Bitcoin (BTC) is the OG crypto: It is the oldest and still the largest cryptocurrency on the market with a market cap of about $826 billion, as of Feb. 7, 2022.
But Bitcoin is far more than just cryptocurrency.
Bitcoin was built using blockchain technology in 2009, and many of the features that established Bitcoin as a pioneering form of crypto quickly became the foundation for thousands of different types of crypto that followed in bitcoin’s digital, decentralized footsteps.
Let’s recap how Bitcoin works, its history, how it’s evolving (think: Bitcoin ETFs) — and what it all means for investors now.
How Does Bitcoin (BTC) Work?
By understanding how Bitcoin works, you begin to understand the fundamentals of other cryptocurrencies as well.
Bitcoin is built on blockchain technology, the transparent, open-source, digital ledger that keeps track of every Bitcoin transaction. Bitcoin is decentralized, meaning that it relies on a vast network of powerful computers, also called miners (or nodes), to confirm all transactions using a proof-of-work (PoW) consensus mechanism. This peer-to-peer network of miners is self-regulating and self-governing, so the platform can run without the need for an intermediary like a bank or financial institution.
In other words, unlike traditional currencies like the U.S. dollar, Bitcoin isn’t overseen, issued, or regulated by a central authority. Rather, Bitcoin established the system of cryptography and consensus (i.e., peer-to-peer) verification that is the foundation of most forms of crypto today.
What Is Bitcoin Mining?
Mining Bitcoin isn’t just how BTC is created. In the case of Bitcoin and other PoW cryptocurrencies, mining refers to the system by which miners (or nodes) validate transactions, potentially earn Bitcoin themselves, and help to secure the network overall.
When a Bitcoin transaction is executed, it gets sent to miners for verification. Bitcoin miners employ powerful computers, sometimes called mining rigs, to do the complex PoW calculations required to confirm each item on the blockchain.
Miners who successfully confirm a block of transactions (1 MB) are rewarded with new Bitcoin. But mining is intensely competitive, especially because the reward is halved every 210,000 blocks and now stands at 6.25 BTC.
That said, the process of mining Bitcoin is important because it helps secure the network. For a hacker to take control of the blockchain and to steal Bitcoin, they’d have to control over 51% of the network. Thus, there is far more incentive for miners to keep the network secure.
Bitcoin is one of the first digital currencies to use peer-to-peer (P2P) technology to facilitate faster payments and transactions, without the need for a middleman like a bank.
This system is outlined in the original whitepaper that established the concept of Bitcoin in 2008, “Bitcoin: A Peer-to-Peer Electronic Cash System.” Using a system of P2P verification would help to solve the so-called double-spend problem that historically had hindered the development of digital currencies, as noted here:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work.”
This P2P verification requires the use of encryption and blockchain technology in order for two parties to securely conduct transactions without a third party involved. This system offers a security advantage; with transactions recorded on every peer’s network, it is extremely difficult to create fraudulent transactions.
Advantages and Disadvantages of Bitcoin (BTC)
As an investment, Bitcoin offers some potential upside for crypto traders in that it’s the oldest form of crypto and therefore well established. That said, investors should always consider all sides of the coin, so to say, before trading crypto. Bitcoin, like all types of cryptocurrency, is highly volatile and therefore poses a risk of loss for would-be investors. And like most types of crypto, Bitcoin remains largely unregulated.
There are thousands of cryptocurrencies on the market today, but Bitcoin is by far the largest, with a market cap of about $826 billion as of Feb. 7, 2022 — a fact that supports Bitcoin’s liquidity and widespread accessibility.
Because Bitcoin is encrypted, and each BTC owner is the only one who holds the private keys to their crypto, no one can know how much Bitcoin a user has in their wallet. And as long as users guard their private keys, BTC can be difficult to steal or hack.
Although Bitcoin can be as volatile as most other forms of crypto, the upside is that BTC can deliver outsize gains, depending on the day (the downside, of course, is the risk of loss).
Like most forms of crypto, Bitcoin is still quite volatile. Even within the course of a single day, the value of a single Bitcoin can fluctuate by thousands of dollars.
Most investors are insured by the SIPC up to $500,000 if a brokerage fails (or funds are stolen). But the SIPC doesn’t cover crypto.
The inconsistency of regulations governing cryptocurrencies has limited the use of crypto around the world. As of Q1 2022, the Securities and Exchange Commission (SEC) was weighing how to regulate crypto.
• High liquidity and accessibility
• Not SIPC insured
• Offers some security & privacy
• Risk exposure
• Growth potential
• Regulatory status up in the air
Who Created Bitcoin (BTC)?
In 2008, a person or group going by the pseudonym Satoshi Nakamoto published “Bitcoin: A Peer-to-Peer Electronic Cash System.” This white paper was perhaps the first to propose “a system for electronic transactions without relying on trust.” In other words, as noted above, the currency would depend on a peer-to-peer system of verification via blockchain technology.
This new system eliminated the need for third-party oversight, while also solving the double-spend problem by creating a permanent, transparent record of all Bitcoin transactions.
Bitcoin History Timeline
To best understand what Bitcoin is and how it has changed the face of finance, consider this early timeline.
Aug. 18, 2008
The domain name Bitcoin.org is registered, though the identity of the person who registered it is still not public information.
Oct. 31, 2008
A person or group using the pseudonym Satoshi Nakamoto published “Bitcoin: A Peer-to-Peer Electronic Cash System,” the renowned white paper that established foundations of Bitcoin and the crypto markets as a whole.
Jan. 3, 2009
Block 0, the first Bitcoin block, is mined. This “genesis block,” as it’s sometimes called, contained a mysterious reference to a headline of the day: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” It may have been proof that the block was mined on or after that date, or political commentary.
May 22, 2010
Better known in crypto circles as Bitcoin Pizza Day, this was the moment when an early Bitcoin adopter in Florida negotiated the exchange of 10,000 BTC for two pizzas, then worth about $25. The transaction was notable because it was one of the first instances of trading BTC for a real-world good — and because, at current valuations, the consumer would have paid the equivalent of about $430 million for his meal.
Bitcoin’s value rises above $1 for the first time. Ethereum and Litecoin, two of the first altcoins, launch this year. These platforms demonstrate the growing potential for crypto as a medium of exchange, as well as the technological capacity of blockchain itself.
Bitcoin reaches a new high of $200 in February, followed by a spike to $1,000 in November, signaling a pattern of volatility that would become the hallmark of most cryptocurrencies.
Why Does Bitcoin (BTC) Have Value?
Bitcoin shares certain qualities with commodities and fiat currencies that have helped create its value: e.g. durability, portability, acceptability, and scarcity.
Since BTC lives on the blockchain, each coin is durable, in the same way a physical dollar cannot be replicated. BTC private keys are numbers and letters, which can be stamped into stainless steel, backed up or divided into pieces, adding to their durability.
Because BTC is digital and each coin you own is identified by its own private key, it’s possible to carry all your assets wherever you do using a cold wallet, or accessed via a hot wallet on a mobile device or exchange.
Not only is Bitcoin traded on most crypto exchanges, and recognized as a store of value, increasingly you can exchange Bitcoin for goods and services in the real world. For example, thousands of individuals and vendors take BTC as payments.
Finally, a chief appeal of BTC is its limited supply. There will only ever be 21 million BTC in circulation. There are almost 19 million BTC that have been mined, as of February 2022, but the number of BTC released in each block is cut in half roughly every four years to slow the release of new coins and keep the total supply finite.
Price of Bitcoin (BTC)
As of Feb. 7, 2022, the price of Bitcoin is about $43,000 with a market cap of over $817 billion and a circulating supply of over 18.95 million BTC. The supply of BTC is capped at 21 million.
Like other forms of crypto, Bitcoin is highly volatile. In 2021 alone, Bitcoin hit a low of about $29,800 in July and a high of over $68,000 in November.
Why Use Bitcoin (BTC)?
As the oldest and still the most popular form of cryptocurrency, Bitcoin has an edge over some of its competitors. It’s widely available for trading on most exchanges, it’s still considered a store of value (despite its volatility), and some companies now accept BTC for purchases of goods and services.
For the most part, though, many people use Bitcoin as an alternative investment, perhaps as a way to diversify their portfolio of more traditional holdings (e.g. stocks, bonds, mutual funds, and ETFs).
How Do You Store Bitcoin?
Like any currency in virtually any type of account, from banks to brokerages, Bitcoin and other crypto are vulnerable to hacks, fraud, and theft. But in addition, storing and securing Bitcoin comes with another, more unusual form of risk — the possibility you might lose or forget the private key that gives you access to your money, and thus lose those assets completely.
In other words, more steps are required to store your crypto in a way that will keep it secure — while maintaining your access to it.
• Hot wallet: Digital currency is stored in the cloud on a trusted exchange or provider, and accessed via the internet (via computer or phone app).
The risks of a hot wallet include being vulnerable to online hacks or theft.
• Cold wallet: An encrypted portable device much like a thumb drive that allows you to download the keys to your Bitcoin.
The risks of a cold wallet include losing the physical wallet and with it losing access to your crypto.
Basically, a hot wallet is connected to the internet; a cold wallet is not. But you need a hot wallet to download Bitcoin into a portable cold wallet.
Other Ways to Invest in Bitcoin (BTC)
Buying and selling BTC isn’t the only way to invest in Bitcoin. You can also buy one of the new Bitcoin-related exchange-traded funds (ETFs). But by doing so you’re investing indirectly in Bitcoin and Bitcoin technology, owing to ongoing regulatory debates over whether crypto is a security.
The Debate About Crypto’s Status
There have been several attempts to create crypto-related securities since Bitcoin first came on the market in 2009, but the SEC has been hesitant to approve any of them — largely because Bitcoin, like most crypto, is unregulated.
The latest word from the SEC is that BTC does not meet the criteria for a security. Bitcoin is being treated more like a commodity in the sense that it can be a store of value (like gold or oil). Because securities are more heavily regulated than commodities, there is considerable attention on the outcome of this debate.
In the meantime, it’s possible to invest in Bitcoin using ETFs.
What Are Bitcoin ETFs?
The first three Bitcoin ETFs (exchange-traded funds) became available in the U.S. in October and November of 2021. All three are tied to Bitcoin futures contracts; they aren’t tied to Bitcoin’s daily market price.
Bitcoin spot ETFs have existed in Canada and Europe for years, and there are several applications for spot ETFs in the U.S., but the Securities and Exchange Commission (SEC), which regulates financial markets, has not yet approved them here.
These funds do not invest directly in “physical” Bitcoin (i.e. actual Bitcoin assets) but shorter-term, cash-settled contracts that are traded on the Chicago Mercantile Exchange or CME.
Does Bitcoin Use Staking?
No, Bitcoin relies on a proof-of-work consensus mechanism, not proof-of-stake. Thus investors cannot stake Bitcoin for rewards.
Bitcoin, as the oldest and largest cryptocurrency, is more than just the leading form of crypto. Since Bitcoin first launched in January of 2009, the result of a white paper authored by an anonymous researcher, Bitcoin has helped establish the technology, the market, and the demand that has paved the way for thousands of types of crypto, altcoins, tokens, and more.
Now the idea of a decentralized form of currency that is built on a blockchain, and governed by a peer-to-peer network is no longer novel. And because Bitcoin was one of the first successful uses of blockchain technology, the use cases for blockchain have likewise expanded throughout the cryptoverse, powering innovations like dApps, smart contracts, and non-fungible tokens (NFTs).
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