Bitcoin explained simply: everything you need to know
From wallets to the blockchain, exchanges to valuation, here we explain Bitcoin in simple terms
Bitcoin explained simply: everything you need to know
Blockchain, cryptocurrencies, decentralisation, HODL, whales, block explorers, cold wallets, tokenisation, pump and dumps. If all of these words just made you break into a cold sweat, you’re not alone. The crypto world dreams of playing an essential role in the global economy – offering an alternative to dollars and pounds. Alas, for many, this industry can feel impossible to understand because of how technical it is. Read on for Bitcoin explained simply – demystifying the world’s biggest cryptocurrency.
Basically, Bitcoin is a digital currency that has been invented without a central bank. Whereas the Federal Reserve is responsible for America’s monetary system, Bitcoin doesn’t have a single person or organisation in charge.
To understand the reason for this, it’s worth looking at why Bitcoin was created. In 2008, a person using the pseudonym Satoshi Nakamoto wrote a white paper setting out their vision for the cryptocurrency. They imagined a world where people could make electronic payments to one another without using a bank or PayPal. (Do remember that this was in the immediate aftermath of a global economic crisis that was largely caused by deregulation in the financial sector.)
Nakamoto imagined that one of the biggest advantages would be lower fees when payments are made. Running a bank is an expensive business – there’s security and office expenses to think about – and these costs often get passed on to consumers. His vision was to make everyone their own bank, and to contrast a system where middlemen would no longer be needed.
This brings us neatly to how Bitcoin was created. In the very beginning, it took 30,000 lines of code to get the cryptocurrency off the ground. Blockchain is the name of the technology that underpins Bitcoin. To cut a long story short, this is a public, fully digitised database of each and every transaction that takes place on the network. Bundles of transactions are placed into blocks and attached to the chain of blocks that came before it. A new block can only be added when a complex puzzle has been solved – and the first person to do so receives Bitcoins as a reward.
So… how many Bitcoins exist?
Well, ever since the cryptocurrency went live in January 2009, the total supply has been capped at 21 million. At the time of writing, more than 18.2 million of them have already been mined. Quick maths will tell you there are about 3 million yet to discover – and in the coming years it’s going to get harder and harder to find them. Estimates suggest the final Bitcoin will be mined in 2140, some 120 years from now.
Fans of Bitcoin argue that this is a refreshing change from what many central banks do: effectively print more money. This measure, known as quantitative easing, often results in inflation, meaning things just end up getting more expensive. By having a fixed supply, proponents claim that Bitcoin manages to achieve digital scarcity – and this makes every coin more valuable as a result. For a real-world example, just look at what’s been happening with the coronavirus. Demand for hand sanitiser exploded recently but the supply remained the same. Because of this, prices went up.
Before we move on, just a quick word about that supply of 18.2 million Bitcoin that’s supposedly in circulation at the moment. Although it’s true that they have all been mined, the number of Bitcoins still active is likely to be a lot lower than this. A couple of years ago, one estimate suggested 4 million BTC has already been lost for ever – and on top of that, another 2 million had been stolen. This would mean that a third of the mined supply is gone. Scarce indeed.
You might ask, well, how can it just vanish? Where is Bitcoin stored?
Well, put simply, a private key grants you the ability to spend your coins. Losing this key can have catastrophic circumstances. Whereas you can ask for a reminder if you forget the password to your email, there’s no such feature with Bitcoin.
Bitcoin price history
A good technique for understanding Bitcoin is to look at Bitcoin market history. The fluctuations in the value of the world’s biggest cryptocurrency have been nothing short of a white-knuckle ride over the past decade or so. It’s crazy to think that, in May 2010, you could get one whole BTC for a fraction of a cent. Fast forward seven-and-a-half years and the Bitcoin highest price was reached – a whopping $20,000. Now that’sa return on your investment.
Some people made a lot of money in the early days. Just look at the Cameron and Tyler Winklevoss. The twins had sued Mark Zuckerberg in the early 2010s and received a settlement that was reportedly in the region of $65m. Licking their wounds in 2013, they invested $11m of the cash in Bitcoin, when it was trading at $120. Fast forward four years and their BTC had risen by more than 10,000 per cent – heading beyond $11,000 per coin. This made them billionaires. Who’s laughing now?
One person who’s trying to put a brave face on things is Laszlo Hanyecz, who will now forever be known as “Bitcoin Pizza Guy”. In an attempt to prove that Bitcoin can be used to make everyday purchases in May 2010, he stumped up 10,000 BTC for two pizzas at Papa John’s. Of course, Bitcoin wasn’t worth all that much back then – but, at the time of writing, it’s worth about $8,600. This effectively meant he paid $86m for two pies… ouch. Hanyecz maintains he doesn’t regret it.
What affects Bitcoin price
If you’re completely new to Bitcoin, there’s one question that you’re probably dying to ask right now. How can a virtual currency go from being worth under a cent to being worth many thousands of dollars?
That’s a very good question. Then again, you could say that for other assets such as 0'>gold, 0'>silver, or the banknotes in your pocket. BTC’s value has grown because it has all of the characteristics of money. There’s one key point of difference: instead of putting your trust in a well-dressed banker, you’re trusting a resilient system that has been built on mathematical principles. As the number of people interested in Bitcoin grow – not to mention the businesses that accept it – the coin’s value will rise further.
Naturally, some other factors are at play. For starters, you have an event that’s known as the halving. If you were paying attention a little earlier in the article (and I sincerely hope you were!) you’ll remember miners get a BTC reward whenever they successfully solve the puzzle that adds a block to the chain. In 2009, when Bitcoin first launched it stood at 50 BTC. But about every four years – about every 210,000 blocks, this prize is slashed by 50 per cent. It tumbled to 25 BTC in November 2012, 12.5 BTC in July 2016, and in May 2020, it’ll go down to 6.25 BTC.
Assuming that demand remains strong for Bitcoin, this could help prices appreciate. Usually, the rise in value doesn’t happen straightaway – it takes about a year or so to properly kick in. As this previous Currency.com feature explains in greater detail, BTC was 8,566 per cent higher in the 12 months after the 2012 halving – and 286 per cent higher after the event in 2016. All eyes are going to be on BTC in May 2021 to see what the lay of the land is.
This isn’t the only event that can serve as catnip for BTC prices. Although trade wars can often prove cataclysmic for the stock markets – just look at the uncertainty the dispute between the US and China caused – Bitcoin actually seemed to rise in value every time the trade war seemed to worsen. (Read our Currency.com feature here.)
Where to spend Bitcoin
All of this brings us to the most consumer-friendly part of our feature on Bitcoin explained simply: where Bitcoin is accepted.
Although the likes of Visa and Mastercard (not to mention good old-fashioned $20 bills) still dominate payment methods worldwide, many retailers are beginning to accept this cryptocurrency – and others – as a payment method. In the US, big brands that allow you to make purchases in BTC include Microsoft, which offers the coin as a payment method on its Xbox Store. What’s even more surprising is that Bill Gates, one of the richest men on the planet, has repeatedly claimed that Bitcoin is better than currency. Elsewhere, you have businesses such as Overstock.com – a retailer which had revenues of $347m in the third quarter of 2019.
In Europe, major supermarket chains have been dabbling with accepting BTC as a payment method too. But perhaps the most exciting innovation lies in how fintech start-ups are introducing products such as prepaid debit cards which enable consumers to use their crypto anywhere Visa is accepted. Here’s how it works: Jerry goes into a store to buy a block of cheese that costs $5.99. At the till, his BTC is instantly converted from Bitcoin into dollars to cover the transaction – with merchants receiving it in fiat.
Tools that make Bitcoin and other cryptocurrencies more accessible to everyday consumers should be celebrated – especially if they make it easier for merchants to accept it too. But, despite the buzz that’s abound in the industry, it’s fair to say that there are some concerns about whether or not BTC will ever go mainstream. Sure, it’s been around for more than 10 years now – but we’re some way away from the all-time highs that were recorded in the heady days of 2017.
Warren Buffett, the multi-billionaire investor who is the fourth-richest man in the US, is a known sceptic of crypto. In a recent interview with CNBC, he wasn’t shy in saying that he never wants to own Bitcoin. He added:
Cryptocurrencies basically have no value and they don’t produce anything. What you hope is that somebody else comes along and pays you more money for it later on, but then that person’s got the problem. In terms of value… zero.
We’ll put him down as a maybe, then.
There are many people who will sit up and take notice whenever Warren Buffett has something to say. But some crypto fans have already suggested that it isn’t worth taking the 89-year-old’s advice “because he doesn’t use a flip phone or email.” Ultimately, the 2020s are going to be crucial for Bitcoin. It’ll either be the decade where it finally manages to tap into the mainstream – or crashes and burns after struggling to maintain its current valuation.