Topic 4

Bitcoin

Introduction

To understand the importance of Bitcoin and cryptocurrency, we will look at a significant event that preceded it.

2008 Great Recession

Many people believe the Global Financial Crisis (GFC) of 2008 paved the way for the release of Bitcoin. In the years leading up to the economic collapse, lenders such as Lehman Brothers were giving out shitty loans (called subprime mortgage loans) to high-risk borrowers with little savings and bad credit. Subprime mortgage loans were set to increase after several years.


When mortgage prices increased, housing prices plummeted, and borrowers defaulted on their mortgages en masse, triggering the Great Recession. The economy tanked, and people lost their homes, jobs, as well as trust in banking institutions. These events made room for an alternative currency like Bitcoin. Cypherpunks viewed cryptocurrency as a timely solution to the problem of trusting middlemen with our money.

What is Bitcoin?

Bitcoin (BTC) is a completely decentralized, peer-to-peer transferable cryptocurrency developed in 2009 by Satoshi Nakamoto. Because Bitcoin is a cryptocurrency coin, it operates on its own blockchain. It’s primarily used as a medium of exchange to buy and sell goods and services, similar to USD.

 

The year before the public release of Bitcoin, Satoshi Nakamoto published a thesis called Bitcoin: A Peer-to-Peer Electronic Cash System, which described the original plan and purpose for Bitcoin. Since its inception, its value has skyrocketed to tens of thousands of dollars. It is now divisible to eight decimal places, or 100 millionths, of one Bitcoin, the smallest unit referred to as a “Satoshi.”


Bitcoin is by far the most popular cryptocurrency, with people trading it, investing in it, and using it to buy and sell goods. Many financial commentators debate the primary use of Bitcoin, with some referring to it as “Digital Gold” due to its scarcity, while others argue that its use case is more aligned to that of a currency.

As previously stated, Bitcoin operates on the Bitcoin Blockchain, and several properties make it truly unique:

What Gives Bitcoin Value?

Two things:

 

1) the system itself
2) people believing in it

 

Bitcoin has a high demand and a limited supply. This makes its value much higher than FIAT. Like other currencies, Bitcoin is portable and convenient for trading goods and services, making it viable as a store of value, similar to how cowrie shells held value in the 14th century.

What Makes Bitcoin Secure?

Users can send Bitcoin directly to other users with almost 100% anonymity. When sending Bitcoin from one wallet to another, their wallets generate addresses or long strings of numbers and letters that change for each transaction. This feature is similar to how Apple’s Hide My Email feature works for usernames so that no personal information needs to be shared with websites when setting up an account.

 

Bitcoin and some other (not all) cryptocurrencies are secure because they are cryptographic, irreversible, and distributed.


We’ll focus on Bitcoin when describing these traits to keep it simple.

Bitcoin uses a private and a public key to ensure transactions are authentic. Each transaction is digitally signed using a private key called the Elliptical Curve Digital Signature Algorithm (ECDSA). The private key is impossible to hack.

Once transactions are added to the blockchain, they are irreversible. Transactions are all connected in a chain, so they can't be changed once added.

As we've previously discussed, you rely on banks to act in good faith, but this doesn't always happen. Blockchains are different because there is no single point of failure. The network is maintained by multiple parties, each of whom maintains a record of the transactions.

How Is Bitcoin Transferred Without Banks?

As described in the previous topic, Bitcoin is kept secure through blockchain technology. Bitcoin is verified by miners who set up computers to authenticate transactions on the blockchain. These computers solve extremely complicated math problems to authenticate these transactions. When the miner successfully verifies one block or 1 MB of data faster than anyone else, they are rewarded a predetermined amount of Bitcoin. Bitcoin mining puts the reliance to securely transfer funds on code and technology rather than people, organizations or the government.

Adoption of Bitcoin

The first country to adopt Bitcoin as a legal tender was El Salvador, and now more than 15,000 businesses in the United States accept Bitcoin as a form of payment. There are also Bitcoin ATMs all over the world, including 700 locations in 30 U.S. states. Not to mention the 114 million accounts that hold Bitcoin globally as of December 2021.

To Recap

The Global Financial Crisis demonstrated that banks could not be trusted as middlemen – enter Bitcoin. Bitcoin was the first cryptocurrency created. Since its creation, its value has skyrocketed. It has proven to be a viable way to store value because of its scarcity, security, and simply because people believe in it. It’s kept secure through Bitcoin mining, where miners use computer software to authenticate transaction records on the Bitcoin blockchain. Because of its popularity and security, Bitcoin is accepted by tens of thousands of businesses worldwide and held in over 100 million wallets.

 

Bitcoin is a digital coin primarily used as currency, while tokens have more utility. We’ll explore the difference between coins and tokens in the next topic.

Key Terms

Blockchain

“Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.”

 

– IBM