Cryptocurrency pioneer Bitcoin. It uses a decentralized protocol, cryptography, and a mechanism to achieve global consensus on the state of a periodically updated public transaction ledger called a 'blockchain' to enable peer-to-peer value exchange.
In practice, Bitcoin is a digital currency that exists independently of any government, state, or financial institution, can be transferred globally without a centralized intermediary, and has a known monetary policy that cannot be changed.
Bitcoin is a political, philosophical, and economic system. This is due to the combination of technical features, participants and stakeholders, and the process for changing the protocol.
Bitcoin is both the software protocol and the monetary unit, denoted by the ticker symbol BTC.
Since its anonymous launch in January 2009, Bitcoin has grown into a global financial asset with a daily settled volume in the billions of dollars. Bitcoin is regulated as a currency or a commodity, and is therefore legal to use (with some restrictions) in all major economies. El Salvador adopted Bitcoin as legal tender in June 2021.
At its core, Bitcoin allows for value exchange outside of the traditional financial system. People use Bitcoin to make international payments that are faster, more secure, and cheaper than using legacy networks like SWIFT or ACH.
Initially, when network adoption was low, Bitcoin could compete with payment networks like Visa and Mastercard (which, in fact, settle transactions long after point of sale). Scaling issues made Bitcoin less competitive as a medium of exchange for low-value items as it became more popular. In short, limited ledger throughput and lack of second-layer solutions made settling small transactions prohibitively expensive. This backed up the idea that Bitcoin is more of a digital gold alternative than a payment network. The argument is that Bitcoin's value comes from a combination of technological advances, a monetary policy built into the code, and powerful network effects. A form of 'pristine collateral' for the global economy, Bitcoin could potentially replace gold as an investment thesis.
Alternatively, Bitcoin promotes economic freedom. It claims to do so by offering an opt-in alternative currency that is protected from (1) monetary confiscation, (2) censorship, and (3) devaluation due to uncapped inflation. This story is not mutually exclusive with the 'digital gold' story.
No one owns or controls the Bitcoin network, and there is no CEO. Instead, the network is made up of willing participants who follow a protocol (which takes the form of an open-source software client). Changes to the protocol require user consensus, and contributors include 'nodes,' end users, developers, miners, and industry participants like exchanges, wallet providers, and custodians. So Bitcoin is a political system. Bitcoin is arguably the most decentralized of the thousands of cryptocurrencies, which strengthens its position as pristine collateral for the global economy.
Distributed: All Bitcoin transactions are recorded on a public ledger that has come to be known as the 'blockchain.' Everyone on the network must store copies of the ledger and run the Bitcoin protocol software. These 'nodes' help the network to properly propagate transactions by following the protocol rules set by the software client. With over 80,000 nodes worldwide, there is virtually no chance of network failure or data loss.
Transparent: The protocol's rules determine who owns how much bitcoin and how new transactions are added to the blockchain ledger.
Peer-to-peer: Although nodes store and propagate the network's state (the "truth"), payments are made directly between people or businesses. So no ‘trusted third party' is required to act as an intermediary.
There are no gatekeepers and no need to create a 'Bitcoin account.' The network will confirm all transactions that follow the protocol's rules.
Pseudo-anonymous. Identity data isn't linked to Bitcoin transactions. Instead, transactions are linked to addresses that are generated at random.
Because Bitcoin transactions are pseudo-anonymous and users hold the 'key' to their bitcoin holdings, authorities have difficulty prohibiting or seizing their use. This has implications for economic freedom and may even act as a global counter-force to authoritarianism.
All Bitcoin transactions are public and can be viewed by anyone. While this virtually eliminates fraudulent transactions, it also allows for the linking of individual identities to specific Bitcoin addresses. Many efforts are underway to improve Bitcoin's privacy, but their inclusion in the protocol is subject to the quasi-political governance process.
Like gold, bitcoin is a “store of value” and new bitcoins are created by “mining” (up to a maximum 21 million coins).
Bitcoin mining is the process of competing among thousands of computers to record and verify network transactions. Mining rigs are specialized computers that solve equations to verify and record new transactions.
Initially, a standard desktop PC was powerful enough to participate, allowing virtually anyone to try mining. Nowadays, the required computers are massive, specialized, and often owned by businesses or large groups of people pooling resources. By October 2021, researchers at Cambridge University estimate that American miners control the largest share of global mining.
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