What is Bitcoin and Crypto?

If you are reading this article – it’s easy to guess that you came here with an interest in the greatest innovation of the financial world in recent years – crypto-currencies, including Bitcoin. Let’s figure out what bitcoin is and why there’s been so much talk about it. And not only in social networks and forums, but also in central banks, parliamentary committees and governments of many countries around the world.

First and foremost, cryptocurrency is a fast and reliable system of payments and money transfers, based on the latest technologies and not controlled by any government.

What is Bitcoin? This is the first and the most famous of the set of cryptocurrencies , the symbol and flagship of the cryptocurrency world, as well as the monetary unit of the same name that circulates within the system. Further in this article we will tell you how the cryptocurrency works, using Bitcoin as an example.

What is the most significant feature of Bitcoin from the point of view of economics? This is a digital product with limited supply, its algorithm is arranged in such a way that there can be a maximum of 21 million units in the system, each of which is also called bitcoin. The emission schedule is determined programmatically and is known in advance. After the last coins are generated, their number will not change. Bitcoin’s economy is built on a deflationary model, which causes fear among many economists. But they do not find practical justification.

In fact, such a relatively small number of coins is enough for daily calculations, since 1 bitcoin is divided into 100,000,000 parts, which are called “satoshi”, in honor of the creator of the system. Sometimes the concepts of “millibitcoin” (mBTC, one thousandth) and “microbitcoin” (uBTC, one millionth) are sometimes used.

Emission schedule

Bitcoin emission chart

Bitcoin began with a concept – document, published October 31, 2008 by a mysterious person who worked under the pseudonym of Satoshi Nakamoto. Who is the real developer, is it a person or a group – is still unknown, despite numerous investigative journalism. Since January 3, 2009, the practical implementation of this concept in the program code has begun. At 18:45 GMT 03.01.2009 the first block in the network, the so-called genesis-block, was generated. This day is considered the birthday of Bitcoin and is celebrated by the community around the world.

What is the difference?

Features of Bitcoin, distinguishing it from other types of electronic and paper money:

    1. Decentralization and accessibility. The Bitcoin network is a combination of all client programs (wallets) and the distributed database blockchain that is stored on each computer where the full client is installed. The Blockchain is completely open for viewing of all operations in the system. Connection to this registry is possible using your own purse or web interface from anywhere in the world, without passwords and any other authorization.
    2. Full transparency of calculations. The history of any payment can (theoretically) be tracked until the moment of coin generation and it will never be deleted from the database. Knowing only the Bitcoin address, you can at any time learn all the transactions received by this address or sent from it.
    1. Free choice of degree of participation. You can install the official Bitcoin Core client, which stores the entire transaction history. If you do not need autonomous work and analysis of the blockchain, you can install one of the light or mobile wallets that require significantly less resources. If you are only going to pay for small purchases on the road or just try the technology – a mobile or online wallet will be enough. For maximum security there are hardware wallets with additional degrees of protection.
    2. Lack of control over the network. Since the blockchain is a distributed database created on the basis of peer-to-peer nodes, the Bitcoin network does not have a monitoring center that can freeze an account, change the number of currency units in the system, block or cancel the payment. There are small commissions , the amount of which in practice is almost imperceptible and does not depend on the amount of transfer. Transactions in the system are irretrievable as well as transactions with cash.
    3. Possibility of anonymous calculations. Bitcoin provides a convenient and if desired anonymous means of calculation, the address – the account number in the system – is not associated with its owner, and for its opening no documents are required. This is a string of about 34 characters from numbers and letters of the Latin alphabet in different registers. The address looks, for example, like this: 1BQ9qza7fn9snSZ6hbQB3ZcN46biBtkt4ee. It can be translated into the form of a QR code or another two-dimensional code for convenience of calculations, and also to transfer as is.
  1. Award for network support. The new bitcoins come into circulation as a reward for those who perform computational operations that ensure the transfer of transactions. Calculations are called “mining“. Those who deal with these calculations are called “miners”. Their task is to write down in a single block all transactions that occurred on the network since the previous one was released (on average 10 minutes), and “seal” it with a complex cryptographic signature. The next block is calculated based on the signature of the previous one, which guarantees the irreconcilability of transactions, and also prevents the entry of “false” banknotes into the system. So the blocks adhere to each other, forming a blockchain.
  2. Unsurpassed protection. With each new block, the processing power required by the miners to calculate the entire chain from scratch increases, and the longer the chain, the more difficult it is to “hack” the network. Bitcoin is a decentralized computer network, whose performance is more than 8 times (based on the speed of SHA-256 hashes calculation ) the total computing power of all supercomputers in the world. In order to seize even limited control over it, huge resources and expenditures of hundreds of millions of dollars are needed.
Graph of complexity

Bitcoin mining complexity graph

Crypto currency in life

Initially, bitcoins were in demand only among mathematicians, cryptographers, and also people very much keen on computer and network technologies. Then the bitcoins served merely as proof that electronic money is possible without guaranteed security. Rather, they can be called an electronic analogue of gold – like gold, bitcoin is difficult to mine, its quantity is limited, and the laboriousness of production increases with time. In the autumn of 2009 1 BTC could already be bought for 0.8 cents. Since then, the history of stock trading began, in which there were many ups and downs, high-profile bankruptcies and successful projects. Transactions for bitcoins were rare and episodic at first. The first and most famous was the purchase of  two pizzas for 10,000 BTC, which took place in May 2010 (at that time the equivalent of $25). Since then, the exchange rate has risen above $19000 and fell back to $6150, but that’s another story …

Exchange rate chart Bitcoin

Exchange rate chart Bitcoin

At an early stage of Bitcoin’s development, the Japanese stock exchange MtGox  and the illegal online market Silk Road created its popularity. Now Bitcoin does not depend on one exchange or pool, and law enforcement officers learned how to deal with illegal activities in cryptocurrencies in the same way as with other economic crimes.

Today Bitcoin is a modern digital currency, which is perfectly suited for transactions on the Internet. More and more stores accept Bitcoin as one of the payment options. The simplicity and convenience of opening an account with bitcoins attracts more and more people from developing countries to this digital currency. In many countries of Asia and Africa, the Bitcoin network replaces people with hard-to-reach and expensive banking services. In developed countries, POS terminals have been distributed for boutique calculations in stores, ATMs for cryptocurrency, hardware wallets for Bitcoin. There was a real boom of startups that use Bitcoin. It turned out that the technology blockade is suitable not only for financial transactions, but also for the distributed storage of data on various assets. There are already several thousand other cryptocurrencies, created on the basis of Bitcoin or from scratch.

A bit about politics

Attitudes of States to cryptocurrencies is very different. There are both explicit encouragement – in Australia, Germany, the Netherlands, New Zealand, Singapore, some states of the USA ,various offshore companies, and serious restrictions that are capable of developing and prohibiting measures – these are Indonesia, China,  Russia , Ukraine. Only Latin America in Bolivia and Ecuador decided on direct bans.

Many governments have chosen a watch line with cautious optimism – these are the majority of the EU countries, the United Kingdom and Switzerland, the US federal government, Canada, Japan and the countries of Southeast Asia. In most developed countries, financial legislation adapts to regulate cryptocurrency, and soon this issue will be resolved.