What Is Bitcoin (BTC)?

Bitcoin (BTC) is the OG crypto: It is the oldest and still the most prominent cryptocurrency on the market, with a market cap of about $826 billion as of Feb. 7, 2022.

But Bitcoin is far more than just cryptocurrency.

Bitcoin was built using blockchain technology in 2009, and many of the features that established Bitcoin as a pioneering form of crypto quickly became the foundation for thousands of different types of crypto that followed in Bitcoin’s digital, decentralized footsteps.

Let’s recap how Bitcoin works, its history, how it’s evolving (think: Bitcoin ETFs) — and what it all means for investors now.

How Does Bitcoin (BTC) Work?

By understanding how Bitcoin works, you also understand other cryptocurrencies’ fundamentals.

Bitcoin is built on blockchain technology, the transparent, open-source digital ledger that keeps track of every Bitcoin transaction. Bitcoin is decentralized, meaning that it relies on a vast network of powerful computers, also called miners (or nodes), to confirm all transactions using a proof-of-work (PoW) consensus mechanism. This peer-to-peer network of miners is self-regulating and self-governing so that the platform can run without an intermediary like a bank or financial institution.

In other words, unlike traditional currencies like the U.S. dollar, Bitcoin isn’t overseen, issued, or regulated by a central authority. Instead, Bitcoin established the system of cryptography and consensus (i.e., peer-to-peer) verification that is the foundation of most forms of crypto today.

What Is Bitcoin Mining?

Mining Bitcoin isn’t just how BTC is created. In the case of Bitcoin and other PoW cryptocurrencies, mining refers to the system by which miners (or nodes) validate transactions, potentially earn Bitcoin themselves, and help to secure the network overall.

When a Bitcoin transaction is executed, it gets sent to miners for verification. Bitcoin miners employ powerful computers, sometimes called mining rigs, to do the complex PoW calculations required to confirm each item on the blockchain.

Miners who successfully confirm a block of transactions (1 MB) are rewarded with new Bitcoin. But mining is intensely competitive, mainly because the reward is halved every 210,000 blocks and now stands at 6.25 BTC.

That said, mining Bitcoin is essential because it helps secure the network. For a hacker to take control of the blockchain and steal Bitcoin, they’d have to control over 51% of the network. Thus, miners have far more incentive to keep the network secure.

Peer-to-Peer Technology

Bitcoin is one of the first digital currencies to use peer-to-peer (P2P) technology to facilitate faster payments and transactions without needing a middleman like a bank.

This system is outlined in the original whitepaper that established the concept of Bitcoin in 2008, “Bitcoin: A Peer-to-Peer Electronic Cash System.” Using a system of P2P verification would help to solve the so-called double-spend problem that historically had hindered the development of digital currencies, as noted here:

“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing it.”

This P2P verification requires encryption and blockchain technology for two parties to conduct transactions without a third party involved securely. This system offers a security advantage; with transactions recorded on every peer’s network, it is challenging to create fraudulent transactions.

Advantages and Disadvantages of Bitcoin (BTC)

As an investment, Bitcoin offers some potential upside for crypto traders because it’s the oldest form of crypto and, therefore, well-established. That said, investors should always consider all sides of the coin, so to say, before trading crypto. Like all types of cryptocurrency, Bitcoin is highly volatile and, therefore, poses a risk of loss for would-be investors. And like most types of crypto, Bitcoin remains largely unregulated.

Advantages

There are thousands of cryptocurrencies on the market today. Still, Bitcoin is by far the largest, with a market cap of about $826 billion as of Feb. 7, 2022 — a fact that supports Bitcoin’s liquidity and widespread accessibility.

Because Bitcoin is encrypted, and each BTC owner is the only one who holds the private keys to their crypto, no one can know how much Bitcoin a user has in their wallet. And as long as users guard their private keys, BTC can be difficult to steal or hack.

Although Bitcoin can be as volatile as most other forms of crypto, the upside is that BTC can deliver outsize gains, depending on the day (the downside, of course, is the risk of loss).

Disadvantages

Like most forms of crypto, Bitcoin is still quite volatile. Even within a single day, the value of a single Bitcoin can fluctuate by thousands of dollars.

Most investors are insured by the SIPC up to $500,000 if a brokerage fails (or funds are stolen). But the SIPC doesn’t cover crypto.

The inconsistency of regulations governing cryptocurrencies has limited the use of crypto worldwide. As of Q1 2022, the Securities and Exchange Commission (SEC) was weighing how to regulate crypto.

Who Created Bitcoin (BTC)?

In 2008, a person or group using Satoshi Nakamoto‘s pseudonym published “Bitcoin: A Peer-to-Peer Electronic Cash System.” This white paper was perhaps the first to propose “a system for electronic transactions without relying on trust.” In other words, as noted above, the currency would depend on a peer-to-peer verification system via blockchain technology.

This new system eliminated the need for third-party oversight while solving the double-spend problem by creating a permanent, transparent record of all Bitcoin transactions.

Bitcoin History Timeline

Consider this early timeline to understand Bitcoin and how it has changed the face of finance.

Aug. 18, 2008

The domain name Bitcoin.org is registered, though the identity of the person who reported it is still not public information.

Oct. 31, 2008

A person or group using the pseudonym Satoshi Nakamoto published “Bitcoin: A Peer-to-Peer Electronic Cash System,” the renowned white paper that established the foundations of Bitcoin and the crypto markets as a whole.

Jan. 3, 2009

Block 0, the first Bitcoin block, is mined. This “genesis block,” as it’s sometimes called, contained a vague reference to a headline of the day: “The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks.” It may have been proof that the block was mined on or after that date or political commentary.

May 22, 2010

Better known in crypto circles as Bitcoin Pizza Day, this was when an early Bitcoin adopter in Florida negotiated the exchange of 10,000 BTC for two pizzas worth about $25. The transaction was notable because it was one of the first instances of trading BTC for a real-world good — and because, at current valuations, the consumer would have paid the equivalent of about $430 million for his meal.

2011

Bitcoin’s value rises above $1 for the first time. Ethereum and Litecoin, two of the first altcoins, launched this year. These platforms demonstrate the growing potential for crypto as a medium of exchange and the technological capacity of blockchain itself.

2013

Bitcoin reached a new high of $200 in February, followed by a spike to $1,000 in November, signaling a pattern of volatility that would become the hallmark of most cryptocurrencies.

Why Does Bitcoin (BTC) Have Value?

Bitcoin shares certain qualities with commodities and fiat currencies that have helped create its value, e.g., durability, portability, acceptability, and scarcity.

Durability

Since BTC lives on the blockchain, each coin is durable; similarly, a physical dollar cannot be replicated. BTC private keys are numbers and letters that can be stamped into stainless steel, backed up, or divided into pieces, adding to their durability.

Portability

Because BTC is digital and each coin you own is identified by its private key, it’s possible to carry all your assets wherever you use a cold wallet or access via a hot wallet on a mobile device or exchange.

Acceptability

Not only is Bitcoin traded on most crypto exchanges and recognized as a store of value, but increasingly, you can exchange Bitcoin for goods and services in the real world. For example, thousands of individuals and vendors take BTC as payments.

Scarcity

Finally, a chief appeal of BTC is its limited supply. There will only ever be 21 million BTC in circulation. Almost 19 million BTC have been mined as of February 2022, but the number of BTC released in each block is cut in half roughly every four years to slow the release of new coins and keep the total supply finite.

Price of Bitcoin (BTC)

As of Feb. 7, 2022, the price of Bitcoin is about $43,000, with a market cap of over $817 billion and a circulating supply of over 18.95 million BTC. The supply of BTC is capped at 21 million.

Like other forms of crypto, Bitcoin is highly volatile. In 2021 alone, Bitcoin hit a low of about $29,800 in July and a high of over $68,000 in November.

Why Use Bitcoin (BTC)?

As the oldest and still the most popular form of cryptocurrency, Bitcoin has an edge over some of its competitors. It’s widely available for trading on most exchanges, it’s still considered a store of value (despite its volatility), and some companies now accept BTC for purchases of goods and services.

For the most part, though, many people use Bitcoin as an alternative investment, perhaps to diversify their portfolio of more traditional holdings (e.g., stocks, bonds, mutual funds, and ETFs).

How Can I Buy Bitcoin (BTC)?

You can buy BTC on the most prominent crypto exchanges, investing apps, and P2P exchanges.

How Do You Store Bitcoin?

Like any currency in virtually any account, from banks to brokerages, Bitcoin and other crypto are vulnerable to hacks, fraud, and theft. In addition, storing and securing Bitcoin comes with another, more unusual form of risk — the possibility you might lose or forget the private key that gives you access to your money and thus lose those assets completely.

In other words, more steps are required to store your crypto to keep it secure while maintaining access to it.

Using a Crypto Wallet

First, it helps to understand the difference between a hot and cold wallet.

•  Hot wallet: Digital currency is stored in the cloud on a trusted exchange or provider and accessed via the internet (computer or phone app).

The risks of a hot wallet include being vulnerable to online hacks or theft.

•  Cold wallet: An encrypted portable device much like a thumb drive that allows you to download the keys to your Bitcoin.

The risks of a cold wallet include losing the physical wallet and losing access to your crypto.

A hot wallet is connected to the internet; a cold wallet is not. But it would be best to have a hot wallet to download Bitcoin into a portable cold wallet.

Other Ways to Invest in Bitcoin (BTC)

Buying and selling BTC isn’t the only way to invest in Bitcoin. You can also buy one of the new Bitcoin-related exchange-traded funds (ETFs). But by doing so, you’re investing indirectly in Bitcoin and Bitcoin technology, owing to ongoing regulatory debates over whether crypto is a security.

The Debate About Crypto’s Status

There have been several attempts to create crypto-related securities since Bitcoin first came on the market in 2009. Still, the SEC has hesitated to approve any of them — mainly because Bitcoin, like most crypto, is unregulated.

The latest word from the SEC is that BTC does not meet the criteria for a security. Bitcoin is treated more like a commodity because it can be a store of value (like gold or oil). Because securities are more heavily regulated than commodities, there is considerable attention on the outcome of this debate.

In the meantime, it’s possible to invest in Bitcoin using ETFs.

What Are Bitcoin ETFs?

The first three Bitcoin ETFs (exchange-traded funds) became available in the U.S. in October and November 2021. All three are tied to Bitcoin futures contracts, not Bitcoin’s daily market price.

Bitcoin spot ETFs have existed in Canada and Europe for years, and there are several applications for spot ETFs in the U.S.. Still, the Securities and Exchange Commission (SEC) regulates financial markets and has not yet approved them here.

On October 19, 2021, the ProShares Bitcoin Strategy ETF  (BITO) became the first ETF to offer investors exposure to Bitcoin futures, with two more launched shortly after its debut. A few days after the ProShares’ ETF went public, the Valkyrie Bitcoin Strategy ETF (BTF). PDF File launched, followed by the VanEck Bitcoin StrategyETF  (XBTF) on Nov. 15, 2021.

These funds do not invest directly in “physical” Bitcoin (i.e., actual Bitcoin assets) but in shorter-term, cash-settled contracts traded on the Chicago Mercantile Exchange or CME.

Does Bitcoin Use Staking?

No, Bitcoin relies on a proof-of-work consensus mechanism, not proof-of-stake. Thus investors cannot stake Bitcoin for rewards.

The Takeaway

As the oldest and largest cryptocurrency, Bitcoin is more than just the leading form of crypto. Since Bitcoin first launched in January of 2009, the result of a white paper authored by an anonymous researcher, Bitcoin has helped establish the technology, the market, and the demand that has paved the way for thousands of types of crypto, altcoins, tokens, and more.

The idea of a decentralized currency built on a blockchain and governed by a peer-to-peer network is no longer novel. And because Bitcoin was one of the first successful uses of blockchain technology, the use cases for blockchain have likewise expanded throughout the crypto-verse, powering innovations like dApps, smart contracts, and non-fungible tokens (NFTs).

These days, there are myriad ways to buy and sell Bitcoin. However, investors need to know how different exchanges work, how to store and secure Bitcoin, and what some restrictions and fees may be. It has never been easier to trade Bitcoin — and dozens of other types of crypto.

Note: ZPEnterprises is not a licensed investor/financial advisor, but we are trying to share awareness of financial topics. Please do further research and work with a licensed financial advisor.