Lesson

What is Bitcoin?

You’ve probably heard Bitcoin called money or a commodity or a store of value. The truth is it can function as all those things, but at its base it’s something quite different. Let’s start from the beginning. Bitcoin was first described in a paper that was announced in several places on Halloween 2008. Written under the pseudonym Satoshi Nakamoto, it describes a way to use a cryptographically strengthened public ledger to record and protect transactions.

Bitcoin was only an idea then, but after two months of planning and software development, the first block of 50 coins was released. This was known as the genesis block. A small development community turned that idea into a working system. One important part of that system is a way to release Bitcoins over time to reward those people who dedicate their computer power to making the system’s infrastructure work. These people are called miners. If things had stopped there it would’ve just been an interesting experiment, and in fact it remained just a curious toy of cryptographers for about a year and a half when the first real world transaction took place, 10000 Bitcoins for a couple of pizzas.

Those Bitcoins were worth about 40 dollars at the time. If that transaction were to take place as I record this though, that pizza would’ve cost millions of dollars. A few things eventually brought Bitcoin wider attention and caused its value to rise. First people started accepting it in exchange for real world goods and services. It was mostly criminals in the early days, drawn by Bitcoin’s ease of transfer and semi-anonymous nature, but soon legitimate organizations, such as WordPress and the Internet Archive, accepted Bitcoin for donations and payments.

Second services appeared to give people ways to buy, sell, store, learn about, and protect Bitcoins. Many of those companies failed, but some were backed by experienced entrepreneurs and were successful. Third people started speculating, buying Bitcoin on the hopes it would increase in value, driving the price up further. Others used Bitcoin as a way to store their wealth. As the value of Bitcoin rose, it attracted the attention of government regulators. Although there’s no way they can ban Bitcoin per se, that hasn’t stopped some of them from trying, and they can crack down on its support services, such as exchanges that convert Bitcoins to dollars.

Bitcoin’s increasing value also attracted the attention of thieves. Billions of dollars worth of Bitcoin has been misappropriated or misplaced, most of it because of common business fraud, incompetence, or bad technical implementations. None as far as I know has revealed a basic flaw of Bitcoin itself. Although it has suffered and recovered from some major technical issues. As Bitcoin grows it faces new challenges, some technical some social, but so far Bitcoin has always bounced back.

Its value has grown increasingly stable over time while more services appear to support Bitcoin’s users, but if history is any guide, the one thing we can expect from Bitcoin is more surprises.