- Investing Guide
- Bitcoin vs.
- How to Buy ‘BTC’
- Bitcoin Whitepaper
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Table Of Contents
According to its anonymous creator(s), Satoshi Nakamoto, Bitcoin (BTC) is a “…purely peer-to-peer version of electronic cash.” It was born of the 2008 financial crash with the purpose of creating “a system for electronic transactions without relying on trust,” and through a mix of ingenuity and determination, it has been more successful than many expected at achieving this.
Importantly, the Bitcoin software is open-source, meaning that its source code is freely available for anyone to review, use, and modify. This promotes transparency and community-driven development and innovation.
Interestingly, despite its continued and growing popularity around the globe, the inner workings of the Bitcoin network, and its approach to creating a sound financial network, remain cloaked in relative obscurity. So, let's take a closer look at the world's most popular digital asset and how it has managed to become the force it is today.
What Problems Does Bitcoin (BTC) Solve?
Before diving into how the network works, it is important to gain an understanding of the problems it first set out to solve.
Bitcoin didn’t enter the market by chance; it was built to function as the currency of the internet and to combat increasingly poor fiscal policies by world governments. In fact, a fundamental message exists within the genesis block of the network, ensuring its original purpose was recorded for all to remember.
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” – Satoshi Nakamoto
The message, which refers to a headline published in The Times, underscored Satoshi Nakamoto's belief that existing fiscal policy would lead the world into disaster. Without a doubt, it is this belief that guided the development of the network, allowing it to become what it is today. Looking deeper, the following are each problems the network was tailor-built to address.
Bitcoin's approach to addressing inflation fundamentally differs from that of fiat currencies. Its decentralized nature, fixed supply, and built-in halving events help to mitigate the effects of inflation by ensuring that its value is not eroded over time through excessive issuance. While Bitcoin's volatility and relatively short history mean it is not without its risks, its underlying principles offer a compelling case for its use as a hedge against inflation.
Decentralized Control: Unlike fiat currencies, which are issued by central governments and subject to their monetary policies, Bitcoin operates on a decentralized network. This means no single entity or government can control its issuance or influence its value through policy changes. The decentralization of Bitcoin removes the possibility of policy-induced inflation, which can occur when governments decide to print more money, thus devaluing the currency.
Fixed Supply / Store of Value: One of the most critical attributes of Bitcoin that addresses inflation is its fixed supply. The total number of Bitcoins that can ever exist is capped at 21 million. This scarcity is coded into the Bitcoin protocol and cannot be changed. By contrast, fiat currencies have no fixed supply, and central banks can increase the money supply at their discretion, leading to inflation.
Due to its fixed supply and global acceptance, Bitcoin is increasingly considered a store of value and a hedge against inflation. Many compare it to gold in this respect. Just as gold has historically been a safe haven during times of economic instability and inflation, Bitcoin is viewed by many as “digital gold,” providing a modern alternative for preserving wealth over time.
Halving Events: Bitcoin has a unique feature known as “halving,” where the reward for mining new blocks is halved approximately every four years. This design reduces the rate at which new Bitcoins are created and mimics the effect of mining resources becoming harder to extract over time, much like gold. Halving events slow down the influx of new Bitcoins into circulation, making Bitcoin disinflationary by nature, as opposed to fiat currencies, which can be inflationary when more money is printed.
Global Market: Bitcoin operates on a global scale, independent of any single economy's health. While the value of fiat currencies can fluctuate based on national economic conditions, inflation rates, and monetary policy decisions, Bitcoin's value is determined by global demand and supply dynamics. This global market presence allows Bitcoin to serve as a hedge against local currency inflation or devaluation.
Like its approach toward inflation, Bitcoin addresses censorship in various ways. Sadly, we live in a world where many voices are silenced if they disagree with popular opinion. This has increased exposure to filtered content and the resulting capability for the masses to be manipulated.
Bitcoin's design as a decentralized, borderless, and censorship-resistant currency offers a powerful tool for circumventing traditional forms of financial control and censorship. While not without its challenges, such as potential privacy concerns and regulatory scrutiny, Bitcoin provides an unprecedented level of freedom in the management and transfer of wealth. The following are a few ways in which Bitcoin achieves this.
Decentralization: Unlike traditional financial systems, where transactions can be censored or blocked by governments, banks, or financial institutions, Bitcoin operates on a peer-to-peer network lacking central authority. This means no single entity has the power to control, block, or censor transactions. As long as you have access to the internet, you can send and receive Bitcoin.
Borderless Transactions: Bitcoin transactions can be conducted across borders without interference from any government or institution. This global reach ensures that individuals in countries with strict capital controls or where certain transactions are censored can still transfer value worldwide.
Immutability: Once a Bitcoin transaction is confirmed, it is recorded on the blockchain, a distributed ledger that maintains a permanent and unalterable history of all transactions. This immutability prevents censorship post-transaction, as no one can alter or erase a transaction once it has been included in a block.
This also means that the network is resistant to tampering. With the blockchain's distributed nature, it means that to censor or alter a transaction, an attacker would need to control most of the network's hash power (computational power). Today, such a feat is so impractical and costly due to Bitcoin's proof-of-work consensus mechanism that it is considered nearly impossible.
Transparency and Anonymity: The blockchain is a public ledger, meaning anyone can view the transactions. While this transparency might seem counterintuitive to privacy, it contributes to the censorship-resistant nature of Bitcoin by allowing anyone to verify transactions independently.
At the same time, Bitcoin provides a certain level of pseudo-anonymity, as transactions do not require real-world identities. While the transaction history of a Bitcoin address is public, the identity of the address's owner can remain unknown. This pseudo-anonymity protects users from being targeted for censorship based on their identity, though it's worth noting that advanced analysis can sometimes de-anonymize transactions.
How Does Bitcoin (BTC) Work
So, we know that Bitcoin operates as a decentralized global network, built upon sound monetary policies, that allows for value to be transferred free of manipulation. How exactly does it achieve this, though?
At its core, Bitcoin operates on a technology called blockchain, which is a decentralized ledger of all transactions across a network. This ledger is composed of blocks, each containing a list of transactions.
The blockchain is maintained by a network of nodes (computers), making it resistant to central control or censorship.
Each transaction on the blockchain is encrypted and linked to the previous transaction, creating a secure and immutable chain. This ensures that once a transaction is recorded, it cannot be altered or deleted, providing a trustworthy and transparent history of all transactions.
What is BTC?
Bitcoin relies on ‘BTC' – the native token of the network. This digital currency serves several essential functions:
- Transaction fees within the network, compensating miners for processing transactions and securing the blockchain.
- Incentive for mining as part of the consensus mechanism, where miners compete to solve cryptographic puzzles using the Proof of Work (PoW) algorithm to earn newly minted BTC as rewards.
- A means of value exchange, allowing Bitcoin (BTC) holders to buy, sell, or trade goods and services, acting as a decentralized digital currency independent of traditional banking systems.
Notably, mining BTC not only secures the network by validating transactions and adding them to the blockchain but also provides a mechanism for miners to earn rewards. This incentivizes participation and investment in the network's security and growth, ensuring its integrity and continued operation.
Mining is both the process through which new Bitcoin (BTC) is created and a critical component of the maintenance and development of the blockchain ledger. It involves several key steps:
- Transaction Verification: Miners collect transactions from the memory pool or ‘mempool' (all pending unconfirmed transactions) and verify their validity. A transaction's validity includes checking that the digital signatures are correct and the sender has sufficient balance to complete the transaction.
- Forming a Block: Once transactions are verified, miners assemble them into a block. Each block also contains the previous block's hash, linking the blocks together in a chain – hence the name ‘blockchain'. This ensures the integrity of the blockchain's history.
- Solving the Puzzle: To add a block to the blockchain, miners must solve a cryptographic puzzle known as proof-of-work (PoW). This puzzle requires miners to find a number called a nonce that, when combined with the block's data and passed through a hash function, produces a hash that meets certain criteria (e.g., a specific number of leading zeros). The difficulty of this puzzle adjusts approximately every two weeks to maintain a target block time of 10 minutes.
- Race to Find the Nonce: Miners across the network compete to be the first to find a valid nonce. This process requires substantial computational power, as the solution is found through brute force—trial and error.
- Block Addition and Reward: The first miner to solve the puzzle broadcasts the new block to the network for verification while other miners check the nonce and the transactions within the block. If the majority agree that everything is correct, the block is added to the blockchain. The successful miner receives a block reward (newly minted BTC) and transaction fees from the transactions included in the block. This reward serves as an incentive to contribute computational resources to the network.
The Bitcoin (BTC) Consensus Mechanism – Proof of Work (PoW)
The consensus mechanism is the process through which the network achieves agreement on the state of the blockchain, ensuring that all participants have a consistent view of the transaction history. Bitcoin uses Proof of Work (PoW) as its consensus mechanism, which offers multiple indispensable traits.
Security: PoW secures the network by making it computationally expensive to add blocks, thereby deterring malicious actors. To alter the blockchain, an attacker would need to control more than 50% of the network's computational power, known as a 51% attack, which is highly impractical due to the cost and resources required.
Decentralization: By allowing anyone to participate in mining (given sufficient computational resources), PoW supports the decentralized nature of the Bitcoin network. This prevents any single entity from gaining control over the blockchain.
Behind the scenes, PoW uses SHA-256, which stands for Secure Hash Algorithm 256-bit. This cryptographic hash function generates a fixed-size 256-bit (32-byte) hash. It is a member of the SHA-2 family of hashing algorithms designed by the National Security Agency (NSA) and published in 2001 by the National Institute of Standards and Technology (NIST) as a U.S. Federal Information Processing Standard.
SHA-256 is widely used in various security applications and protocols, including SSL/TLS and digital signatures, as well as in blockchain technologies and Bitcoin. In the context of Bitcoin, SHA-256 is used in the mining process and in creating Bitcoin wallet addresses. The algorithm's strength lies in its ability to produce a unique hash for every input, making it virtually impossible to predict the input based on the output (pre-image resistance), to find two different inputs that produce the same output (collision resistance), and to ensure that it is infeasible to modify the input without changing the output (avalanche effect). These properties are crucial for maintaining the integrity and security of the data on the Bitcoin blockchain.
Together, mining and the consensus mechanism are foundational to Bitcoin's design, providing a secure, decentralized way to process transactions and agree on the state of the blockchain without needing a trusted central authority. While there are alternative consensus mechanisms, such as the popular Proof-of-Stake (PoS), each sacrifices the security, reliability, or decentralization that makes Bitcoin what it is.
Bitcoin (BTC) Network Updates
For those just learning, today's Bitcoin (BTC) is not the same as when it launched. Over the years, the network has undergone various upgrades, bringing increased functionality, security, and performance.
Segregated Witness (SegWit) – 2017
How It Works: SegWit is a protocol upgrade implemented as a soft fork. It addressed several issues, including transaction malleability and scalability. SegWit works by segregating the witness (signature) data from the transaction data. This segregation allows more transactions to fit into a block, effectively increasing its capacity without altering its size limit.
Implementation: As a soft fork, SegWit was compatible with the existing blockchain, requiring only a majority of miners to upgrade their software to enforce the new rules. Once activated, it allowed users and services to opt-in to using SegWit addresses and transactions.
Taproot – 2021
How It Works: Taproot was a significant privacy and efficiency upgrade for Bitcoin. It introduces Schnorr signatures, replacing the ECDSA signatures previously used. This change allows for more complex Bitcoin transactions to appear the same as standard transactions on the blockchain, enhancing privacy. Taproot also makes smart contracts more space-efficient and private on the Bitcoin network.
Implementation: Taproot was activated through a soft fork using the Speedy Trial activation method, which required miners to signal their readiness within a specific window. The upgrade achieved widespread support, enabling new possibilities for smart contracts and enhanced transaction privacy.
How Updates Are Implemented
These updates were implemented through soft forks, which are quite different from hard forks.
Soft Forks: These are backward-compatible upgrades that tighten or add new rules to the blockchain's protocol. Only a majority of miners need to upgrade to enforce the new rules, while non-upgraded nodes can still participate in the network.
Hard Forks: These are not backward-compatible and create a permanent divergence from the previous version of the blockchain. Hard forks require all nodes to upgrade to the new protocol to continue participating in the network.
Updates like SegWit and Taproot, being soft forks, allowed for a smoother transition and wider adoption within the community without splitting the network.
Bitcoin (BTC) Layer 2 Solutions
For Bitcoin (BTC) to scale and function as a true currency and not just a store of value, many believe that the answer can be found in layer 2 solutions. Currently, the Lightning Network is the clear leading candidate to facilitate this role.
How It Works: The Lightning Network is a layer 2 payment protocol layered on top of the Bitcoin blockchain. It enables instant, high-volume micropayments by allowing users to create payment channels between any two parties on that extra layer. These channels can exist for any amount of time, and transactions within them are not broadcast to the blockchain until the channel is closed. This setup significantly reduces the burden on the main Bitcoin network, enabling faster transactions with lower fees.
Implementation: The Lightning Network is built using smart contracts on the Bitcoin blockchain. Users need to lock up a certain amount of Bitcoin in a payment channel, which they can then transact within almost instantly. When the channel is closed, the final state of its balances is recorded on the Bitcoin blockchain. The Lightning Network operates independently of the main blockchain, with users running Lightning nodes alongside traditional Bitcoin nodes.
The evolution of the Bitcoin network through updates like SegWit and Taproot, alongside the development of layer 2 solutions such as the Lightning Network, has done well to showcase the community's commitment to improving Bitcoin's scalability, privacy, and functionality over the years. These updates are carefully tested and implemented to ensure compatibility and security, aiming to make Bitcoin a more efficient and versatile digital currency.
How to Buy Bitcoin (BTC)
Uphold – This is one of the top exchanges for United States & UK residents that offers a wide range of cryptocurrencies. Germany & Netherlands are prohibited.
Uphold Disclaimer: Terms Apply. Cryptoassets are highly volatile. Your capital is at risk. Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment, and you should not expect to be protected if something goes wrong.
Paybis – This truly global company offers services to residents from 180+ countries, including Canada, Europe, UK, & USA.
Kraken – Founded in 2011, Kraken is one of the most trusted names in the industry, with over 9,000,000 users and over $207 billion in quarterly trading volume. This exchange offers trading access to over 190 countries, including Australia, Canada, and Europe, and is our most recommended exchange for USA residents. (Excluding New York & Washington state)
How to Store Bitcoin (BTC)
As the world's largest digital asset, essentially every service supports storing Bitcoin (BTC), ranging from exchanges to non-custodial software and hardware wallets.
The phrase “not your keys, not your coin” is often emphasized to those who prioritize the safety of their holdings, meaning if you do not control your private key, you are trusting another to safeguard your holdings. This means opting for a hardware wallet – or at least a non-custodial software variant – is recommended to maintain control of your private keys. In addition, it is always important to establish effective password habits.
To learn more about why Bitcoin cannot simply be supplanted by one of its many would-be competitors, visit our look at the network's fundamentals and how they will allow for it to endure.
A Look Forward for Bitcoin (BTC) – Concerns and Projections
Investing in Bitcoin comes with unique considerations that potential investors must weigh carefully.
While the price of Bitcoin (BTC) has increased dramatically over its lifetime, it is also historically quite volatile. This means that it is subject to dramatic fluctuations in value resulting from changes in market sentiment, regulatory announcements, and broader economic factors. This volatility underscores the importance of a cautious investment approach, ideally as part of a diversified portfolio.
On the regulatory front, Bitcoin (BTC) has been afforded more clarity than any other digital asset. It is viewed as a commodity in the United States and is now accessible through traditional investment products like ETFs.
Still, the landscape is evolving, with different countries adopting varied stances on cryptocurrencies—ranging from open embrace to stringent restrictions. On a broader scale, these regulations may impact Bitcoin's accessibility, use, and overall market dynamics.
Environmental concerns also play a critical role in the discourse around Bitcoin, especially regarding the energy-intensive nature of its mining process. Critics point to the significant carbon footprint of mining operations, although there is a growing movement within the community towards more sustainable practices and renewable energy sources. Interestingly, this has resulted in a shift in sentiment to the point that many now view Bitcoin (BTC) as an environmental boon due to its ability to monetize flared methane and stranded energy.
Despite these challenges, the potential for price increases remains a strong and valid draw for many investors. Driven by factors such as increasing adoption, limited supply due to the capped maximum of 21 million coins, and its growing role as a “digital gold” that can act as a hedge against inflation, Bitcoin continues attracting significant interest from retail and institutional investors.
As with any investment, a thorough understanding of the risks and an awareness of the changing landscape are essential for navigating the world of Bitcoin investing.
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