What is Bitcoin (BTC)?
Bitcoin (BTC) is the staple of the whole crypto world. The aim of developing Bitcoin was to create a digital currency that would work in a peer-to-peer manner and would be independent of any third-party financial institutions or middlemen.
In other words, Bitcoin is an open-source project that is easily accessible to everyone, no one owns or controls it, and its code is available to the public. It is run by a global open network of dedicated computers that is maintained by a global community of BTC fans.
The creation of the Bitcoin token was the catalyst that, in the years to come, would result in the inception of decentralized finance. Besides, the BTC token serves as the basis for the creation of a huge variety of other cryptocurrencies.
Bitcoin created the fundamental principle of the entire cryptocurrency market – specifically, that people should be able to transfer money without the need for middlemen or financial institutions, wherever they may be.
After more than a decade, BTC is still at the top of the dynamic crypto market. With a market cap that topped $1 trillion in 2021, Bitcoin continues to be the largest cryptocurrency, even after losing its undeniable dominance. If you’re interested in the current Bitcoin price, check out its price chart above.
Besides, it’s important to note that Bitcoin is perceived as a decentralized store of value. Meaning that, rather than immediately spending BTC tokens, people tend to hold them for a long period of time. It could be the case because it’s the first crypto asset ever and it has a limited supply. This means that, with time, its value could grow even more.
By popular opinion, Bitcoin is often referred to as digital gold. It’s compared to physical gold because it’s anticipated that, just like gold, Bitcoin will keep increasing in value over time.
The Story of Bitcoin
The whole concept of Bitcoin originated in November of 2008. Satoshi Nakamoto, the founder of BTC, proposed the idea of Bitcoin and presented its whitepaper in an online cryptography forum.
In the whitepaper, the components of the Bitcoin protocol were defined in detail, along with how they would work together to maintain security. Bitcoin was referred to as an electronic peer-to-peer payment system based on mathematical proof. Besides that, the whitepaper explained how a new sort of database (a blockchain) would be used to record and maintain the records of Bitcoin transactions.
In January 2009, Satoshi Nakamoto created the very first block of the Bitcoin blockchain, this way launching the first crypto asset in the world. The block is known as the Genesis block, or Block 0. Within this block, Nakamoto left a message: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." This was a headline taken from The London Times. Thus, Bitcoin was created immediately following the Financial Crisis of 2008.
Nakamoto posted the first version of Bitcoin on a website for developers called SourceForge. This enabled anyone to see the source code and run it.
Up until 2010, Satoshi kept on writing the Bitcoin code himself. However, after that, he left it in the hands of Gavin Andersen and the whole open-source community. Now, there’s a long list of contributors that deal with Bitcoin’s source code including Marco Falke, Jonas Schnelli, and many others.
Satoshi Nakamoto has been out of the picture for a pretty long time. Since nobody has ever been able to determine who Nakamoto is, the man's identity has remained a mystery. Anybody or even a group of people could be Nakamoto. Over the years, there have been many theories about who he is, but none of them have been proven.
When talking about the story of the Bitcoin crypto project, it's also important to bring up May 22, 2010, known as the legendary Bitcoin Pizza Day. This is the day when Laszlo Hanyecz spent 10,000 Bitcoin to buy two pizzas. It was the first real-life transaction using BTC tokens.
At that time, the Bitcoin price varied from $0.0008 to $0.08. However, now, given the fact that the Bitcoin price is worth thousands of dollars, these two pizzas would cost millions of dollars. These would be some pricey pizzas.
Overall, as time goes on, Bitcoin is becoming more and more prevalent in our daily life. For instance, in 2021, El Salvador accepted Bitcoin as a legal tender, and it was the first country to do that. Apart from El Salvador, there are many other countries that plan to implement this change or have already done it. Besides, the president of El Salvador, Nayib Bukele, is planning to create a city where the sole source of electricity is the geothermal energy from volcanoes that would be used to mine BTC tokens.
How Does Bitcoin Work?
Firstly, it should be noted that the SHA-256 algorithm is used to secure Bitcoin. In addition to being utilized for transaction verification, it controls address generation and management. Since Bitcoin uses double SHA-256, algorithm operations are applied twice. The algorithm's primary purpose is to protect sensitive data.
Essentially, a 256-bit hexadecimal number is used to encrypt transaction data that is stored in a block. All transactional information and details related to previous blocks are contained in that number.
What happens with that number? Overall, miners (those who participate in the process of mining as validators and creators of new blocks) have a queued list of transactions they have to validate. They take one transaction and all attempt to verify it at the same time. Essentially, miners have to solve a nonce (a four-byte number) included in the block header.
A miner continually hashes or generates the block header at random until it reaches a target value set by the blockchain. After that, a new block is constructed so that additional transactions can be encrypted and confirmed after the block header has been resolved.
Thus, the consensus mechanism that Bitcoin employs is Proof-of-Work (PoW). It’s a mechanism that requires miners to solve mathematical puzzles to add new blocks to the blockchain and verify various transactions as it was just described.
In exchange for utilizing specialized software to solve mathematical problems, miners receive a specific amount of Bitcoin. By providing users with Bitcoin as rewards, new BTC tokens are issued. This way more people are encouraged to mine.
Talking about mining rewards, there’s also a process known as Bitcoin halving. It’s a core rule that reduces miner rewards by half every 210,000 blocks. Bitcoin block rewards began at 50 BTC per block. However, as of the previous halving that happened in 2020, it’s now 6.25 BTC per block. Up until the final Bitcoin is mined in roughly 2140, the rewards will continue to decrease in this manner every four years.
Lastly, note that Bitcoin employs the Lightning Network. Essentially, it’s a second-layer solution, which enables transactions to be processed more quickly among participating nodes. Besides, it’s designed to address the problem of Bitcoin's scalability. The Lightning Network functions on top of the blockchain. Additionally, while BTC transactions are often done on-chain, the Lightning Network allows users to shift their transactions off-chain.
How to Mine Bitcoin?
There are a few ways to mine Bitcoins. One of them is to use a Bitcoin-compatible mining program on your current personal computer to join a mining pool. Groups of miners create mining pools and pool their computing power. They do that to improve their mining process and compete against the massive ASIC mining farms.
However, you could also buy an application-specific integrated circuit (ASIC) miner if you have the money to do so. A new one typically costs roughly $20,000. Though miners also sell used ones when they improve their equipment. Just take into consideration that there will also be additional electricity and cooling costs.
In any case, don't forget to check out the current BTC price. You can do that by looking at the Bitcoin price chart featured above.
The Bitcoin Supply
The total supply of Bitcoin is limited to 21 million tokens. This means that, once it reaches this amount, there will be no possibility of creating new tokens. Besides, note that no tokens have been given to the creators prior to the initial Bitcoin release to the general public.
All existing Bitcoin tokens were created during the process of mining after the release to the public. Now, there’s a lot of competition in the process of mining Bitcoin tokens because, due to the current hash rate and the BTC price, Bitcoin mining is quite profitable. Though when Bitcoin was first released, a lot of early miners managed to collect substantial sums of BTC tokens through routine mining, given that there was little competition to do that.
When it was launched, the Bitcoin price was $0. After a year, it varied from $0.0008 to $0.08. However, it didn't stop here, Bitcoin's value continued to grow every year, eventually reaching tens of thousands of dollars. Based on its market capitalization, as of writing this article, Bitcoin continues to be the top cryptocurrency. Just keep in mind that the BTC price is just as erratic as the prices of any other crypto assets. It is impacted by a wide range of variables that cause the whole cryptocurrency market to fluctuate.
How Can Bitcoin Be Upgraded?
To upgrade Bitcoin, or any other cryptocurrency, hard and soft forks are used.
A hard fork is a process when a blockchain splits into two chains. This involves significant protocol changes and typically produces new digital currencies. Since hard fork results in permanent modifications that are not backward-compatible, all nodes must be updated in order for the old and new network versions to work together.
One of the bigger proposals to hard fork Bitcoin to expand its block size from 1 MB to 8 MB surfaced in 2017. By changing the block size, it was intended to alter the possible amount and the speed of the BTC transactions. Unfortunately, the majority of the community rejected this proposal. However, the remaining portion of the community decided to go with it, which resulted in the creation of Bitcoin Cash (BCH).
Later, BCH had a few more hard forks itself, which created additional cryptocurrencies. Besides, after the BCH hard fork that occurred in 2020, a new chain was developed called Bitcoin Cash Node (BCHN).
Another way to upgrade the Bitcoin network is through a soft fork. A soft fork is when a blockchain is altered to add or remove functionality without significantly altering the structure of the network. The nodes that decide not to upgrade to new consensus rules can still access new transactions and blocks. This is what differentiates a soft fork from a hard fork – a soft fork is backward-compatible. Besides, not all miners need to approve a soft fork for it to happen, just the majority.
Over the years, Bitcoin has employed a number of soft forks to update the network, fix bugs, or add functionality. This assisted in avoiding the more divisive hard fork option, which calls for forcing all miners to accept new consensus rules and runs the risk of severing the network.
One of the more popular soft forks of Bitcoin is Taproot, which was activated in November 2021 at block 709,632. The goal of the Taproot soft fork was to increase the efficiency, scalability, and privacy of crypto transactions on the Bitcoin network. Three independent Bitcoin Improvement Proposals (BIPs) – BIP340, BIP341, and BIP342 – were a part of the upgrade.
The Merkelized Abstract Syntax Tree (MAST) and Schnorr Signatures were the two main modifications introduced by Taproot. The Schnorr Signatures contribute to transaction authorization optimization by enhancing security and lightening the data burden. It allows users to combine multiple signatures into a single one for a single transaction. MAST, on the other hand, helped reduce the amount of transactional data sent by smart contracts to the blockchain. It enables the sender and recipient of a transaction to approve the transaction's settlement simultaneously.
The Environmental Footprint of Bitcoin
Many people argue that Bitcoin takes up a tremendous amount of electricity which might contribute to environmental issues. In fact, even Elon Musk decided to reject BTC tokens as a payment method for Tesla in 2021 because of the environmental footprint that Bitcoin has.
Essentially, this happens due to the consensus mechanism of Bitcoin. Since PoW requires miners to use computer power to solve mathematical puzzles, it usually takes a lot of electricity. In fact, it was stated in one report regarding Bitcoin energy consumption that transactions of BTC take such an amount of electricity that would be sufficient for an average American house to last six weeks.
However, a lot of people also believe that the problem with Bitcoin energy consumption might be a bit exaggerated. It’s argued that the banking industry requires twice as much energy as Bitcoin consumes.
Besides, the banking industry has a much larger carbon footprint overall. This is due to the fact that, in addition to earning money, we also need to transport it to ATMs, safeguard it with security measures, develop ways to distribute it, and so forth. All of it uses more energy and has a far larger impact on the environment. However, it’s usually not taken into account when counting the energy consumption of banks.
Thus, it’s hard to track and trace the energy consumption of the banking industry. Though it’s not the case with Bitcoin because you can easily track and trace all of the sources that consume energy.
Currently, the majority of energy used by BTC token miners comes from renewable sources. However, again, not everyone is happy with this idea. Some people claim that the growing use of renewable energy by Bitcoin may reduce the quantity of renewable energy available for usage in buildings such as homes, hospitals, or factories.
Though Bitcoin plans to build new reusable energy farms specifically for mining. This will be put into practice if the mining operations become even more extensive.
Besides, there are various initiatives that aim to solve the issues of the environmental footprint of Bitcoin. The Crypto Climate Accord and the Bitcoin Mining Council are two examples of these initiatives. In fact, the Crypto Climate Accord suggests a strategy to end all greenhouse gas emissions by 2040. It’s believed that such ambitious goals might be accomplished given Bitcoin's inventive potential.