Bitcoin is the first cryptocurrency ever. The main feature of Bitcoin is its underlying blockchain technology. A technology that has been used by many after them and is continuously growing. This digital currency is not only used as a means of payment but has also found an important place in the investment portfolio of many: both private and institutional investors. It has even been introduced as legal tender in a Central American country, El Salvador.
In this article, we will discuss the history, use case, and basic principles of Bitcoin. Without getting too technical.
The creation of Bitcoin
Bitcoin is the first and therefore oldest cryptocurrency. However, it is not the first digital money. Around the time of its founding, several digital currencies had already been established, or attempts were made. These may very well have inspired the development of Bitcoin.
The international banking crisis of 2008 also occurred around this time. A devastating economic event that exposed how dependent people are on large financial institutions. Bitcoin was built as a currency that is not dependent on any one central authority.
The first block of the Bitcoin blockchain seems to confirm that this banking crisis is one of the reasons behind the creation of Bitcoin. This block - the so-called Genesis block - carries an unambiguous message:
“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
It has been the number one cryptocurrency ever since.
The founder, or founders, are known only by a pseudonym: Satoshi Nakamoto. It is not known whether it concerns an individual or a group and where they come from. Over the years, there has been much speculation about Satoshi's identity and there were even lawsuits concerning its identity. Satoshi's bitcoins have been sitting unmoved at the same address for years.
Bitcoin as a currency
Just like stocks have abbreviations (e.g. KO for Coca-Cola), crypto also has these types of abbreviations, also called a ticker. For Bitcoin this is BTC. So when someone talks about 10 BTC, they mean 10 whole bitcoins.
Since the current price of a whole Bitcoin isn't affordable for every household, many hold a fraction of a Bitcoin. Bitcoins are divisible into sats, short for satoshis. One sat is 0.00000001 BTC. A bit like a euro can be divided into euro cents, but much smaller. This has made investing in Bitcoin a lot more accessible to a larger group: you can start with just a few euros.
How many bitcoins exist?
It is well-known that money can always be printed and that central banks and governments can exert a great deal of influence on its value. In addition, inflation can be a major economic problem. If you are not familiar with the term, think of it like this: someone has 1000 euros stored in a safe for five years, but during those five years the groceries have become more expensive. Where initially they could have bought 1000 loaves of bread with that 1000 euros, today that may only be enough for 500 loaves.
As leverage against inflation and to prevent the devaluation of Bitcoin, its creator decided to make the total supply of Bitcoin fixed. That means there is a maximum amount of Bitcoin that will ever exist. This creates scarcity. While it is easier and more common to say that the maximum is 21 million Bitcoin, the precise amount is 20,999,9999,9999,9769 BTC.
But not all of this BTC is available yet. Instead, new BTC is created for each new block mined. This new BTC is part of the block reward. Back in the day, it started at 50 BTC per new block and it has been decreasing since then. Every once in a while this reward is halved during an event known as the halving. This happens every 210,000 blocks. The final Bitcoin is expected to be mined in the year 2140.
How is the Bitcoin price determined?
The price of Bitcoin is determined by several factors. Bitcoin is a global, decentralized currency with censorship-resistant properties, which in itself adds value by giving users full control over their money and enabling free trading.
Additionally, its price is still largely determined by the basic principles of supply and demand. The supply is becoming scarcer, partly thanks to the halving. Demand largely depends on the economic situation, such as prosperity, inflation, and interest rates.
What is the blockchain?
Bitcoin's showpiece is the blockchain technology itself. Bitcoin was not only the first to introduce blockchain technology but also solved two crucial problems. It ensures that no one can spend the same amount twice, the so-called double spending problem. And, it prevents a single entity from controlling the network, thus preventing tampering.
But how does the Bitcoin blockchain work? Put very simply, these are the basic principles:
- Transactions are recorded in blocks, which in turn are connected to their previous blocks thanks to cryptography, which is why Bitcoin is also called a cryptocurrency.
- Miners (a type of computer) use computing power to be the first to solve a cryptographic puzzle. If they succeed, a new block is mined.
- As a reward for mining a new block, miners receive a block reward. This reward is decreasing over time, which creates scarcity.
- Previous and new blocks are recorded in chronological order on the blockchain. This data is immutable after the network reaches a consensus on the transactions in a block.
- The blockchain and all data are distributed through nodes (computers in a globally connected network) that confirm incoming transactions and validate transaction history.
What is the use case for Bitcoin?
In the whitepaper on Bitcoin, it is defined as peer-to-peer electronic cash. It can be used for payments and settlement of transactions. Countless companies and online stores worldwide accept BTC as a means of payment.
Since Bitcoin is also very scarce, it is also considered a hedge against inflation. Therefore it is also referred to as “the digital gold”. Nowadays this has rendered Bitcoin a staple in a diverse investment portfolio. Not only private individuals invest in Bitcoin, but also various multinationals such as Tesla and MicroStrategy. As with any investment, this of course comes with risks.
How do I invest in Bitcoin?
The most well-known way to invest in Bitcoin is to simply buy BTC. This can be done, for example, through a broker or crypto exchange. You can pay with a local currency such as euros, or by swapping for another cryptocurrency such as Ethereum. Crypto is kept in a wallet, either at the exchange itself or in an external wallet.
Other options include:
- Bitcoin ETF: Bitcoin ETFs are not available in all countries, but are popular among investors who want to invest in Bitcoin without having to buy and hold Bitcoin themselves. The best-known and largest Bitcoin ETFs are based in the United States and are not available to European private investors due to regulations.
- Invest in the technology: it is also possible to invest in the underlying technology and not so much in crypto itself. This gives an investor some exposure without owning crypto themselves.
- Crypto companies: it is also possible to invest in crypto companies, such as mining companies, or publicly listed companies such as Coinbase.
- Crypto asset management: an investor does not have to make purchases themselves, but this is outsourced to a trusted party with a well-researched strategy, such as Blockrise.
Is Bitcoin a revolution?
When talking about the technology behind it, it certainly is a revolution. It has also gained a lot of traction as a means of payment, but we are still far away from worldwide introduction as legal tender.
As an investment, Bitcoin has increasingly become a strategic and valuable addition to many portfolios. It's not just some daredevils with a lot of technical knowledge that own BTC. Companies and institutions around the world also hold BTC on their balance sheets. This institutional adoption is only expected to increase, led by a good regulatory framework and consumer protection.
The information provided in our articles is intended solely for general informational purposes and does not constitute (financial) advice.