What is Bitcoin?

It is the first cryptocurrency that exists before our eyes. 21 Million is the magic number. No more, no less. It is digital. It is virtual. And nobody controls and owns it, not even the central banks or governments or even its creator which goes by the name - Satoshi Nakamoto. That currency I am talking about is, precisely, Bitcoin.

These are some questions I first asked myself when I bumped into Bitcoin.

• "If nobody controls and owns it, then who runs the Bitcoin system?"
• "Who is there to verify the transactions?"
• "What makes Bitcoin valuable?"

Let's get to it! 🚀

If nobody controls and owns it, then who runs the Bitcoin system?

Bitcoin is run by thousands of nodes around the world. But what is a node exactly? A node is a computer connected to other computers which follow rules and share information. And a full node is a computer in Bitcoin's peer-to-peer network which hosts and synchronizes a copy of the entire blockchain (a copy of all the transactions that ever happened in the Bitcoin peer-to-peer network). A blockchain is a special kind of append-only database - which means data can only be added to it.

Who is there to verify the transactions?

When I make a transaction of 0.5 Bitcoin from Berlin to my friend in London, the transaction is broadcasted directly to the Bitcoin peer-to-peer network instead of the banks. And miners instead of bankers are the ones to verify this transaction. In the world of cryptocurrency, mining is the process through which cryptocurrency transactions are gathered, verified, and recorded into a digital ledger known as the blockchain. And since anyone can run the Bitcoin open-source software, anyone could be a miner to verify the transaction. But still, why would they do it?

Miners are humans, and one way to make somebody do somebody is by providing financial rewards. By mining, miners add blocks to the blockchain by dedicating computing power to solve a numerical problem. And electricity is needed to dedicate the computing power. In return, there is a reward (or known as block reward) for miners. The reward is made up of two components - The fees attached to the transaction and the block subsidy, namely the amount of new bitcoin minted in each block. Whenever a block is produced and added to the blockchain (the public ledger), miners will be rewarded to mint a certain amount of bitcoin. So as long as the reward from mining is greater than the electricity cost incurred, miners would be financially incentivized to keep mining. And that keeps the records on the blockchain secure, correct, and unalterable.

Note: If you are interested to know why we should trust some random strangers over the Internet rather than our bank, Glen Boston has a written up a clear answer in Quora for that question.

What makes Bitcoin valuable?

Over the years, the value of the U.S. Dollar drops while the value of Bitcoin has risen significantly. So, why does the value of a dollar go down over time, while a Bitcoin's goes up?

A currency is usable and valuable if people believe that it has a value not only today but also does not depreciate in value over time. When central banks are printing money excessively, their actions lead to much more currency supply than demand on the whole market. In the long run, it makes a unit of currency today worth less than a unit of the currency in 5 years' time.

But if Bitcoin is a currency, wouldn't its value goes down over time, just like the dollars? In the case of Bitcoin, its supply is capped - there will only be 21 million Bitcoins forever. Bitcoin is also decentralized, censorship-resistant, secure, and borderless. Because of its scarcity and the difficulty in producing it, Bitcoin has been dubbed as digital gold.

So, what’s next?

Hope you enjoy reading it and helps you understand a little more about what this Bitcoin thingy is all about. A preview of the next article: we will be diving into how to buy Bitcoin and how to store it.

If you are curious to learn more about crypto and want to take some actionable steps to start building wealth in crypto, Market Meditations has spent 1000+ hours and compiled a great guide for beginners.

Disclaimer: My knowledge of Bitcoin is still very limited. I am trying to understand and learn more about it by learning in public. One of the best ways to learn is to create content for the subject we are learning - feedbacks are welcomed!