What is Bitcoin?

Bitcoin is digital money.

That’s the short answer.

Bitcoin is the first, biggest and by far the most important in a new category of currencies built from cryptographic technology and it has some remarkable features, benefits and consequences. Many people believe it is uniquely positioned as the basis of a whole new financial system well beyond just money.

Bitcoin is also a payment network, enabling transactions of tiny or massive amounts of money for little or no transaction fees.

Bitcoin is complex and full of novel technicalities so it requires detailed study to fully understand how it works. While there are vocal critics, even billionaires and Nobel Prize winners in Economics, most of these profess almost total ignorance of Bitcoin. You should definitely be skeptical but also educate yourself.

Bitcoin the currency works a bit like gold because of the way its supply is strictly constrained (by “mining”) and is ultimately deflationary, but it is also a bit like modern cash because it has no physical commodity accompanying or “backing” its value, it’s a pure token.

Being electronic, it’s easily transacted online but unlike Paypal or credit cards, it’s fully decentralised with transactions that work through peer-to-peer connections without third party authorities like banks. Being decentralised is crucial, not least because it accelerates Bitcoin’s global adoption by billions of unbanked and underbanked people even those with minimal internet access and no permanent electricity supply.

This global potential has driven many people to speculate on Bitcoin’s value and while the exchange rate has seen sharp drops, it’s seen intense and explosive growth over the years.

Bitcoin development is a community-driven project which focuses on building reliable software systems of consensus transactions without requiring trust. It works by combining several existing technologies into a groundbreaking solution to some long-standing open problems of computer science. Bitcoin’s zero trust consensus protocol enables many kinds of transactions like contracts, property, licensing, voting, identity validation, auditing and various financial instruments. More complex kinds of transaction systems like whole markets can also be built on top. Startup businesses building such services and apps on top of Bitcoin are growing exponentially.

Bitcoin is increasingly recognised by dominant financial institutions and governments as a threat to old ways of doing things. Their spokespeople raise important questions about how crime and terrorism can be fought without centralised controls and these same voices call desperately and hastily for regulation.

You might be wondering how you can get some Bitcoin.

Anyone can buy Bitcoins or tiny fractions of Bitcoins through a business running an exchange and anyone can decide to sell their products or services for bitcoin. There is another way to get Bitcoins, called “mining” which usually involves the use of specialised high-power computers but this is an advanced technical topic and newcomers can generally ignore it.

Bitcoin is considered by many to be in an early high-risk gold-rush phase, just five years after its creation in 2008. It’s still often a confusing technical challenge to safely transact and store significant monetary value and Bitcoin’s value is highly volatile. It’s possible the whole thing could crash permanently!

Bitcoin was invented by a mysterious person named Satoshi Nakamoto who has since retired from the project and whose secret identity will possibly never be known. While this mystery is unsettling to many, other people say it’s an important and distinguishing feature of Bitcoin that the identity and motivations of its inventor don’t matter. The software is fully open source so every digital nut and bolt is bared to the world for inspection. As for the motivation, there are hints that Satoshi made Bitcoin in response to the poor economic management of governments and the catastrophic failures of large banking institutions.

There are plenty of places to read more about Bitcoin, such as We Use Coins and Bitcoin.org.


Also recommended is the Let’s Talk Bitcoin podcast and a free video course on Bitcoin at Khan Academy.

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