What Is Bitcoin, and How Does It Work?

What is bitcoin? Why is it valuable? What Makes it Different?

Bitcoin is digital money. The revolutionary characteristic that sets bitcoin apart is – it’s not controlled by a central bank or any type of centralized governing body.

“bitcoin is a secure way to send money over the insecure internet”

Kiara Bickers, Author of Bitcoin Clarity

This is in stark contrast to fiat currencies like the US dollar, the Euro, and every single other national currency. These currencies are controlled by central banks, and are subject to their manipulative monetary policy.

When Was Bitcoin Started?

Bitcoin is was designed as “A Peer-to-Peer Electronic Cash System” in the wake of the 2008 global financial crisis.

Bitcoin officially started when Satoshi Nakamoto mined the first bitcoin block, known as the genesis block, on January 3rd, 2009.

Who Created Bitcoin?

An anonymous individual (or group) who used the pseudonym “Satoshi Nakamoto” developed bitcoin, wrote the bitcoin white paper, and launched bitcoin.

Over the years, many have tried to uncover the identity of Satoshi Nakamoto, however, their identity remains a mystery.

Why Was Bitcoin Created?

Bitcoin was created to be sound money. It was supposed to give anyone in the world a way to opt-out of the inflationary nature of fiat money – and it worked!

People in power have been inflating the money supply since ancient times. Inflation was of the the problems which led to the fall of the Roman Empire. They started added impurities to silver coins, thus diluting the money supply.

Although it was accomplished in a different way, this had the exact same effect as central banks printing money today – monetary inflation. History tells us this does not end well.

Although the United States effectively abandoned the gold standard in 1933, it wasn’t until Aug 15, 1971 that it fully removed itself from the standard. This was supposed to be “temporary” according to Richard Nixon, but that was only a lie to ease the transition.

Inflation raged during the 1970’s and early 80’s following the exit from the gold standard. In the decades following, inflation continued to be slow and steady until the 2008 financial crisis when central banks started printing money at an unprecedented rate.

What many people don’t realize, is that even when inflation is ‘slow and steady’, it is problematic and stealing your purchasing power over time.

The inflationary monetary system that we live in rewards debt and risk, while penalizes saving. Indebted, stressed, busy, people who are enslaved to the man, are not happy, healthy people living their best life!

The solution is hard money which cannot be inflated: bitcoin.

Let’s take a deeper look at what makes bitcoin special. The bitcoin network has three main characteristics that make is so useful, brilliant and unstoppable.

1) Bitcoin Is Decentralized, and Permissionless

Bitcoin is designed in such a way that online payments can be sent directly from one party to another (with no trusted third party aka middle man).

This secure system of eliminating the middle man is what makes Bitcoin truly different. For the first time in history, a monetary network has been created that enables nearly instant, nearly free, and 100% trustworthy payments to be sent anywhere in the world.

The underline technology that makes bitcoin possible is called Blockchain. A blockchain is a publicly disturbed ledger system. It’s essentially a detailed record of which bitcoins belong to which addresses.

To learn more about bitcoin’s blockchain and how it works, check out – What is Blockchain?

Bitcoin vs Visa & MasterCard vs PayPal

Other common online payment networks such as Visa, MasterCard, and PayPal are centralized and used a trusted financial institution as the middle man between you, and the payment recipient.

The downsides to a middle man are twofold.

Problem #1 Trust. When it comes to network security, and money, trust is something that should be avoided at all cost.

Problem #2) Fees. When payment networks operate in a free market, competition should lead to fair prices. However, the reality is that the financial system is more like an oligopolic marketplace, and transaction fees tend to be artificially high.

Bitcoin solves both of these problems.

In addition, bitcoin is not controlled by any person, group of people, or governing body. It is controlled by consensus of those on the network – therefore, it’s not possible for self-serving governors to make poor monetary decisions regarding bitcoin.

2) Bitcoin Stores Value Over Time

Why is Bitcoin so valuable? Because of the basic economic principal: supply and demand. There is a fixed total supply of Bitcoin (21 Million coins) but demand is elastic.

Although the total supply of bitcoins is fixed at 21 million, there is only about 18.6 million in circulation that have been mined so far (in 2021).

Bitcoin mining introduces new coins into the market at a pre-determined rate that decreases exponentially over time – the rate of new coin issuance is cut in half every 4 years.

Yes, because of coin issuance though bitcoin mining, there was monetary inflation during the early years. However, this was part of the design that made it succeed.

To be clear, even though bitcoin was experiencing monetary inflation, it was simultaneously gaining millions of percent in purchasing power.

To learn more about mining check out my article: What Is Bitcoin Mining, and How Does It Work.

Bitcoin’s Demand Driven Price

Historically, demand for Bitcoin has greatly increased over time. When demand increases faster than supply, the result is price appreciation. Bitcoin’s compounded annual growth rate for the past 10 years is mind boggling at nearly 200%.

Fiat currencies like the US dollar (USD) lose value to inflation over time (increases in the monetary supply aka money printing). According to the CPI (consumer price index), the US dollar has lost 21.37% of its purchasing power In the past 10 years. In the same 10 year time period, Bitcoin gained about 50,000% in purchasing power.

10 Year Change In Value

USD: -21.37%

Bitcoin: + 50,000%

These parabolic gains in purchasing power will decrease over time as Bitcoin matures, but the point is that Bitcoin stores (and gains) value over time, while fiat currencies lose value over time.

While the parabolic gains may not be sustainable forever, the strong retention of value and slow price appreciation over time is sustainable. This is why bitcoin is the most attractive form of money, and the reason why so many bitcoiners have such a strong conviction.

3) Security: The Bitcoin Network Is Impenetrable

When it comes to money, security is absolutely crucial. The value of money is directly tied to the confidence of its users.

The Bitcoin Network is the most secure network in the entire world.

Since Bitcoin was first created in 2009, there has been a constant onslaught of hackers attempting to penetrate the network, and steal coins – however the’ve never succeeded. That’s a pretty good track record.

As bitcoin becomes more valuable over time, the Bitcoin Network becomes proportionally stronger, making it even more secure.

To learn more about how bitcoin mining secures and powers the network, check out my article – How Does Bitcoin Mining Work?

Should You Buy Bitcoin?

I’m not your financial advisor, and I’m not a financial advisor at all. So do your own due diligence, and make your own informed decisions. I do personally own bitcoin.

I believe the proper portfolio allocation for bitcoin is non-zero. In other words, anyone trying to make smart financial decisions should own at least some bitcoin.

My portfolio allocation for bitcoin is high, because I have a very strong conviction.

To learn more reasons why you might want to consider adding bitcoin into your portfolio, check out my article: Should You Buy Bitcoin? In the article, I share tons of information, plus my favorite place to buy bitcoin.

Thanks for reading along! Please leave any comments or questions below.

Want To Learn More? Check out all my other bitcoin articles and guides.