Bitcoin 101: What Is It & Why Is It Valuable?

Disclaimer This article is for general information purposes only and isn’t intended to be financial product advice. You should always obtain your own independent advice before making any financial decisions. The Chainsaw and its contributors aren’t liable for any decisions based on this content.

Bitcoin is the first globally decentralised payments system that utilises a blockchain and cryptocurrency to allow for peer-to-peer transactions. Launched in 2009 by pseudonymous creator Satoshi Nakomoto after the 2008 global financial crisis (GFC), Bitcoin was created to be a decentralised payment system that doesn’t require the trust of a human intermediary. This system cuts out the centralised financial institutions which contributed to the GFC, allowing instead for entirely peer-to-peer, global transactions.

It’s a little known fact that Nakamato actually cited the Bob Rubin Trade in the Genesis block of Bitcoin, which was their way of giving Wall Street a discreet middle finger after nearly all the top executives responsible for the GFC walked away without so much as a slap on the wrist.

What is Bitcoin?

Bitcoin (BTC) is the world’s first decentralised cryptocurrency or digital currency to enable the transfer of value without the need for an intermediary, like a bank. It utilises blockchain technology to secure and power the transactions on the network, which is an open, distributed ledger that records transactions in code.

Transactions are recorded in ‘blocks’ linked on a ‘chain’ of records across a distributed network of computers. The transaction data cannot be altered because it is secured by interlinking, near-unbreakable cryptographic code.

The Bitcoin network gives all users equal access, allowing people to transact peer-to-peer across borders.

Cryptocurrencies are a group of digital assets that utilise decentralised blockchains to transfer transactions.

A decentralised peer to peer (p2p) payment system

One of the foundational aspects of Bitcoin is that it is a completely decentralised, peer-to-peer payment system with no ‘middle man’ required to facilitate transactions. Unlike fiat currencies, which are directly impacted by decisions made by governments and reserve banks, no central authority can alter the foundations of the Bitcoin network.

Ever since Richard Nixon ditched the gold standard in 1971, declaring the US Dollar the official reserve currency of the global economy, reserve banks around the world have been enjoying their newfound ‘growth only’ super power: printing more money ad finitum.

The consequences of this unchecked stimulus have begun to make themselves known as we bear witness to increasing inflation figures increasing at record rates.

In contrast to fiat currencies, Bitcoin is designed to be anti-inflationary owing to its hard-coded supply limit of 21 million coins, introducing scarcity to its value.

Satoshi Nakamoto believed that inflationary fiat currencies would have far-reaching, negative impacts on society, so Bitcoin’s code prevents anyone from ever being able to create more.

Currently there are just over 19 million in circulation, with miners unlocking more supply every day. However, as the circulating supply edges closer to 21 million, the difficulty in mining more BTC becomes exponentially more difficult.

With this 21 million BTC limit, Bitcoin is an inherently scarce asset, with many investors treating Bitcoin as a store of value, often referring to it as ‘digital gold’.

How does Bitcoin work

Bitcoin utilises blockchain technology to decentralise, immutably store transaction data and power its network. A distributed network of computers have miners who run nodes that power the network and work round the clock to verify transactions and add new blocks to the chain. When a transaction is requested, it is broadcasted to the network, and the network of participants validate the transaction, which is combined with other transactions to create a new block of data for the ledger.

A blockchain is a distributed ledger of information that is stored across many different computers around the world. Every time a certain amount of information, or transactional data, needs to be stored, it is added to the ledger in a data ‘block’. These blocks are added after previous ones, forming a chronological chain of transactions, hence the name ‘blockchain’.

Blockchains are immutable because the information is stored on a network of individual computers distributed throughout the world. Each computer stores a full copy of the entire blockchain’s data and recently added new information, and all computers verify their own copy is the same as all the others. This process is known as consensus.

Consensus

If one computer has a different copy, the other computers will remove it from the network. This means that if an ‘unsavoury’ actor decided to alter transaction data, which would usually be an attempt to transfer more money to themselves, they would need to alter all of the information on the majority of computers in the network all at once — a feat that not even Frontier (the most powerful supercomputer in the world) could achieve.

Proof-of-Work (PoW)

To secure the Bitcoin network, thousands of different computers solve increasingly complex cryptographic problems, which serves the function of validating the transactions on the blockchain. The people and organisations that choose to undertake this are rewarded with a new Bitcoin for their efforts. This is what people are referring to when they use the term ‘mining’, because the computers are quite literally doing physical work to secure the network and create new digital assets — the same way that physical labour is used to dig minerals out of the ground.

The upside of the PoW model is that it guarantees an extremely secure blockchain network, which is constantly being validated and secured by colossal amounts of raw computing power. In order to hack a Proof-of-Work system, the hacker would have to have a computer or, more aptly, thousands of computers that are more powerful than 51% of the total network. This makes Proof-of-Work incredibly secure.

The downside to this is that it requires dizzying amounts of power to mine new Bitcoin and validate the transactions on the network.

While Bitcoin mining has been heavily criticised for its energy usage, it has recently undergone a dramatic shift towards the use of renewable energy to power the process. Most newer blockchains have moved to a more energy efficient form of consensus, called Proof-of-Stake (PoS). This form of consensus is less energy intensive as it only requires the locking up of assets (staking) to validate transactions.

What is Bitcoin mining?

Bitcoin mining refers to the process of creating a new Bitcoin by solving complex algorithms powered by computer power to verify transactions are legitimate. When a miner successfully validates a block, they are rewarded with a predetermined amount of Bitcoin.

Bitcoin transactions are parcelled together in a ‘block’. Each block carries information about the transaction with a set of cryptographic rules called a hash code (a string of letters and numbers) that miners work to verify. This is a mathematical function generating a unique piece of code that cannot be duplicated, much like a fingerprint. If the hash is altered, it will not connect to the next block and cannot be verified. The next block in the chain is related to the last, so in order to alter the records, a hacker would need to alter both blocks, which would be near impossible.

Miners will work to solve the equation via guesswork. The total number of possible guesses to the equation number in the trillions and the number of possible solutions increases with each miner that joins the network. The miner that is first to successfully confirm the hash is rewarded and the transaction is then confirmed by the network.

How to use Bitcoin

Using Bitcoin is extremely easy. To send Bitcoin from one wallet to another, all that is required is the other wallet’s public address and a secure internet connection. The first step is to enter the amount of Bitcoin that is being sent to the other wallet, followed by the receiver’s wallet address. Once these details have been entered, you can press ‘send’ and a dialogue approval will appear. This will detail the information of the transaction, including the associated fee and generally the estimated time for it to arrive.

Once you have checked the information is correct, you can confirm the transaction and the Bitcoin will be sent. The transaction will be submitted to be added to the next block, and once it has been added by a miner, it will show in the receiver’s wallet. Bitcoin’s ease of use has bolstered the network’s usage from global payments, especially for those residing in developing countries with less sophisticated traditional financial infrastructure.

How to buy Bitcoin

Being the original cryptocurrency, Bitcoin is listed on practically every single exchange, making it one of the easiest digital assets to purchase.

Bitcoin is divisible into smaller components, called ‘satoshis’. Each satoshi is equal to 0.00000001 (eight decimal places) Bitcoin, so for those of you who don’t wish to buy a full Bitcoin (or just can’t afford one), you can still quite easily become a satoshi millionaire!

The easiest way to buy Bitcoin is via a centralised exchange. There are thousands of exchanges out there, each catering to a specific jurisdiction. Different exchanges have different features, but ultimately, any reputable exchange will allow investors to purchase Bitcoin.

Steps to buy Bitcoin

  1. Sign up for a trusted exchange that is compliant in your local jurisdiction. It is important to ensure you use a reputable exchange as there have been cases of fraudulent exchanges. It is also highly recommended to transfer your assets to a digital or hardware wallet. Hardware wallets take your assets offline, where they are less vulnerable to potential hacks.
  2. Once you have signed up for the exchange, you may need to complete a know-your-customer (KYC) process. This often involves providing a full name, image of a government issued ID and answering some security questions.
  3. After the signup and KYC is completed, you should now be able to deposit funds onto the exchange. Different exchanges offer different deposit methods from card to bank transfer, so choose what option is right for you.
  4. Once you have deposited the funds you wish to invest, you can now buy BTC on the exchange. It is important to determine the amount of BTC you are able to purchase, taking the price at the time into consideration.

What is Bitcoin worth?

The value of Bitcoin in fiat denominated terms, referred to as the ‘Market Capitalisation’ or ‘Market Cap’, is derived from the number of Bitcoin in circulation multiplied by their current market price. At Bitcoin’s all-time-high valuation in late 2021, it was worth almost US$1.3 trillion. However, since then it has declined to US$450 billion at the time of writing.

What is the price of Bitcoin?

Bitcoin’s price history has been tumultuous and had many rapid price increases followed by equally swift price drops. When Bitcoin was launched, basic computers could mine thousands of BTC every day. Bitcoin was programmatically created to become more difficult to mine over time, so the process for mining has become more intensive.

Bitcoin was essentially worth nothing when it first launched as there were significantly fewer buyers and therefore less demand. Once word spread of an online, anonymous digital currency, some individuals began to buy them and use them for purchases on the dark web. Today, some of the world’s largest financial institutions have adopted Bitcoin on their books.

For the first few years, Bitcoin’s price remained below US$1, however in 2011, BTC began trading for above $1 and soon soared to $30 a few months later. The price crashed back down to a few dollars quickly afterwards. In 2013, Bitcoin once again ran upwards in price to $230, before once again falling rapidly.

Later that year, it once again pushed to new highs of over US$1200. It once again fell and remained in the three figure range until 2017, when it broke out and pushed to almost US$20k in less than six months. Following this, Bitcoin’s price once again fell rapidly and stayed below US$20K until 2020. In late 2021, it reached an all-time-high price of US$69k, however has declined to approximately US$20k at the time of writing.

Should you buy Bitcoin?

Even though it was one of the first peer-to-peer cryptocurrencies, Bitcoin is very much a relatively new asset, and is well-known for its extreme price volatility.

In fact, Bitcoin remains the highest-performing investment of the past decade, eclipsing all other high growth assets by a factor of well over 1000%.

While it’s always nice to imagine ourselves — with the benefit of hindsight — as being just an unlucky potential billionaire, Bitcoin’s rise was not obvious to anyone except an extremely select few and no asset should ever be seen as a source of guaranteed returns.

To answer the big question here: you should only purchase Bitcoin or any other cryptocurrency depending on how it fits into your overall investment thesis. As for any investment, you should only spend what you can afford to lose. It goes without saying, but this sort of information is entirely general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs.

With Bitcoin’s hard-coded limit of 21 million coins, investors can approach it as a scarce asset, similar in this sense to gold. If central banks around the world continue to be unable to reign in inflation pressure, it is reasonable to expect that investors will use Bitcoin and similar digital assets as potential hedges.

The advantages of Bitcoin

For those interested in adding Bitcoin to their investment portfolio, it can be helpful to consider the value of Bitcoin beyond being just another traditional asset. Bitcoin that is stored outside of a centralised exchange is valuable because it not only gives investors the opportunity to profit from price movements, but it also provides a means of transferring value to anyone in the world via a decentralised system. No central authority can have a material impact on how Bitcoin can be used, no matter the price of the asset. Whether Bitcoin goes up or down in fiat-denominated value, it will always have intrinsic properties that make it valuable to individuals who need a secure, decentralised and anonymous (to a point) global payment system. This has spurred the introduction of new innovations in the generation and creation of wealth.