Bitcoin is a decentralized digital currency that can be sent without the need for a bank or intermediary through the use of blockchain technology. It was first described in the Bitcoin Whitepaper, a document released in 2008 by a person known as Satoshi Nakamoto. While Nakamoto’s true identity has never been revealed, the document he/she/they left us with outlined the principles of a truly peer-to-peer payment system not controlled by any singular government or corporation.
The Bitcoin Protocol
Bitcoin is neither a government-issued currency nor a product created by a corporation but is instead a protocol that anyone can build on.
A protocol is a set of rules governing how data is sent. Some examples of protocols include SMTP for email, TCP/IP for the Internet, and HTTPS (web). So if email is a protocol for sending messages online, you can think of Bitcoin as a protocol for sending value online.
How can Bitcoin be mined?
New Bitcoins are issued at a fixed rate through a process called mining. The amount of Bitcoin that is mined is determined by the network’s Proof of Work algorithm, responsible for securing each transaction. Through this algorithm, miners use the computing power of their mining rigs to solve complex cryptographic problems. As each of these problems is solved, miners are rewarded with new Bitcoin as an incentive to keep the network secure.
The New Digital Gold?
Although Bitcoin was originally promoted as a payment system, the network today can only process up to 5 transactions per second. This is very slow compared to other payment networks which can process more than a thousand transactions per second. In addition, transaction fees for a single Bitcoin transaction tend to be too high for small purchases, so using Bitcoin to buy things like a cup of coffee currently isn’t feasible.
As a result, Bitcoin is now often considered a store of value similar to that of gold. Why is that? Well like any scarce resource, the amount of Bitcoin that can be created is limited to 21 million units as determined by the code it operates on. Once this limit is reached, no Bitcoin will ever be mined or minted again. This makes Bitcoin the first ever digitally scarce asset that is subject to the forces of supply and demand.
Disclaimer: The information and publications in this article are not intended to be and do not constitute financial advice, investment advice, trading advice, or any other advice or recommendation offered or endorsed by Coins.
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