What is Bitcoin and how does it work?

By now most of us have heard about a new type of digital money called cryptocurrency. For many people, it is a brand new concept that is a little confusing and difficult to fully understand. Cryptocurrency is a topic that is flooded with hype, speculation and skepticism. And with over 1500 different kinds of cryptocurrencies out there, who can blame you for not being an expert already. But fear not, in this article we are going to explore the new and exciting world of cryptocurrency and find the simple answer to what exactly Bitcoin is. We will look into some of the advantages and disadvantages of what Bitcoin has to offer so you will be informed beyond the hype, and better equipped to navigate the murky waters of the crypto world.

Today, the world of cryptocurrency is enormous. It is a market worth over 2 trillion USD which has exploded seemingly out of nowhere over the last decade. So where exactly did crypto come from? To answer that question we’ll need to go back to the origin story of the very first cryptocurrency, Bitcoin.

What is Bitcoin and where did it come from?

It’s 2008, and in the midst of the Great Recession, the world’s financial system is on the verge of total collapse. The greed of the big banks pushed their limits too far and as a result, the lives of millions of people were destroyed. Entire life savings vanished in an instant and many were never able to recover. Some lost all trust in the banking system and rightfully so. And others started thinking that perhaps there is a better way things could be done. A way that no longer allows the banks to have too much control over the monetary system, and gives more power back to the people.

Still to this day, no one knows who the real creator of Bitcoin is. They are known only by the pseudonym Satoshi Nakamoto. And in October 2008, they released a white paper to a group of developers which outlined a new proposal for a form of digital money called Bitcoin. In January 2009, the Bitcoin blockchain network went live.

What is a blockchain network and how do they function?

Bitcoin operates on a type of decentralised network known as a blockchain, and this is structured differently from a typical database in regards to the way information is stored. In a blockchain network, the software runs on thousands of computers at the same time. So in the case of Bitcoin, this means that no single person or central group has control over the network. Instead, all users on the network share control collectively.

A blockchain network provides great transparency. As each transaction is checked and validated by the network, the data is then stored in a type of digital ledger that can be seen by all, but altered or changed by none. This results in the accuracy of records on a blockchain network being far greater than that of a typical database.

What are the advantages of Bitcoin?

Bitcoin is a good solution to the issues we currently have in an inflationary monetary system. Traditionally, when times get tough governments have the option to simply print more currency by the billions, and this might help to ease things in the short term, but at the same time, it causes a spike in inflation. This means that each time a government decides to print more currency, everyone else’s cash loses some of its value. However, Bitcoin is not an inflationary currency. A 21 million Bitcoin limit has been implemented on the blockchain and this means there is a finite number of the currency, preventing inflation from occurring.

Bitcoin also allows us to send money around the world much easier, faster and cheaper too. This is because using Bitcoin cuts out the banks as middlemen in the financial system. You can securely send Bitcoin directly to any other person in the world at the click of a button, no need for slow and costly international bank transfers. Traditional banks simply cannot compete with this new technology.

Are there any problems with Bitcoin?

Bitcoin has some clear advantages that have driven it to rapidly become the new cash for the internet. It is democratising money and decentralising finance to the benefit of millions of people. However, Bitcoin is not completely perfect and it is important to be aware of the potential issues that it comes with.

Some of the processes involved with the Bitcoin blockchain require very high levels of computing power and this is very energy-intensive, and at this point in time, the energy being used is largely sourced from fossil fuels. However, this issue should only be short-term in nature as the global trend of decarbonisation continues to gain pace.

As Bitcoin is becoming the new cash of the internet, it is essential that you have a reliable internet connection to use the blockchain network. If the internet goes down from time to time you will also occasionally experience difficulties accessing your digital cash.

The cryptocurrency industry is relatively young and it is still largely unregulated, this makes it difficult to incorporate into the existing economic system, which slows down mainstream adoption. As with the adoption of any new major technology, there are likely to be several bumps along the way and this tends to create wild swings in the value of Bitcoin and the wider crypto market.

As blockchain and cryptocurrencies are still a new technology, these issues are likely to become less pronounced over time as mainstream adoption continues to gather momentum. These are still early days in the cryptocurrency story, and as this technology is developed further the future possibilities for its uses seem almost limitless.

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Disclaimer: Please note the above information is for general education purposes only. It has been written without taking any of your personal circumstances into consideration. This is not a buy, hold or sell recommendation.

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