Bitcoin

3 min read

Pronunciation

[bit-koyn]

Analogy

Bitcoin is like digital gold combined with a global payment system. Just as gold is scarce, durable, and valuable without government backing, Bitcoin has a limited supply and derives its value from collective agreement. However, unlike gold, Bitcoin can be sent instantly across the world through the internet, divided into tiny fractions, and verified by anyone with a computer. It's as if you could email gold directly to someone else, with every recorded in a public that everyone can verify but no one can falsify.

Definition

Bitcoin is the world's first and decentralized digital currency system, created in 2009 by an anonymous person or group known as Nakamoto. It enables peer-to-peer transactions without intermediaries like banks or governments, using a distributed called a to record all transactions. Bitcoin operates as both a payment network and a store of value, with a fixed supply cap of 21 million coins.

Key Points Intro

Bitcoin revolutionized digital payments by solving the double-spending problem without requiring trusted third parties.

Key Points

Decentralized: No central authority controls Bitcoin; it operates through a network of computers running the Bitcoin software, making it resistant to censorship and single points of failure.

Limited Supply: Only 21 million bitcoins will ever exist, with new coins created through mining at a predictable, decreasing rate until approximately 2140, making it deflationary by design.

Pseudonymous: Transactions are linked to Bitcoin addresses (alphanumeric strings) rather than real-world identities, offering privacy while maintaining transparency of transaction flows.

Immutable Ledger: Once confirmed, Bitcoin transactions become part of the permanent blockchain record and cannot be reversed, providing finality and preventing fraud like chargebacks.

Example

When Alice wants to send 0.5 BTC to Bob, she broadcasts a from her . verify the and include it in a . After about 10 minutes, the receives its first . Bob can see the incoming payment immediately but typically waits for 3-6 confirmations before considering it final. The entire process happens without banks, and anyone can verify the on explorers like .com or blockchair.com.

Technical Deep Dive

Bitcoin operates on a mechanism where compete to solve complex mathematical puzzles (finding a below a target ) to add new blocks to the . The uses algorithms for and ECDSA (Elliptic Curve Algorithm) for signatures. Each contains a of transactions, allowing for efficient verification. The adjusts every 2,016 blocks (approximately two weeks) to maintain an average time of 10 minutes, regardless of total network power. Transactions use an (UTXO) model, where each consumes previous outputs and creates new ones. Bitcoin Script, a stack-based programming language, enables programmable money through features like multi-signature transactions, time-locked transactions, and basic smart contracts. The has undergone several upgrades including SegWit (Segregated Witness) in 2017, which increased capacity and enabled second-layer solutions like the . Nodes maintain a complete copy of the (which was over 500GB in early 2025 and continues to grow) and validate all transactions and blocks according to rules. The network achieves through economic incentives: are rewarded with newly minted bitcoins (block reward) and for honest behavior.

Security Warning

Never share your private keys or seed phrases with anyone. Store large amounts of Bitcoin in hardware wallets or properly secured . Be extremely cautious of websites, fake apps, and attacks. Always verify addresses character-by-character before sending funds, as transactions are irreversible. Consider using multi-signature setups for additional security. Be aware that Bitcoin transactions are pseudonymous, not anonymous - with enough data, transactions can potentially be traced back to individuals.

Caveat

Bitcoin faces several challenges and criticisms: high energy consumption from , limited throughput (approximately 7 transactions per second on the layer), price volatility that can hinder its use as a medium of exchange, regulatory uncertainty in many jurisdictions, and a steep learning curve for new users. can become expensive during periods of high network congestion. The irreversible nature of transactions means user errors or theft cannot be undone. solutions like are still evolving and have their own complexities and trade-offs.

Related Terms

Blockchain & Cryptocurrency Glossary

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