Cryptonomics 101 Lesson #1: What is Bitcoin?

Bitcoin is a currency. A virtual currency. A digital currency. A cryptocurrency.

A currency, by definition, simply means a system of money commonly used as a medium of exchange in a country. A fiat currency is, at its core, money that is worth what the government and free market determine it is worth. It gets its value through fiat. Every developed nation uses fiat currency, because the value can be controlled through monetary policies.

Digital currencies, on the other hand, get their value through scarcity imposed on them by the need to solve difficult algorithm equations. For example, Bitcoins need to be 'mined' by computers that solve mathematical problems, and once 'solved', are rewarded with a 'Bitcoin'. The technology that drives these decentralised protocol is called the Blockchain.

Bitcoin has a fixed supply of 21 million coins. No more coins can ever be issued beyond that point, giving all bitcoins in circulation some form of value at any time, with the potential to increase in value over time. Crypto analysts have predicted that it will take until 2140 before all 21 million bitcoins are completely mined.

Until the 21st million Bitcoin is mined, anyone in the world can participate in the 'mining' process. There is no approval process to go through, as Bitcoin is an open ecosystem welcoming people from all over the world to participate. All funds are controlled and verified by the people active in the ecosystem, creating a decentralised system that works on a Proof of Work concept and is based on consensus within the network before any transaction is verified.

This multiple points of distribution also means that there is no single point of failure, making the network far more secure and completely tamper-proof. Hence, to hack the system, it will require a computing system capable enough to be beyond 51% of the entire Bitcoin blockchain capacity globally to be able to do so. Simply put, almost impossible and very hard to do.

Last but not least, spent bitcoins are injected directly into Bitcoin’s growing economy once again. Spent fiat currency on the other hand, is kept out of the ecosystem until it is brought back to the bank, a process that can take anywhere from hours to years. A crypto-based economy like Bitcoin is self-sustainable, open to anyone, and simply better.

The future is here, and it’s happening now.

Next Cryptonomics lesson - What is Blockchain? Stay tuned