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What is Bitcoin? Basic Concepts and Principles

Anyone who’s watched the news in the past ten years has certainly heard the name “Bitcoin,” but unless you’re plugged in to the financial and technology spheres, it was probably easy enough to ignore. But time has shown Bitcoin was no flash in the pan event, so having an understanding of the basic principles of what bitcoin is and how it works could be helpful.

What is Bitcoin?

Bitcoin is the world’s first cryptocurrency, released in 2009 by an anonymous person or group operating under the name Satoshi Nakamoto. Bitcoin’s primary purpose was to serve as a currency outside the bounds of any person, organization, or government to control, allowing people to securely pay one another without requiring a third party in any form, such as banks or governments. This also means payment transfer can be done quickly and anonymously worldwide, without regard for national borders or exchange of currencies.

Bitcoin achieves this through a concept known as a “blockchain.” A blockchain is basically a ledger of all transactions that have ever occurred using, for example, Bitcoin, distributed throughout and constantly verified by all large number of computers in a network. Essentially, you can think of it as a whole bunch of different people comparing notes on transactions; since so many people are taking notes and they will almost all agree about almost everything, any errors or discrepancies are spotted quickly. In this manner, no one can create more Bitcoin or commit a fraudulent transaction (such as spending Bitcoin they don’t have) because all of the computers verifying the blockchain will stop the transaction.

Where do Bitcoins come from?

It takes a lot of computing power to verify the transactions in the blockchain. To incentivize people to use their computers to do this, Bitcoins are paid out to the first computer to successfully solve a very complicated math problem, called a hash, that helps verify a transaction as legitimate. This process of contributing your computer power to receive new Bitcoins is called “mining.” As more and more people have attempted to mine Bitcoin over the years, they’ve combined computing power to solve blocks and distribute the awarded coins according to input, which is why you often see rewards in very small fractions of a single coin.

Why do I hear so much about Bitcoin on the news?

Even though it was created to be used as a currency, as soon as it started gaining traction, it began to be used more as an investment instrument. Rather than spending some Bitcoin to order a pizza for dinner, it became common to buy Bitcoin to hold. As a currency divorced from any government practice, it turned out to be attractive to investors to guard against inflation and store their wealth.

As a result of people buying it for this purpose, the Bitcoin price started surging. The highest Bitcoin price ever seen was in November 2021, at $68,789 USD. As of November 2023, a single Bitcoin is worth about $38,000 USD. This extraordinarily high price per bitcoin has interfered with its ability to serve as a currency as its founders originally intended, though it’s still possible to pay in tiny fractions of a single coin for smaller transactions.

Bitcoin’s surprising and astronomical success also led to the creation of a huge number of other cryptocurrencies. The biggest ones have often strived to take some aspect of Bitcoin and improve it, such as requiring less energy to approve transactions and thus be better for the environment, but none have approached Bitcoin in actual usage or notoriety.

Regardless of its current status as an investment vehicle first and easily spendable currency second, it’s clear at this point that Bitcoin isn’t going away any time soon.

Disclaimer: This information is of a general nature only and should not be regarded as specific to any particular situation. This should not be taken as financial advice to buy, trade, or sell cryptocurrency or use any specific exchange. This is not intended for use as investment, financial or legal advice as each individual's need will vary.

Binance Australia is not affiliated, associated, endorsed by, or in any way officially connected with any individual or organisations mentioned in the article. Binance Australia is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly by use of this newsletter and expressly disclaims any and all liability for any loss or damage you may suffer.

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