Bitcoin
About Bitcoin (BTC)
Bitcoin is the world’s first cryptocurrency and blockchain.
Bitcoin was first described in a white paper published by Satoshi Nakamoto in October, 2008. Nakamoto is believed to be a pseudonym for the individual or group responsible for Bitcoin as there is no record of a computer scientist by this name prior to the launch of Bitcoin in 2009.
At the time, Satoshi claimed to be a 37 year-old man living in Tokyo, Japan. The translation of his name offers interesting insights: satoshi means “clear-thinking” or “wise,” naka means “inside” or “relationship,” and moto means “the origin” or “the foundation.” Taken together, it could be translated as “thinking clearly inside the foundation.”
Satoshi continued to update the Bitcoin source code until 2010 and wrote hundreds of blog posts in flawless English totalling 80,000 words, roughly the length of a novel. Satoshis’ first post used American spellings, however, every subsequent post used British spellings and colloquialisms. His writing timestamps don’t point to any particular time zone.
On the 23rd of April, 2011, Satoshi disappeared from the Internet, telling a developer in an email that he has "moved onto other things." Whoever Satoshi is, he is considered a polymath who possesses extensive knowledge with respect to computer programming, economics, cryptography, and peer-to-peer networking.
Bitcoin was born during the 2008 Financial Crisis. To commemorate this moment in time, Satoshi embedded a Times of London newspaper headline into the metadata of the first block of the Bitcoin blockchain, known as the Genesis Block. It reads: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
Token
Bitcoin (with a lowercase “b”) or BTC is the digital asset token of the Bitcoin network (Bitcoin with a capital “B”). All BTC balances and transactions are recorded on the Bitcoin blockchain. The smallest subunit of BTC is the “satoshi,” which is named after Bitcoin’s pseudonymous creator, Satoshi Nakamoto. One satoshi is equal to 10-8 BTC or one hundred-millionth of a BTC (0.00000001 bitcoin). Bitcoin can be bought and sold for fiat currency or other digital currencies.
Bitcoin can be purchased on a cryptocurrency exchange and stored in a crypto wallet and custodian like Gemini.
Supply
The supply of bitcoin is deterministic and fixed at 21 million BTC. The supply schedule is embedded in the Bitcoin protocol.
Bitcoin Mining
Satoshi’s major breakthrough was solving the The Byzantine Generals’ Problem. The Bitcoin mining algorithm that Satoshi proposed in the Bitcoin white paper demonstrated how a network of computers around the world could reach consensus with each other and agree on something, even if certain computers were bad actors on the network trying to confuse the others.
This consensus mechanism allows the Bitcoin network to agree on which bitcoin transactions are valid, thereby solving the “double-spend” problem and ensuring that one bitcoin isn’t spent more than once by the same person. As a result, it safeguards the integrity of the Bitcoin blockchain, a record of all bitcoin balances and transactions, without the need for a trusted third party.
Bitcoin’s consensus mechanism uses a proof of work algorithm. Specifically, miners must solve math puzzles using the SHA-256 hash algorithm of the Secure Hash Algorithm 2 (SHA-2) family. By committing computational power towards solving the Bitcoin mining algorithm, miners audit and verify the transactions of the Bitcoin network. The more computer power a miner brings to bear on the Bitcoin network, the more likely she or he is to solve the proof of work algorithm and win the bitcoin that the network rewards to the miner who writes the newest block to the Bitcoin blockchain.
Characteristics
Bitcoin is often called “digital gold” because its traits closely resemble those of gold. In 2015, a U.S. Federal judge concluded in the Coinflip, Inc. order that bitcoin was legally a “commodity” under the Commodities and Exchange Act.
The following table offers a comparison between bitcoin and gold:
| TRAIT | BITCOIN | GOLD |
|---|---|---|
| Scarcity | Fixed | Scarce |
| Durability | Software | Hardware |
| Portability | Software: Bitcoin can be sent anywhere in the world via the Internet just like email. | Hardware: approximately 25lbs per bar or 350-430 fine troy ounces. (London Bullion Market Association specifications per Good Delivery Rules) |
| Divisibility | 0.00000001 bitcoin | Troy ounce |
| Authenticity Verification | Bitcoin miners / blockchain ledger | Good Delivery Referees / chemical test |
| Storage | Digital wallet | Safe or vault |
| Fungible | Yes | Yes |
| Counterfeit Difficulty | Prohibitively expensive, has not occurred to date. | Difficult, but possible. |
| Adoption | Market capitalization of {{ MARKET_CAP }} | Market capitalization of ~$8 trillion USD Based on total annual supply of gold according to the World Gold Council 2019 report. (4,776.1 troy ounces x $1,700 USD per troy ounce). |
Bitcoin Halving or Halvening
The supply schedule of bitcoin is deflationary. This schedule — embedded in the Bitcoin protocol — dictates that every time a miner successfully writes a new block to the blockchain (i.e., solves the proof of work puzzle), that miner shall receive a set number of bitcoin called the "block reward." The Bitcoin protocol sets and adjusts the mining difficulty so that miners will be able to win the block reward roughly every 10 minutes. The block reward is how all new bitcoin are issued or minted, and how all bitcoin in circulation have come into existence.
Every 210,000 blocks — roughly every 4 years — the block reward is reduced by half, an event often referred to as the "the halvening" or “the halving.” When Bitcoin launched in 2009, the initial block reward was 50 bitcoin. On November 25, 2012, the first halvening occured, halving the block reward from 50 to 25 bitcoin. On July 10, 2016, the second halvening occured, halving the block reward from 25 to 12.5 bitcoin. The third halvening is expected to happen in May, 2020 and will reduce the block reward from 12.5 to 6.25 bitcoin.
The block reward will continue to undergo halvings until it reaches 0. This is estimated to happen sometime in the year 2140. At this point in time, there will be a total of 21 million bitcoin in circulation.
| BITCOIN SUPPLY SCHEDULE | |
|---|---|
| Total Supply | 21 million by 2140 (approx.) |
| Block Reward | Every 10 minutes (approx.) |
| Halving event | Every 4 years (aprrox.) Every 210,000 blocks until total supply reaches 21 million (fixed). |
HODL, HODLing, and HODLers
HODL is a slang in the crypto space that refers to the act of buying and holding bitcoin. The etymology of the term can be traced back to a misspelling of the word “hold” in a message posted to Bitcointalk’s Bitcoin Forum in 2013 and titled I AM HODLING. Some, however, have incorrectly assumed that the word is an acronym for the phrase “hold on for dear life.”
HODL has become a prominent internet meme and rallying cry for the Bitcoin community, especially during times of high volatility and large price declines. Those who HODL are called HODLers and are said to be HODLing. The basic principle behind HODLing is to take a long term buy and hold view towards bitcoin as opposed to a short-term one that involves trading in and out of bitcoin on a daily, weekly, or monthly basis. HODLING avoids having to correctly time trades with the market and react to price volatility, which can result in buying high or selling low. It does, however, require strong conviction and resolve during market downturns.
HOLDING may also result in tax benefits related to capital asset treatment per IRS Virtual Currency Guidance (Please Note: nothing contained herein should be considered or construed as tax advice of any kind. This content is provided for information purposes only).
The HODL strategy appeals to Bitcoin maximalists who believe that bitcoin may ultimately replace fiat currencies. It also an important component of “stacking sats,” #stackingsats, or “stacking satoshis,” a popular investment strategy based on the premise that accumulating even small amounts of bitcoin (a satoshi is the smallest subunit) over time will prove to be a valuable investment in the long run if bitcoin goes “to the moon!” — a popular space metaphor and trope used by bitcoiners to describe bitcoin price appreciation.
The Bitcoin Pizza and Bitcoin Pizza Day
The bitcoin pizza refers to the first time bitcoin was used to purchase a real good. On May 22, 2010, a programmer in Florida named Laslo Hanyecz (now referred to as the “Bitcoin Pizza Guy”) purchased two Papa John's pizzas for 10,000 bitcoin; a day now referred to as Bitcoin Pizza Day. Initially, Laslo posted a message titled "Pizza for bitcoins?" on Bitcointalk’s Bitcoin Forum. An 18-year old named Jeremy Studivant responded under the handle “Jercos” and the two later consummated the transaction over Internet Relay Chat (IRC). Afterwards, Hanyecz exclaimed: "I just want to report that I successfully traded 10,000 bitcoins for pizza. Thanks jercos!"
Lalso paid for the two pizzas using bitcoin that he mined with his personal computer. At the time, the bitcoin that exchanged hands was valued at approximately $30 dollars. Since then, the value of that same amount of bitcoin has grown exponentially (worth over $90 million dollars as of May 22, 2020), making this the most expensive pizza ever purchased in the world. Every year on May 22, the Bitcoin community commemorates Bitcoin Pizza Day. This historical day highlights the deflationary nature of bitcoin and its store of value properties.
Learn more about Bitcoin on Cryptopedia: