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Have you heard of Bitcoin?
It’s almost a rhetorical question at this point, since Bitcoin is rapidly gaining popularity and is endlessly discussed in the media. However, that doesn’t mean everyone understands what it is.
In fact, most people don’t, mainly due to the technical nature of the underlying technology, which can be really intimidating.
Our aim in this guide is to explain the nitty gritty concepts relating to blockchain and Bitcoin in an easy-to-grasp manner. This is going to be a long guide, so we broke it down into digestible sections.
The concept of Bitcoin and blockchain includes a lot of specific terms. For quick definitions, you can reference this glossary.
1. How Bitcoin Came to Be
A. Who Invented Bitcoin?
Bitcoin was invented by an anonymous person under the pseudonym Satoshi Nakamoto. In October 2008, he published a paper and circulated it throughout the cryptographic community.
In 2009, Nakamoto completed the code for the Bitcoin software and also invited other people from the open source community to contribute to it.
He mined the first block himself on January 3, 2009. As per the public records of his Bitcoin addresses, he currently owns an amount of Bitcoin worth over $19 billion – making him the 44th richest person in the world.
But no one really knows who Satoshi Nakamoto is. There have been many investigations by journalists, and it’s been speculated that he is various students or celebrities, but nothing has yet been proven. It may sound ridiculous, but some have even claimed that Satoshi Nakamoto is a time traveler from the future.
What isn’t up for debate is that by inventing Bitcoin, Satoshi Nakamoto has revolutionized the concept of money, solving many of the problems that occur with the use of traditional currency.
B. The Problem with Traditional Currency
We all know how to withdraw cash from an ATM and how to buy a pack of gum. But how many of us actually know why these transactions work? Why does everyone accept that these metal discs and strips of paper have any value?
Well, traditionally, currency was bound to some physical commodity, like gold. So, for instance, in the year 1900, gold was worth $20.67 per ounce. That meant that the U.S. government was only allowed to mint $20.67 worth of currency if it had an ounce of gold in the reserves to back it up. It also meant that any holder of U.S. currency could go to the government and exchange it for its equivalent worth in gold.
In the US, this system ended in 1971, when the American dollar became a fiat currency – meaning it has no intrinsic value. In recent decades, all the world’s major currencies have been converted to the fiat system.
In these cases, the value of the currency is determined by supply and demand, and is sustained by the people’s trust in the economy. While this allows the government to promote economic stability through the control aspects of the economy like credit supply, liquidity, and interest rates, it could also lead to the government printing more money than it should – causing hyperinflation.
Another problem with fiat currencies is that the fact that the system is centralized means it requires a lot of regulation. In other words, every transaction needs to be facilitated by a financial body – e.g. a credit card company or a bank – in order to make sure it’s carried out correctly. That’s why when you go to an ATM that doesn’t belong to your bank, or when you transfer money from your account to a friend’s, you often pay a fee.
You can read more about decentralized currency in this article.
C. Bitcoin Solves the Problems of Centralized Currencies
It’s almost a rhetorical question at this point, since Bitcoin is rapidly gaining popularity and is endlessly discussed in the media. However, that doesn’t mean everyone understands what it is.
In fact, most people don’t, mainly due to the technical nature of the underlying technology, which can be really intimidating.
Our aim in this guide is to explain the nitty gritty concepts relating to blockchain and Bitcoin in an easy-to-grasp manner. This is going to be a long guide, so we broke it down into digestible sections.
The concept of Bitcoin and blockchain includes a lot of specific terms. For quick definitions, you can reference this glossary.
1. How Bitcoin Came to Be
A. Who Invented Bitcoin?
Bitcoin was invented by an anonymous person under the pseudonym Satoshi Nakamoto. In October 2008, he published a paper and circulated it throughout the cryptographic community.
In 2009, Nakamoto completed the code for the Bitcoin software and also invited other people from the open source community to contribute to it.
He mined the first block himself on January 3, 2009. As per the public records of his Bitcoin addresses, he currently owns an amount of Bitcoin worth over $19 billion – making him the 44th richest person in the world.
But no one really knows who Satoshi Nakamoto is. There have been many investigations by journalists, and it’s been speculated that he is various students or celebrities, but nothing has yet been proven. It may sound ridiculous, but some have even claimed that Satoshi Nakamoto is a time traveler from the future.
What isn’t up for debate is that by inventing Bitcoin, Satoshi Nakamoto has revolutionized the concept of money, solving many of the problems that occur with the use of traditional currency.
B. The Problem with Traditional Currency
We all know how to withdraw cash from an ATM and how to buy a pack of gum. But how many of us actually know why these transactions work? Why does everyone accept that these metal discs and strips of paper have any value?
Well, traditionally, currency was bound to some physical commodity, like gold. So, for instance, in the year 1900, gold was worth $20.67 per ounce. That meant that the U.S. government was only allowed to mint $20.67 worth of currency if it had an ounce of gold in the reserves to back it up. It also meant that any holder of U.S. currency could go to the government and exchange it for its equivalent worth in gold.
In the US, this system ended in 1971, when the American dollar became a fiat currency – meaning it has no intrinsic value. In recent decades, all the world’s major currencies have been converted to the fiat system.
In these cases, the value of the currency is determined by supply and demand, and is sustained by the people’s trust in the economy. While this allows the government to promote economic stability through the control aspects of the economy like credit supply, liquidity, and interest rates, it could also lead to the government printing more money than it should – causing hyperinflation.
Another problem with fiat currencies is that the fact that the system is centralized means it requires a lot of regulation. In other words, every transaction needs to be facilitated by a financial body – e.g. a credit card company or a bank – in order to make sure it’s carried out correctly. That’s why when you go to an ATM that doesn’t belong to your bank, or when you transfer money from your account to a friend’s, you often pay a fee.
You can read more about decentralized currency in this article.
C. Bitcoin Solves the Problems of Centralized Currencies
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