoption as citizens seek to preserve purchasing power.
Companies like Microsoft, Overstock, and Twitch accept Bitcoin for payments, while payment processors like BitPay enable businesses to accept Bitcoin and convert it to fiat currency if desired.
In places like El Salvador, which adopted Bitcoin as legal tender in 2021, people can use Bitcoin for everyday transactions from coffee purchases to utility bill payments, though many users prefer cryptocurrencies with lower fees for smaller transactions.
As the first cryptocurrency, Bitcoin has established itself as the dominant digital asset by market capitalization. Its finite supply cap of 21 million coins creates scarcity, which many investors believe makes it a hedge against inflation and currency devaluation.
Bitcoin experiences price cycles often referred to as "bull" and "bear" markets, with significant volatility compared to traditional assets. This volatility has decreased somewhat as the market has matured and more institutional investors have entered the space.
Despite its price volatility, Bitcoin has been one of the best-performing assets since its creation, though past performance doesn't guarantee future results. Investors should be aware that regulatory changes, technological developments, and market sentiment can all significantly impact Bitcoin's price.
An investment of $1,000 in Bitcoin in 2013 would have grown to over $400,000 by 2023, despite experiencing several major market crashes along the way.
All terms and definitions may update as the Cryptionary improves.