Bitcoin (BTC)

What is Bitcoin? BTC is the pioneer among cryptocurrencies.

It is a decentralized, censorship-resistant, digital currency based on blockchain technology.

It is not regulated by any state or central bank. It is inflation-proof, as the inventor Satoshi Nakamoto has limited the absolute amount to 21 million.

Bitcoin cannot be physically printed or controlled, regulated or even manipulated by a central bank or other central institution. Nevertheless, like any other currency, it can be used to buy goods, services or as a store of value (digital gold).

The basis of Bitcoin is the so-called blockchain. The name is derived from the cryptographically linked blocks that contain the transaction data. This decentralised register is not subject to state control or to a central bank, which can control the money supply or determine the framework conditions. The currency is thus self-regulating and is therefore protected from inflationary fluctuations or government influences.

Pioneer of cryptocurrencies

Bitcoin is the oldest cryptocurrency in the world and still defines the key aspects of blockchain and cryptocurrencies today. The Bitcoin network has by far the most network participants and is therefore the most secure, stable and censorship-resistant cryptocurrency. In the media and in public discussion, Bitcoin is still the currency used to represent the overall concept.

However, the theoretical construct on which Bitcoin is based dates back to the 1990s. However, the theory was only implemented with the release of Bitcoin in 2008 and implemented as a functioning system in 2009. As a result, Bitcoin is not only the pioneer among digital currencies, but also defines exactly the standard on which most later cryptocurrencies are built. The origin of Bitcoin is also surrounded by a mystery. To date, no one can say for sure who is really behind the creation of Bitcoin.

Bitcoin was created by Satoshi Nakamoto (Technical Whitepaper). Whether this name or pseudonym is a single software developer or a whole group is unclear. There are countless theories on the Internet about who could be the father of the cryptocurrency. A valid answer is still not available today.

What is certain, however, is that the first Bitcoin were mined at the beginning of 2009 and that billions of transactions have been carried out since then. During this time, the blockchain grew to an impressive 210 gigabytes, with Bitcoin now dominating the digital currency market.

How many Bitcoins are there?

The total number of Bitcoin is limited to almost 21 million Bitcoin and is therefore a (mathematically) limited resource. Forecasts assume that the last Bitcoin will probably be mined in 2140. Smaller Bitcoin amounts are often expressed in “Satoshi”. A Satoshi corresponds to a hundred millionth Bitcoin and is the smallest unit that can be recorded in the blockchain. By the way, the name of the unit is a homage to the founder of the digital currency.

Is Bitcoin anonymous?

The Bitcoin is considered pseudo-anonymous. Although Bitcoin’s rise originally began in Darknet, today the popular currency is used less as an anonymous means of payment for illegal transactions.

The reason for this is the nature of the Bitcoin blockchain. Each transaction is stored transparently in this blockchain. A transaction contains the amount of Bitcoin transferred as well as the sender’s and recipient’s data. Although no names are displayed in plain text in the blockchain, it is technically possible to assign the Bitcoin addresses to real persons.

Therefore, Bitcoin is only partially attractive for illegal activities such as money laundering or drug trafficking. In addition, other currencies such as Monero, Zcash and Dash now offer a much higher degree of anonymity. But now there are also possibilities to disguise Bitcoin transactions with special methods (e.g. CoinJoin, Bitcoin-Mixing).

How does Bitcoin work?

The decentralized structure of Bitcoin requires that all transactions take place transparently within the Bitcoin network. To become part of the network, you need a kind of “Bitcoin account” called a wallet.

The wallet has a unique identification and a cryptographic key pair (so-called “private key” and “public address”) and can be installed both on the computer and on the smartphone. The private key acts as a digital signature, a kind of password, to be able to use your Bitcoin in the blockchain. The public key serves as a public address (comparable to an e-mail address) to which Bitcoins can be sent.

The advantages of Bitcoin

Bitcoin’s decentralized and tamper-proof architecture makes middlemen such as banks or credit institutions obsolete. This eliminates the expensive transaction costs that banks often charge their customers for foreign transactions.

The fact that all transactions must be signed gives the participants the certainty that the transaction actually arrives at the desired recipient. In addition, transactions within the network are processed and confirmed in just a few minutes, without any detours.

  • Bitcoin is censorship-resistant and tamper-proof
  • Decentralized: Bitcoin is not controlled by an instance or company, the network belongs to “everyone and nobody”.
  • “Permissionless” – anyone can participate in the financial system, even without a bank account
  • A global network for value transfer and storage
  • Free of high inflation by limiting the total amount in the protocol code

Where can I buy Bitcoin?

Bitcoin can be purchased on various stock exchanges and trading platforms on the Internet.

The weaknesses of Bitcoin

Bitcoin is subject to some restrictions that have been deliberately set out in the protocol. With the constantly increasing number of users, the transaction volume increases. The high frequency means that transactions can often no longer be processed fast enough these days.

The origin of the problem lies in the block size defined by the protocol, whose limit is simply insufficient for the current transaction density. The current block size was set at 1 MB in 2010. This means that all blocks exceeding this size will be rejected. The measure was originally intended to prevent hackers from paralyzing the system through attacks.

Today, however, this decision is a limitation for the network and increasingly frustrates users. So it is not uncommon for users to have to wait several hours for a transaction in times of high load. Currently, many Bitcoin developers and groupings are working on solutions to Bitcoin’s scaling problems. One of the most ambitious and advanced projects is the Lightning Network.

Lightning Network

There are various approaches to solving the scaling problem, which have led to numerous discussions within the community. One of the best known solutions is the so-called Lightning Network, which could handle transactions not only faster but also cheaper.

The Lightning Network is basically a billing system that can be set up as a “second protocol level” on the Bitcoin blockchain. In the first step, several transactions are placed on their own payment channel and executed by Smart Contracts.

The execution of transactions therefore only takes a few seconds and generates significantly lower fees. This is achieved by reducing the number of transactions that have to be stored on the blockchain forever. Instead, transactions flow into payment channels and are exchanged between payers outside the blockchain.

The final state of the payment channel can be sent to the Bitcoin network at any time, which securely clears the funds on the blockchain. The capacity of the network currently amounts to approximately 1,000 Bitcoin. Further information and technical details can be found on the Lightning Network website.

The future of Bitcoin

Bitcoin is open source software, so the community is constantly working on new technological developments, innovations and features. Two of the currently most interesting and promising developments are the so-called “Schnorr-Signatures” and “MimbleWimble”.

  • Schnorr signatures

Each Bitcoin transaction executed within the network must be signed. This signature increases the size of the transaction data, negatively affecting speed and increasing the size of the blockchain. The Schnorr signature is used to sign multiple transactions together. This noticeably reduces the transaction size and can help to solve storage and scaling problems.

  • MimbleWimble

MibleWimble” is a protocol that focuses in particular on scalability and anonymity. The basis of the protocol is again the blockchain. All transactions are cryptographically masked so that they can no longer be uniquely assigned. Thanks to mathematical algorithms, however, it is still ensured that no false coins can be generated.

In addition, it is not possible to send more money than is actually available on the account (“double-spending”). The slim architecture of the system reduces the size of the transaction data, which greatly reduces the scaling problem. The approach is currently only in its infancy, which means that MimbleWimble is currently only used and tested in a few projects.

What is Bitcoin?

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