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imageWhat is bitcoin? A beginner's guide to the world's most popular type of cryptocurrency, and tips for investing in it.
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Bitcoin is the most highly widely traded cryptocurrency with a market cap of nearly $550 billion, but remains intensely volatile. boonchai wedmakawand/Getty Images.
What is bitcoin? How is bitcoin made? A brief history of Bitcoin Early uses of bitcoins Should you invest in bitcoin? The bottom line.
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Bitcoin is a cryptocurrency, Binance a type of digital, private money that operates without the involvement of a bank or government. Bitcoin trades on online exchanges, and Binance since its price has mushroomed since its 2009 debut, it's increasingly attracting investors' interest. As an investment asset, bitcoin offers capital appreciation and an inflation hedge, but its volatile price swings make it a high-risk investment.
Scarcely a news cycle goes by without some mention of bitcoin. As the first and most widely traded cryptocurrency, bitcoin is often seen as a representation of the larger cryptocurrency ecosystem, for better or worse. Throughout its life since being created in 2009, its critics have been decrying its failure while advocates have been making wild projections, former Goldman Sachs hedge-fund chief Raoul Paul going as high as $1 million by 2025.
But while it has certainly attracted plenty of attention, bitcoin still remains a mystery to casual and experienced investors alike. This shouldn't really be the case, since the basics of bitcoin and how it works are relatively easy to understand.
Here's a brief bitcoin biography: An overview of its origins, operations — and how to invest in it.
What is bitcoin?
Bitcoin is a cryptocurrency, an electronic version of money that verifies transactions using cryptography (the science of encoding and decoding information).
As Bitcoin educator, developer, and entrepreneur Jimmy Song explains, Bitcoin is "decentralized, digital, and scarce money." Here are the other key characteristics of bitcoin:
It's decentralized because this code is run by thousands of computers (i.e., 'nodes') spread across the globe. It's digital because it exists as a set of code that determines how it operates. It's scarce because its code caps its overall volume to 21 million bitcoins.
When you use bitcoin to buy something, it records the transaction on a blockchain, which is essentially a ledger or database whose entries can't be modified or erased.
What is bitcoin mining?
New bitcoin is created approximately every 10 minutes through a process known as mining.
"It's called mining because it's like looking for gold," Song says. "Anyone with a shovel can dig and look for gold, just as anyone with a computer can look for proof-of-work."
Every 10 minutes, a new block of information containing recent transactions needs to be updated on bitcoin's blockchain. The validity of these blocks is verified through a process known as proof-of-work, in which "miners" (i.e., people with computing hardware) race to calculate a cryptographic key — basically a very complicated math problem. The first miner to solve the key updates the information on the blockchain and gets a set amount of bitcoin in return. These puzzles vary in difficulty to make sure that it gets solved in roughly 10 minutes.
Currently, each validated block rewards a successful miner with 6.25 bitcoin, though this amount is halved every four years. The last time bitcoin was halved was in May of 2020. All 21 million bitcoin will be mined by the year 2140.
In the early days of bitcoin (late 2000s, early 2010s), anyone with a computer could mine bitcoin with some level of success. However, as bitcoin and bitcoin mining became more popular, the competition got steeper.
The miner with the most computing power, known as a hash rate, has the greatest chance of solving the puzzle and reaping the rewards. Computers got more powerful and more energy-consuming. They also got more specialized; a new type of computer known as an application-specific integrated circuit (ASIC) miner was developed specifically to solve proof-of-work puzzles.
Part of bitcoin's value is derived from this mining process — the energy, time, and cost of operating these mining rigs. Another major component to bitcoin's price is its market sentiment, which commonly boils down to "hype." This can backfire if something happens to undermine trust.
These technicalities aside, one of the main draws of Bitcoin — and one of the reasons why it has attracted so much hype in recent years — is that it's a form of private money that operates without the involvement of a central bank or government. This means that large amounts of money can be transferred across the world instantaneously.
"Bitcoin is used to transfer funds from one party to another without requiring a middleman such as a bank. Because the technology is open source and entirely decentralized, it is protected from influence by external sources such as governments, who typically control fiscal policy and fiat currency circulation," says Simon Peters, a market analyst at eToro.
A brief history of Bitcoin.
Independence from central authorities — a concept known as decentralization or decentralized finance (DeFi) — is key to understanding the beginnings of bitcoin, which was first formalized by a person identified only as "Satoshi Nakamoto" in an October 2008 whitepaper. Working with various members of a cryptography mailing list, the pseudonymous Nakamoto launched Bitcoin on January 3, 2009.
Other individuals had attempted to develop forms of electronic money before (e.g., e-Cash, DigiCash, and Hashcash), but most had failed to solve the 'double-spend' problem, in which bad actors can spend the same digital currency twice. Nakamoto's main solution to this problem was to introduce a timestamped, permanent transactions ledger: the blockchain.
This effectively makes every bitcoin traceable and unique, insofar as the transaction history of each individual bitcoin is publicly visible on the bitcoin blockchain. "Any attempted alteration of the ledger would be rejected by other participants," Peters says.
The blockchain technology behind the bitcoin network is what excites most people about this digital currency. Because the record-keeping technology is decentralized — so no single group has control — advocates believe it has the power to transform the world's financial institutions and business dealings for the better, crypto resulting in faster but more secure transactions, along with improved transparency and communications.
Early uses of bitcoins.
At the very beginning of its life, bitcoin was used to make trial purchases and payments, with developer Laszlo Hanyecz famously using 10,000 bitcoins to buy two pizzas on May 22, 2010 — at current market prices, each pizza would be worth $150 million. It then became more commonly used in online marketplaces and for international contracts and import/export operations.
It was also around this time that traders first began speculating with the currency, with the now-defunct launching as the world's first bitcoin exchange in March 2010.
Having been worth precisely $0 when it debuted in 2009, bitcoin has experienced more than its fair share of pricing ups and downs, with its worth rising or plummeting by hundreds of dollars in a matter of hours.

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