Coin Insights: What Is Bitcoin?

Bitcoin-Logo

Unless you’ve been hiding from the news, you’ve almost certainly heard about Bitcoin (BTC). But perhaps you have some unresolved questions that need to be answered about the most well-known cryptocurrency in the world. The cryptocurrency that started it all. We’re going to discuss what it is and why, despite its high price point, it could be a cryptocurrency you want to pay attention to.

Who created Bitcoin?

Bitcoin was first envisioned in August 2008, when an anonymous person with the pseudonym of Satoshi Nakamoto registered the domain Bitcoin.org. 

In October that year, a paper titled Bitcoin: A Peer-To-Peer Electronic Cash System was published on the internet, authored by none other than Satoshi himself. Satoshi used the word ‘we’ often in the whitepaper. Some have speculated that Nakamoto is actually more than one person, although most of the strongest proof points to a man named Hal Finney, who sadly passed away not long after Bitcoin’s release.

While we might never know who Satoshi Nakamoto was, his work created Bitcoin, and was the reason why cryptocurrency exists today.

What Is The Purpose of Bitcoin? Why Was It Created?

Satoshi Nakomoto left clues as to why Bitcoin was created.

On January 3rd, 2009, after the first block of Bitcoin was ‘mined’ (or created), a message was written at the end of the block’s signature. It read:

“The times 03/Jan/2009 Chancellor on brink of second bailout for banks.” 

You can see it in the bottom right hand corner of this image:

bitcoin-block-1

Source: Documenting Bitcoin, Twitter

This is referring to that specific date (Jan 03 2009) when the UK Chancellor was on the verge of bailing out several banks in response to the crash of the housing market. You can see the article headline below:

The-times-bitcoin-reference

Source: Documenting Bitcoin, Twitter, The Times UK

Whoever signed this first block was sending the world a message – that the purpose of Bitcoin was to provide an alternative to a mismanaged and broken financial system.

What was the solution Bitcoin proposed?

Bitcoin’s solution to a broken financial system is a peer-to-peer digital cash system.

Peer-to-peer means that all participants in the system are equally privileged and no one has more power than anyone else.

This sounds great in theory, but does this work?

How does Bitcoin make peer-to-peer digital cash possible? How does it all work?

Peer-to-peer cash uses digital signatures to send money.

Digital signatures are a type of cryptographic technology that sign transactions. When you send someone Bitcoin, you are making a digital signature or ‘hash’ in the Bitcoin blockchain that says “Yes, I agree to send xyz this amount of money, at this specific point time.”

However, digital signatures weren’t really anything new or special when Bitcoin was invented. Banks had been using cryptography to make digital signatures possible for a very long time before Bitcoin was invented. Which makes one wonder “What makes Bitcoin so special then?”

What is remarkable about Bitcoin is that it removes the trust based model seen ubiquitously across other forms of digital cash and in the financial system as a whole.

It sounds complex, but it’s really not.

Remember, Bitcoin was created for the purpose of being a peer-to-peer electronic cash system. This means that at ground zero, one of Bitcoin’s purposes was to remove the need for financial middlemen – or banks.

In this way Bitcoin removes the trust based model that we’ve all grown accustomed to. We trust that the banks will take care of financial transactions and verifications for us. But Bitcoin can be used without a banking system, or without having to trust that the middleman will verify, insure, and process your transaction.

Digital signatures was one of the first things that Bitcoin leveraged to help enable that.

But it goes even further. Bitcoin distinguishes itself as being unique from other forms of digital cash that came before it, in two major ways.

First, is that Bitcoin transactions are irreversible. Once entered on the blockchain, they cannot be altered or changed.

Second is that Bitcoin found a way around something called the Double-Spend problem without compromising decentralization. We’re going to discuss both of these, in sequence below.

Why should I care about irreversible transactions?

Imagine that you want to go to see your favorite hockey team with your family on the weekend. It’s Thursday and you promptly decide to buy tickets to a match. You go online, use your credit card to make the purchase, and find the tickets have arrived in your email mere seconds later. Ah, the power of the internet. You’re excited to go to the game!

Only, unbeknownst to you, 5-minutes after you pressed “Buy” on their website, your bank denied the transaction. They suspected fraudulent activity and reversed the transaction on your credit card. The result was the money never went to the ticket seller… only you’ve already got the tickets.

And while this sounds like a win for you in the short run, (a free set of tickets right?), we’ve got to remember that if this happened to you, or millions of businesses and people on an ongoing basis, that system would not function properly.

Taking it a step further, with a peer-to-peer electronic cash system, there would be no intermediary to intercede with and reverse your purchase of the hockey tickets. If anyone could reverse transactions then the system would absolutely not function properly.

Thus Bitcoin eliminated the ability to reverse transactions on the blockchain. If you pressed the “Buy” button to purchase your hockey tickets, your money would be sent instantly to the ticket seller. This is another great reminder on why you should always check your transaction addresses before you buy, sell, or send cryptocurrency.

But Bitcoin still needed to solve another challenge.

Bitcoin had to overcome a major obstacle to create a genuinely peer-to-peer payment system without any intermediaries. Bitcoin had to overcome the obstacle known as the double-spend problem.

Why is the double-spend problem hard to solve and why does it matter?

With the double-spend problem, the concern is that anyone can replicate digital money and make as many copies of it as they desire. You might ask “What’s the big deal, can’t a bank do this easily?”

Well, yes, you would be correct.

However, banks ‘printing more money’ was exactly the problem that led to Bitcoin’s creation. Having this ability built into Bitcoin would have gone against Nakomoto’s vision of a peer-to-peer digital cash system. Furthermore, if anyone could print more money, then our money would simply be worthless. This was a problem that Bitcoin did not want to have at its core.

Thus Bitcoin’s second obstacle when getting started was in trying to figure out how to overcome the double-spend problem without having an intermediary as the deciding factor.

To solve Bitcoin’s double-spending problem, Satoshi said:

“To accomplish this without a trusted party, transactions must be publicly announced.” 

But how? And why would this solve the double-spend problem?

How the double-spend problem is solved

One way of doing this, Satoshi remarks, can be found in your local newspaper. It’s a simple solution that everyone can relate to.

Every newspaper always has the date of the newspaper listed at the top of the page.

When applied to computers and code, this is what is called a timestamp server. It makes a public timestamp of every transaction recorded on the blockchain.

Below is an illustration of timestamp blocks. Each timestamp includes the previous timestamp in its hash, forming a chain.

bitcoin-time-stamps

You’ll notice each block or timestamp contains a digital fingerprint of the block before it. This means that the identity of the second block is determined by the block that came before it.

Therefore, in order to change any of the data on the Bitcoin blockchain, one has to start with the very first timestamp that was ever created on the blockchain.

In our example above about your hockey tickets, imagine if the bank had to change every credit card statement for every credit card, since the beginning of credit cards, just in order to reverse your ticket purchase or to stop the double spending of cash! This is similar to what changing a transaction on the blockchain is like.

Thus Satoshi Nakamoto solved multiple very difficult problems to make his peer-to-peer cash system of Bitcoin a reality:

  1. How do you eliminate the intermediary and build a trustless system?
  2. How do you stop people from reversing transactions without an intermediary?
  3. How do you solve the double spend problem without an intermediary?

In doing so Satoshi Nakamoto created Bitcoin, and unleashed the world of cryptocurrency that we see unfolding before our eyes today.

What else should I know about Bitcoin?

The first Bitcoin transaction that sent 10 BTC from Satoshi Nakamoto was a cryptographer named Hal Finney who helped Nakomoto work though Bitcoin’s bugs and security in the early days. This transaction was worth 10 BTC.

The first use of Bitcoin as a form of payment happened in May of 2010 when a man named Laszlo Hanyecz agreed to pay 10,000 Bitcoins (BTC) for two Papa John’s pizzas. Today, those 10,000 BTC would be worth nearly $450-million USD, or $525-million CAD. Bitcoin Pizza Day as it’s now known, has been created in the community to commemorate this historic event.

Bitcoin has a total maximum supply of 21-million tokens, with a current supply of approximately 18.5-million. This means that there will never be more than 21-million tokens.

Bitcoin’s market cap is consistently at number one, which now hovers around $800-billion USD. Although the market caps and price are constantly changing, Bitcoin continues to remain one of the most sought after cryptocurrencies in the market as a store of value or as ‘digital gold’.

Bitcoin remains the longest standing, most stable cryptocurrency the world has ever seen, and is consistently sought after by investors and individuals of all types.

You can purchase Bitcoin here on the Coinberry platform, getting access to fantastic prices if you so choose.

Bitcoin (BTC) Resources

If you’re interested in learning more about Bitcoin (BTC), you can continue to read our educational series. We’ll be releasing more articles on this cryptocurrency, and covering various aspects of it.

Bitcoin.org

Bitcoin Whitepaper

Coinberry.com

Coinberry prices

History of Bitcoin

Where Did Bitcoin Come From? – The True Story

Bitcoin (BTC) References

The websites, articles, and content that was used to make this article:

Bitcoin.org

Bitcoin Whitepaper

Ivan on Tech

Bitcoin Whitepaper – Programmer explains