Bitcoin was created by Satoshi Nakamoto in 2009, along with the software that supports it. To this day, it remains a mystery who is behind that name, a person or an institution. Bitcoins are created through a process known as bitcoin mining, which we will explain below.
Origin and history of Bitcoin
The origin of Bitcoin as a cryptocurrency dates back to 2009. History indicates that its creator operated under the pseudonym, Satoshi Nakamoto.
Who is Satoshi Nakamoto?
Although it is true that the domain bitcoin.org was registered in 2008, in October of that same year, Satoshi Nakamoto wrote an article entitled “Bitcoin: An electronic cash system between equals.”
In this document, he detailed how the network works, how bitcoins were generated, and its advantages. After that, already in 2009, the origin of the first open-source Bitcoin client emerged, and the network began to become popular progressively.
What is and how does a Bitcoin work?
Although Bitcoin does not exist physically, it has the same functions as other money. Still, unlike a bill or a non-virtual currency, bitcoins do not have a serial number or another type of mechanism to trace to buyers and sellers who use this virtual currency. This makes it attractive to those who want or need privacy in their transactions.
Unlike any other currency, Bitcoin is not fiat money. In other words, it is not backed by the confidence of a central bank, by a government, or by a material (for example, the gold standard). Instead, they use a proof-of-work system to avoid double-spending and reach a consensus among all nodes operating on the network. This consensus is known as the blockchain.
The blockchain or blockchain
The blockchain is a fundamental piece for the operation of Bitcoin since to falsify a transaction, and it would not be enough to change one or more computers. Being a public registry, there can be millions of copies. The registries of all the computers that keep a copy would have to be changed, which is practically unfeasible since it is an open and public database.
In addition, bitcoin transactions are open source for their operation and do not need any intermediary to carry out the transactions. Therefore, it promises to have lower transaction costs.
It should be remembered that the rest of the currencies (such as the dollar, the euro, the pesos, or the yen, among others) do exist physically. Still, even so (in 2016), only 8% of the money that exists in the world denominated in those currencies are physical money; the rest is electronic money in the banks’ balance sheets.
Characteristics of Bitcoin
To avoid the problems derived from a currency that is not backed by an entity or a third party but by a working system, the BTC has several fundamental principles:
Twenty-one million limits: The number of units can never exceed 21 million bitcoins. Therefore, unlike fiat currencies, the money supply is limited, where the central bank can issue as many as it wants.
Can’t censor: No one can ban or censor transactions that have been validated.
It is open-source: The source code used must always be accessible to everyone.
Access to all: Everyone can make transactions in bitcoins without the need for a permit. No one can prevent participation in the network.
It uses pseudonyms: The real identity of its owner is not reflected, and it is not necessary to identify yourself to participate in the Bitcoin network, although, unlike an anonymous network, it allows the possibility of generating a reputation and trust between the different users.
It is expendable: All units are interchangeable.
Payments are irreversible: Transactions that have been confirmed cannot be modified or deleted.
How are bitcoins created?
Bitcoin is a cryptocurrency created and distributed by peer networks, commonly known as P2P (peer to peer). These networks allow the direct exchange of information without the need for fixed servers. The BTC generation process is through cryptocurrency mining. It consists of solving challenging mathematical problems thanks to computer processors.
The person who solves a problem receives a reward in BTC in return. The incentive that makes more people join this process. Each participant is connected through the P2P system, and they validate each movement in the system. Therefore, the more participants there are, the more secure the process will be. On the other hand, as problems are solved, their difficulty increases. In this way, the speed of BTC generation is controlled.
Bitcoin, as we have already explained, is not regulated by anybody. However, it is programmed to reduce the generation rate by 50% every four years until it reaches 21 million BTC in circulation.
To give us an idea, as of January 25, 2021, the total BTC in circulation was 18,844,750. In 2014 it was just over 12 million bitcoins. Every 10 minutes, it increases, but each time at a slower pace.
Over time we are approaching the limit of 21 million. So if the demand for bitcoins continues to increase and the supply does not compensate for that increase in demand (it does not do so because it is limited), the most likely thing is that the price of Bitcoin will increase. Of course, as long as the demand is maintained.
How are bitcoins used?
The time has come to see how one can manage with these coins that are but are not. Bitcoin is money, and it has certain characteristics that differentiate it from other currencies. However, as a currency, it fulfills the properties of money:
Serves as a unit of account
Preservation of value medium
The latter is the one that is creating the most controversy around Bitcoin due to its fluctuating nature. See volatility
On its usefulness as an accounting unit, little more or nothing needs to be added. The same does not happen with its properties to facilitate the exchange. The appearance of Bitcoin meant the breakdown of electronic commerce as it was known until then. Transactions no longer have to be channeled through banks or other trusted financial entities, which means breaking with the corresponding service fees to which the transactions were subjected.