What is Bitcoin?

Idea and Mission

Bitcoin became a response to the imperfections of the financial system, in which you can't do without intermediaries and large commissions. This problem is especially acute when making cross-border transfers, when international payment systems are additionally involved in the process. As a result, it takes up to several days to make a transaction, and all information about it is available both to credit organizations and regulators.

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The problems of the modern financial system do not end there. One of the main challenges for the developers of bitcoin was to create a universally accessible payment infrastructure. The fact is that at the beginning of the XXI century, more than a billion people around the world did not even have access to banking systems.

Bitcoin was meant to solve this social inequity, because it was conceived as the first public payment system, where the transfer of property rights takes place without guarantors and intermediaries. At the initial stage of bitcoin's development, there was not even a transaction fee, that is, theoretically, any transfers in BTC could be done absolutely free of charge. Now the amount of commission ensures that the transaction can be included in the nearest block. Trust between senders and recipients was ensured by a continuous history of transactions on the blockchain. Thousands of computers around the world, synchronized with each other, stored and constantly updated with complete information about bitcoin transactions. From the very first to the most recent. Such key nodes in the network are called complete nodes. An attempt to make changes to this "chronicle" on one computer will be instantly detected by other users.

What does this mean in practice? At least the used funds cannot be spent more than once, it is impossible to revoke or cancel the transaction, and anyone with a computer or smartphone connected to the Internet has access to the payment system.

History and predecessors

Bitcoin, to one degree or another, used already existing ideas and technologies, sometimes quite old. For example, the concept of blockchain, that is, chains of blocks that verify electronic document flow, emerged back in the 1990s.

Nor was Bitcoin the first digital currency. Before it, there were DigiCash, B-Money (the first Proof-of-Work consensus was described within it) and Bit Gold, which many crypto-enthusiasts rightly consider the predecessor of Bitcoin, and its creator - Nick Szabo - is identified with Satoshi Nakamoto, the person who is credited with the authorship of the current largest cryptocurrency.

A few words about Satoshi

It is widely known that the creation of new peer-to-peer payment system started in 2007. In 2008, there was published a file with description of its protocol and working principles. The next year, the client program code was presented. All of this was done by a person or group of people acting under the alias "Satoshi Nakamoto". Over the next decade there were repeated attempts to de-anonymize this person, without much success.

Initially, the profile on the P2P Foundation stated that Satoshi lived in Japan and was about 40 years old. However, the first linguistic examinations have shown that the native language for the man hiding behind the name of Nakamoto is English. Moreover, for quite a long time bitcoin software had no documentation in Japanese.

In 2014, there was almost a sensational revelation: A Newsweek reporter in the course of a journalistic investigation came to the conclusion that Satoshi Nakamoto is... Satoshi Nakamoto. The boy with that first and last name was born in Japan, at age 10 he moved with his family to the United States and now lives in California. Since childhood, Satoshi demonstrated remarkable talents in mathematics, bordering on genius. After college, the young man worked for the U.S. military, but at the age of 23 decided to cut all ties with them and focused on civilian projects, mainly related to information security.

Satoshi's psychological profile is a perfect fit for someone who could potentially create bitcoin. He is secretive, fearful of interference in his personal life and work, yet fully dedicated to the cause he loves and can work around the clock to solve any important task.

The American Satoshi Nakamoto is the creator of bitcoin, and there are more convincing facts, such as a specific programming style. But despite the weight of the "evidence," Nakamoto still denies any involvement in the creation of bitcoin.

Why is de-anonymizing Satoshi Nakamoto's identity so important? Experts estimate that wallets belonging to the creator or creators of bitcoin hold hundreds of millions of dollars worth of coins with which to exert any speculative influence on the market.

Tokenomics

Bitcoin issuance is finite and has a clear timetable. A total of 21 million coins will be "mined." According to the Proof-of-Work consensus algorithm, a reward in the form of new tokens is paid to miners for calculating each new block. This happens about six times per hour. The size of the reward is also known: right now it is 6.25 BTC per block.

After mining every 210 thousand blocks the rules of the game change: the complexity of calculations required to create the blocks increases, and the size of the reward decreases exactly in half. Hence the name of this process - halving. The last one took place in early May 2020; the next one will happen tentatively in May 2024.

Halving plays a very important role in the bitcoin network. Firstly, they help to control the issuance, and secondly, they stimulate the growth of BTC value. It has long been seen that every new bull rally in the cryptocurrency markets coincides with another halving.

The last bitcoin in history will be released into circulation around 2140.

How did the price of bitcoin change?

The first bitcoin transaction took place in the fall of 2008, and the coin received its exchange rate against the U.S. dollar on October 5, 2009. On that memorable day, bitcoin's price was 8 to the minus fourth power of the dollar... To put it simply, you could buy 1,309 bitcoins for one U.S. dollar.

By November 2010, the value of the digital currency increased more than 100 times, reaching the mark of 50 cents per coin. That was also when the historic purchase of the world's most expensive pizza took place, for which 10,000 bitcoins were given. In November 2013, one BTC was worth more than $1,200.

The next year passed for the cryptocurrency in search of an adequate rate, devoid of speculative support, which it found at $300-330.

In 2016, bitcoin rose to $1,000 per coin. BTC was worth $2,300 in May 2017, $3,000 in mid-June, and $5,000 in late August. In late 2017 - early 2018, the value of the first cryptocurrency came close to the $20,000 mark, but quite quickly there was a correction, after which the bitcoin rate stopped at $12,000 for a long time.

A new bullish rally began in the spring of 2021. In April, $63,000 was given for a single bitcoin. In November, a new high of $69,000 per coin was conquered. Then a prolonged correction began, and bitcoin is still hovering around the $20,000 mark.

Bitcoin criticism

Bitcoin has been heavily criticized from the beginning. It was seen as an ideal means of payment for criminal elements: drug dealers, slave traders, arms dealers and "black transplantologists. In reality, criminals have used other payment instruments for their needs, since the bitcoin blockchain has never been completely anonymous. Yes, the protocol does not know the user's real name, but even a modest transaction history will be enough to de-mask a person. Moreover, the community is not the first to be operated by large analytics companies whose business is built on de-anonymizing and selling information to law enforcement and corporations.

Bitcoin has been heavily criticized for the harm it does to the environment. The Proof-of-Work consensus algorithm, on which the cryptocurrency's blockchain is built, actually uses a lot of electricity to calculate each new block. In 2021, 120 terawatt hours of electricity were used to mine bitcoin, more than the annual consumption of a country like Argentina, for example. If the situation does not change, in the next 30 years the contribution of digital currency to global warming will be 2 degrees Celsius. However, proponents of new technologies respond to these accusations with their own calculations and prove that the traditional banking system is even more energy-consuming than the BTC blockchain.

Bitcoin is also often blamed for its high volatility, which makes it impossible to use it as a full-fledged means of payment, much less as an instrument of accumulation. The epithet "digital gold", which just recently tried to award the main digital asset, still looks inappropriate.

The fact that millions of people around the world buy bitcoins not for transactions, but solely for speculative purposes, would hardly please Satoshi Nakamoto. The original purpose of this cryptocurrency was quite different, and the possibility of exchange trading of the asset was a concomitant factor. Through the efforts of numerous speculators, everything was turned upside down.

The scalability problem

Bitcoin's scalability problem is related to the limitation of the size of the underlying data storage structure in its blockchain to one megabyte. At the first stage of the project's development, this was even perceived as an advantage, but as bitcoin grew in popularity and the number of transactions increased, the community began to experience objective difficulties. Due to the modest block size, queues of transactions arose. In 2017, the situation worsened so much that during peak periods, the waiting time for new transactions to be included in the block increased to several days.

The obvious solution to the problem was to increase the size of the base block to 8 megabytes. However, not all bitcoin blockchain nodes supported the proposed changes, which led to several forks in the network. The most successful bitcoin forks were Bitcoin Cash, Bitcoin Gold and Bitcoin Diamond.

The solution to the blockchain scalability problems of bitcoin itself is associated with the Bitcoin Lightning Network (LN) - a second-level network, which should unload BTC, primarily by removing small payments that require maximum speed. As for the technical side of the issue, the LN is a superstructure of the main chain of the main cryptocurrency, which is a separate protocol and, therefore, requires special wallets and its own payment channels.

The legal aspect

From a legal point of view, bitcoin still has an ambiguous attitude. In some states, BTC has exactly the same rights as fiat currencies, while in other states, it is prohibited for use altogether. In countries that are loyal to bitcoin, it is considered an investment asset or commodity. A number of states, such as Japan, Germany, and El Salvador, consider the coin a full-fledged means of payment. The Swiss authorities have decided that they will treat bitcoin like any other foreign currency.

However, most countries have not yet come to full acceptance of BTC. Even in China any transactions with bitcoins, both for individuals and legal entities are prohibited. Coins can only be stored.

Russia has a rather interesting attitude to bitcoin. On the one hand, the national legislation recognizes the existence of digital currency, on the other hand, it is not defined as a means of payment, but as a property, commodity or investment instrument (259-FZ "On Digital Financial Assets"). That is, it is impossible to buy anything inside the country for bitcoins, but it is possible to own them, which means that they must be declared to the Russian tax authorities.

How to buy bitcoins

Bitcoin is the most liquid of all currently existing cryptocurrencies, and therefore there is no problem with its purchase. The coin is traded on cryptocurrency exchanges, and it can be bought both for fiat and for other cryptocurrencies. Bitcoins are sold on numerous P2P platforms, exchanges, electronic payment systems, Telegram bots and even crypto machines.

Conclusion

Bitcoin pioneered the world of cryptocurrencies. Revolutionary ideas and solutions for the financial world were tested on it. The developers managed to prove that you don't need to contact banks to conduct transactions with assets. Like an icebreaker, BTC paved the way for the next, more technically advanced cryptocurrency projects.

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