Note: This article was originally published on Zonotho, a financial education start-up, in March 2021
Original post here
In this series we’ll build up an understanding of Bitcoin, starting with the absolute basics. In Part 1 we’ll answer the questions: “What is Bitcoin?” and “Where did it come from?”
What is Bitcoin and what makes it different to traditional currencies?
Bitcoin, or BTC, is a currency like the US Dollar or the South African Rand. You can receive Bitcoin as income or use it to pay for things. And a single Bitcoin can be subdivided into 100 million smaller units called satoshis. Bitcoin has many differences that make it unique compared to government currencies.
Firstly, Bitcoin is purely digital. There are no physical Bitcoin coins or notes. To transact with Bitcoin, you must download Bitcoin software and connect to the internet. Bitcoin can be sent or received to and from different people, much like you send or receive e-mails and text messages.
Secondly, Bitcoin was not created by a government and is not controlled by a reserve bank. It is completely independent and is managed by its users through software that is freely available for anyone to download. Just like anybody can create their own website, anybody can use Bitcoin software on their computer or mobile phone to transact.
Thirdly, Bitcoin is scarce. The US Federal Reserve can always print more Dollars and the SA Reserve Bank can always print more Rands. However nobody can simply print more Bitcoins. New Bitcoins are created through a process called “mining”, which we will explore later in this series. At most, there will only ever be 21 million Bitcoins.
What can you do with Bitcoin?
The first thing you can do with Bitcoin is to receive it as payment. You can do so by offering goods and services to get paid in Bitcoin, or you can buy Bitcoin directly using traditional currencies.
Once you have some Bitcoin you can spend it. There are many online stores that accept Bitcoin, and you can also pay people directly with Bitcoin. Bitcoin is commonly used to send money overseas. While a traditional wire transfer can take up to a week and cost a fortune, Bitcoin can be sent much more cheaply in around ten minutes, without using a bank.
More common than spending, many use Bitcoin as an investment. Bitcoin has commonly been called a “store of value” or “digital gold”. We will explore its qualities as an investment later in this series.
Where did Bitcoin come from?
Bitcoin was first invented in 2008 by a pseudonymous programmer called Satoshi Nakamoto.
Satoshi created the first version of the Bitcoin software and wrote the technical document called the Bitcoin Whitepaper. The Whitepaper is worth reading if you would like to understand the system on a deeper level.
While Satoshi created Bitcoin, the software is open source, which means anyone can download it, use it, or change it. Satoshi left the project in 2010 and since then Bitcoin has been maintained by users around the world.
Satoshi is a bit like Robert Khan and Vinton Cerf, the people who created the underlying technology of the internet. While they deserve the credit for making the internet possible, the internet itself is the collective effort of thousands of users, programmers, researchers, universities, and businesses around the world. It the same with Bitcoin.
And just like we don’t need to know who created the internet to use the internet, the same can be said about Bitcoin. We do, however, have some idea of why Satoshi created Bitcoin. On 11 February 2009, Satoshi released v0.1 of the Bitcoin software and wrote:
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” (source)
This was shortly after the 2008 financial crisis. Satoshi felt the need for an alternative to central banking that did not require users to trust banks or politicians. In fact, in the very first Bitcoin transaction, Satoshi left us a hidden message. It reads:
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks (source)
In the rest of this series, we will explore different aspects of Bitcoin in more detail.