A beginner’s guide to Bitcoin.
A QUICK INTRODUCTION
Following the 2008 financial crisis, a person named Satoshi Nakamoto introduced a technical paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” Bitcoin was put into action in January 2009 when Nakamoto created the first block on the digital ledger. To this day Satoshi’s identity remains a mystery, and that’s a good thing – more on this later.
Bitcoin is unlike regular money because the government doesn’t make or control it, and it only exists digitally. This means people from anywhere can trade with each other without using a bank or middleman, making transactions quicker, cheaper and more secure.
These transactions are checked by a network of computers dubbed ‘miners’, a network 100x more powerful than Google’s machines put together. Once miners validate the transactions they’re added to the next block in the chain typically within 10 minutes, allowing the receiver to be sure they now have the funds. Because these machines are distributed worldwide with no middle man, these transactions can’t be interrupted allowing for final irreversible settlement.
And what’s to stop anybody creating as much Bitcoin as they want?
Well, one big thing that makes Bitcoin special is its hard-coded strict limit of 21 million coins. This limit is built into the rules of how Bitcoin works, the same can’t be said for any other form of money we’ve ever seen…
Bitcoin Basics
History of Money
FROM EVOLUTION TO REVOLUTION
Since as early as 6050 BC, salt has played a crucial role in shaping the world’s history, weaving itself into the fabric of most nations. It’s value and importance led to it being used as a medium of exchange (money) in various civilizations, where it played a vital role in trade.
But why salt?
Salt was used as a food preservative, crucial in times before refridgeration, but it was also hard to source, wouldn’t spoil, was easy to transport and was difficult to source. Salt from one nation was also interchangeable with salts from another.
Historically money has always held a number of these properties.
Take gold, first documented to be used in 600BC and still used today. Gold can’t be used to preserve food but it’s beauty alone lead the Egyptian’s to accumulate and wear vast amounts of it as a sign of importance, furthermore it doesn’t spoil and can be melted and mixed with other gold with no loss of quality. But what really makes gold appealing today? It’s scarce, with global supply growing by a meagre 2% per year.
For millenia scarcity has been paramount to successful money.
Then came modern currency, the cash in your wallet and numbers on the screen, better known as fiat currency – fiat meaning ‘trust’. In the US this trust took the form of a promise that a $1 bill held by a foreign government such as France or the UK was backed by $1 of gold in the bank, meaning the amount of dollars in the economy in theory wouldn’t exceed the amount of gold held by the US government and central bank (The Federal Reserve).
In 1971, Richard Nixon brought an end to the gold standard with a stroke of the pen, allowing the central bank to print money without the obligation of holding additional gold.
But there’s no free lunch. In 1971 the US had just $500 Billion or $0.5 Trillion of debt, today’s figure is $34000 Billion or $34 Trillion. The inflation you feel at the supermarket checkout today is in large part due to the trillions printed out of thin air during the COVID-19 crisis, afterall the $1 bill you have in your pocket is suddenly far less scarce if there are far more $1 bills being created. Armed with the knowledge that scarcity is key for a successful long term money, it’s enough to make anymore concerned.
Where does Bitcoin fit in this equation? See below
BANKING THE UNBANKED & FIGHTING FINANCIAL OPPRESSION
As of 2024 almost 20% of the world still remains unbanked, completely excluded from sending digital payments and saving their wealth in the thousands of financial instruments available in the west. Worse yet, in many countries women are forbidden to freely transact or save.
Thankfully there are almost twice as many internet-capable mobile devices as there are people on earth, each of which can partake in the Bitcoin network without permission; a barista in New York has as much right to transact on the network as a farmer in Kazakhstan. No ID, credit score or minimum balance required.
Whilst in the West these troubles are understandably overlooked this is far from the case for the millions living mostly outside of democracies. Dissidents in North Korea and Journalists in Iran can, when required, securely store their funds on the Bitcoin Network and flee the country with their wealth intact. Moreover, as Bitcoin operates as an internet-native payment network, human rights programs worldwide can gather funds directly from anonymous donors, eliminating the need for an intermediary NGO.
For more in-depth exploration of how Bitcoin upholds human rights globally, take a look at the work Alex Gladstein and his team at the Human Rights Foundation.
Human Rights
Bitcoin Mining
A DIGITAL GOLD RUSH
Bitcoin mining, somewhat misleadingly, has nothing to do with physical mining itself. Each miner is, in fact, a specialized computer, typically housed in data centers by the tens, hundreds, or thousands. Their job is to guess patterns of numbers known as a ‘hash.’
Think of it like a lottery whose number is drawn every ~10 minutes. Each computer on the network is working hard to guess the correct number while also adding valid Bitcoin transactions into the next block in the chain. Whichever miner guesses the correct number (hash) first is awarded a block reward by the network of 6.25 Bitcoin, plus the transaction fees for that block, which at times have exceeded the block reward itself.
The cost of this hard work is electricity consumed by the miners, known as ‘Proof of Work’. While this is notoriously deemed wasteful by some vocal figures (we’ll explore this further later), the energy consumption is required to protect the network from outside attacks. This energy is comparable to an army protecting a bank; any would-be attacker would require an even larger army to break into the bank. With Bitcoin, the army protecting the network comes in the form of the world’s most powerful computer network. To put it into perspective, if we grouped together all Google servers, it would still need 1000x the power to plausibly stand a chance. Because of its high-security budget, the Bitcoin network can handle transactions of billions of dollars with 100% certainty funds will be received in less than an hour. Compare that to the physical cost or time required to move billions of dollars of gold, and suddenly Bitcoin can be seen as an antidote to such inefficient transactions.
In May 2021, China declared a ban on domestic Bitcoin mining, causing 30% of the whole network’s miners to be turned out in the space of a month. While this is somewhat of an issue in the short term, the Bitcoin code has a built-in ‘Difficulty Adjustment’ that automatically rebalances the difficulty for miners every ~2 weeks. Simply put, the China ban had no long-term effect on the network security.
UNRAVELING THE MYTHS
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Misconceptions
Buying Bitcoin
READY TO DIP YOUR TOE?
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FURTHER READING
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