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What is Bitcoin?

TABLE OF CONTENTS

What is Bitcoin?

What is Bitcoin?

Vantage Updated Updated Thu, May 16 08:29

Bitcoin has been dominating financial markets for the past few years. The asset has exhibited a compound annual growth rate (CAGR) of 63.3% over the last decade [1]. This performance poses the question of what bitcoin is and how it has come this far in merely a decade. 

Key Points

  • Bitcoin, launched in 2009 by the mysterious Satoshi Nakamoto, enables peer-to-peer transactions without middlemen using blockchain technology, establishing it as a digital currency for various uses including payments and investments.
  • Bitcoin transactions are secured by digital signatures and undergo a verification process by miners on the blockchain network, which records all transactions publicly and immutably.
  • Bitcoin’s mining process, crucial for transaction verification, rewards miners with new bitcoins while maintaining a limited total supply of 21 million coins, echoing principles of scarcity similar to precious metals like gold.

Introduction

Bitcoin was launched in 2009 by Satoshi Nakamoto, a mystery founder whose real identity remains unknown. The concept of the currency is simple: to enable peer-to-peer transactions by eliminating the need for middlemen like banks. The easiest way to explain it is internet money based on blockchain technology. This is essentially a digital network that enables the share of value among users without the need for a centralised authority. 

Over the years, bitcoin has developed multiple use cases. While it is primarily used as a store of value, brand adoption, and integrations have created opportunities for it to be used as a payment method as well. So, we see this digital currency used in the following ways:

  • Peer-to-peer payments
  • Micropayments
  • Store of value
  • Cross-border payments
  • Gambling
  • Investments, etc.

How does bitcoin work?

To understand how Bitcoin works, let’s first understand how a traditional transaction works. 

Suppose person A wants to send $10 to person B. A transaction is initiated and the bank verifies whether A has the balance to match the requested transaction. Ledgers are updated and person B receives the money. Here, your money is fully in the hands of intermediaries like banks or payment processors like PayPal or Venmo. 

Bitcoin, on the other hand, is operated by a peer-to-peer network that is responsible for bringing transactions to completion in the most decentralised way. The decentralised ledger is updated by the Bitcoin network. This disruptive ledger is called blockchain which is considered an essential prong in Bitcoin’s trident.

What is Bitcoin

Bitcoin’s decentralised payment system is an amalgamation of three key components:

  • The underlying technology: Blockchain
  • Transactions
  • Mining

Blockchain

The crypto space is overwhelmingly jargony for beginners and while most of these concepts aren’t necessary to grasp the concept of these digital currencies, blockchain stands at the core. 

Simply put, blockchain is a public ledger that records transactions. What’s special, is that this ledger or database is available for all to see, is incorruptible and immutable. Imagine Google Sheets with view access for everyone and edit access that only allows some to enter data that is verified by the network. 

The structure of this database, as the name implies, is in the form of a chain of blocks. Each block stores the information of transactions which is then chronologically linked to the previous blocks.  

This blockchain is the base of bitcoin which makes it decentralised and secure.

Transactions

Bitcoin transactions are a form of information transfer that tracks the movement of bitcoins between a sender and a receiver. To ensure the level of security, legitimacy, and transparency, each transaction goes through the following steps:

  • Initiation — A transaction is initiated when you send Bitcoin to someone from your wallet. This requires the sender and receiver’s address, the amount that needs to be sent, and the transaction fee that you’re willing to pay.
  • Digital signatures — The security of your fund requires signing any transaction that you initiate. Each transaction is signed through your private key creating a digital signature on the transaction.
  • Broadcasting — Once a transaction is signed, it is sent to a pool of transactions. This is where miners (discussed later) pick these transactions up and verify them. The verified transaction is then added to a block and broadcast for the network.
  • Confirmation — The process of transaction completion doesn’t stop after the block is broadcast. To ensure security and validity, this block is to be verified by the majority of the network. Once this is done, nodes in the network copy this information on their chain and the transaction is considered final.

Bitcoin has an average transaction completion time of 10 minutes. This is due to the limitations in block size and network activity. This is a point of concern for new entrants as this limits the possibility of Bitcoin becoming a payment giant. However, new technologies are being worked upon to bring this time to a minimum. 

Mining

Bitcoin mining

The transaction explanation missed an essential piece of the puzzle, mining. 

When we talk about bitcoin and digital currencies, we take pride in the fact that it is maintained by the network of nodes that verify and validate transactions. But why would these nodes spend their computing powers to help the network? The obvious answer: incentives.

Miners add transactions to the block while minting new bitcoins. Behind the scenes, the nodes use their computing powers to solve hashes associated with a transaction. In simpler words, the computer solves complex cryptographic puzzles to ensure that the transactions are indeed valid. For this effort, these miners are rewarded with freshly minted bitcoins. In the earlier days, bitcoin mining could be done using personal computers. This isn’t possible now since the algorithm is designed in such a way that with increasing competition in the network, the mining difficulty increases. 

As of 18 December 2023, out of Bitcoin’s total limit of 21 million coins, 19,573,975 have been mined, leaving 1,426,025 Bitcoins remaining to be mined [2]. This supply is brought into circulation through the process of mining. Like gold, the circulating supply is increased through a mining process but in the case of precious metals, mining increases the overall supply whereas bitcoin’s total supply remains constant. 

When did Bitcoin start?

Bitcoin was introduced by Satoshi Nakamoto in October 2008 when he announced it to a cryptography mailing list at metzdowd.com. His statement read:

“I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”

Satoshi Nakamoto is a pseudonym used by an individual or a group who is responsible for the creation of bitcoin. To date, the identity of the individual or individuals behind this name remains a mystery.

The Genesis Block [3]

The first block of bitcoin was mined on 3 January 2009. This block was called block 0 or the genesis block. This block had the headline of the Times encrypted in the transaction data that stated: 

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks

While this was intended as proof that the block was mined on the 3rd of January, most people believe that Satoshi also meant to comment on the flawed banking system and bailout culture.  The irresponsible lending practices called for a new financial system, that was brought by bitcoin and explained in the whitepaper.

The White Paper [4]

The whitepaper of the revolutionary currency was published on 31 October 2008 in the metdowd mailing list. The whitepaper came as a proposal for a trustless financial system. The paper highlights that the traditional banking system is extremely centralized and has inherent flaws. There is a lot of mediation cost and trusted third parties are required to carry out operations normally.

Bitcoin, on the other hand, addresses these issues through code and algorithms. The escrow system is transparent and trustless and already caters to issues like fraud and double spending. 

The whitepaper also attempted to explain the architecture of this newly introduced financial system and how cryptography had an important part to play in security and immutability. The result is an electronic peer-to-peer system that uses blockchain technology to record the history of transactions and to manage transactions and transfers algorithmically. 

Trade Bitcoin with Vantage

Bitcoin is a growing asset that has been welcoming institutional and retail investors for over a decade. The asset stands at over a trillion dollar market cap but regulatory changes and macroeconomic factors have kept bitcoin’s prices turbulent in an upward trend over the years. The asset has an average CAGR of 63.27% in the last 10 years [5]. This is significantly higher than market benchmarks like S&P 500. 

Now there are multiple ways how you can trade in this market. Your trading strategy can be defined by your risk appetite. CFDs are on the rise in this market as they give the ability to trade long and short using margins, doubling the opportunity but increasing the risk proportionate to the margins. 

Vantage allows users to trade using CFDs using leverage with simple on-ramp processes. Contracts-for-Difference or CFDs allow traders to speculate on the price movements of a financial product without owning the unlerlying asset. Although the platform values Bitcoin against fiat currencies traders can trade BTC against other commodities like gold and other cryptocurrencies. 

In simple terms, you can get started on Vantage by following the steps below:

1. Open the browser of your choice and log in at https://protrader.vantagemarkets.com/. Alternatively, you can open an account to begin trading.

2. After opening the trading account, navigate to the right side of your screen to see available assets. Use the dropdown menu to navigate to cryptocurrencies.

3. Right-clicking on the charting area lets you open trades through a menu as shown below:

4. The trading menu lets you trade using different order types like market, limit, and stop. 

The trading panel lets you add take profit and stop loss limits based on your trading strategy and analysis. Users can also use indicator presets to check the performance of the asset over time to make decisions about upcoming trades. 

Cryptocurrency is a volatile market. To make the most out of your trades, be sure to avoid risks by adding the appropriate stop losses and trading with low margins to begin.

References

  1. “Historical performance of the Bitcoin index – Backtest by Curvo”. https://curvo.eu/backtest/en/market-index/bitcoin?currency=usd. Accessed 9 May 2024.
  2. “What Happens to Bitcoin After All 21 Million Are Mined? – Investopedia”. https://www.investopedia.com/tech/what-happens-bitcoin-after-21-million-mined/. Accessed 9 May 2024.
  3. “Genesis Block: Bitcoin Definition, Mysteries, and Secret Message – Investopedia”. https://www.investopedia.com/terms/g/genesis-block.asp. Accessed 9 May 2024.
  4. “Bitcoin Whitepaper: Explained – The Motley Fool”. https://www.fool.com/terms/b/bitcoin-whitepaper/. Accessed 9 May 2024.
  5. “Bitcoin (^BTC): Historical Returns – Lazy Portfolio ETF”. https://www.lazyportfolioetf.com/etf/bitcoin/. Accessed 9 May 2024.

Disclaimer: The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our client. No representation or warranty is given as to the accuracy or completeness of this information and therefore it shouldn’t be relied upon as such. Any research provided does not have regard to specific financial situations, needs or investment objectives. Vantage accepts no responsibility for any use that may be made of these comments and for any consequences that result. Consequently, any person acting on it does so entirely at their own risk. We advise any readers of this material to seek professional advice where necessary. Without the approval of Vantage, reproduction or redistribution of this information isn’t permitted.

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