Bitcoin: Decrypted!

Launched hardly over a decade ago, Bitcoin today finds itself more lustrous than ever. Despite being declared dead for precisely 389 times, this cryptocurrency has now surged to an all-time high-price of approximately $34,000 per bitcoin. Its highly controversial and volatile nature makes it difficult for us to classify it clearly as a currency, an asset class or a mere store of value. But before we attempt to do so, let’s first understand what the idea behind bitcoins is.

The Origin

The first-ever mention of bitcoin was made in a whitepaper, written by a pseudonymous Satoshi Nakamoto, released in the year 2008. They consequently launched the Bitcoin software in January 2009. The identity of the author(s) remains a mystery to date. The probable reasons for Satoshi being anonymous are privacy (from the media, governments and banks) and protection (since the idea threatens the globally existing banking and monetary systems).

What is Bitcoin?

Bitcoin is the world’s largest cryptocurrency (digital money) by market capitalisation. As explained in Bitcoin's whitepaper, its meaning is deceptively simple- “A peer-to-peer electronic cash system”, i.e. bitcoin is a software-based currency that facilitates instant payment between two parties, not necessarily humans.

(Top 10 Cryptocurrencies by Market Capitalisation; Source: Coindesk)

But digital-wallets and instant money transfer options already exist, so why Bitcoin? Because the existing widely-used online payment platforms require a third-party, i.e. the banks or credit/debit card companies, that ensure smooth and secure transactions, maintain a record of the same and charge us a cut as transaction fees.

Conversely, the whole idea behind bitcoins is to not involve any third party, be it a bank or the government. It only requires two parties willing to transact. It promises lower transaction fees and is operated in a decentralised manner, unlike the government-backed currencies, and is therefore not accepted as legal-tender currency. But its revolutionary nature, the ease of transactions offered and the opportunities unfurled in the world of ‘Fintech’ and ‘Internet of Things’, have led to its popularity.

Additionally, bitcoin offers a much larger degree of divisibility, contrary to other fiat currencies. A bitcoin is divisible up to 8 decimal places. The smallest unit of a bitcoin, equal to 0.00000001 bitcoin is called a Satoshi. This enables quadrillions of individual units of bitcoins to be circulated throughout the world economy.

Who makes/releases bitcoins?

Firstly, there are no physical bitcoins. There is no central regulatory authority involved in pumping bitcoins into the economy. Instead, Bitcoins are released into circulation through a process called Bitcoin Mining. In layman’s terms, mining involves solving computationally complex puzzles to discover new bitcoins, which then get added to the network. Miners, i.e. the people who solve these puzzles to discover new bitcoins, are rewarded with a certain number of bitcoins as an incentive. Thus, miners are seen as the decentralised authorities that hold up the credibility of the bitcoin network.