Cryptocurrency in the last few years become a more and more popular topic. Prices have soared, 100’s of cryptocurrencies have been created and a whole infrastructure has been created. Even in the last week, cryptocurrency was featured in the UK’s longest running Soap Opera Coronation Street with the average viewership of 8 million per episode, as well as Venture capital investor Tim Draper predicting that the total cryptocurrency market capitalisation will hit $80 trillion in the next 15 years.

But where to start? Here at Crowdholding, we are creating a series of crypto 101’s so you can understand what is going on next time you hear the word “cryptocurrency”. In today’s article we will focus on Bitcoin, the largest and most valuable cryptocurrency on the market.

When was Bitcoin created and who created it?

Bitcoin was first mentioned back at the end of 2008 by a softare developer going by the name of Satoshi Nakamoto (Although this is a pseudonym and to this day nobody knows who the creator actually is).

The domain name “bitcoin.org” was registered on the 18th of August 2008. In November 2008, a link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted. In this paper, it explained the concept behind Bitcoin, and how it works in principal. Nakamoto implemented the bitcoin software as open source code and it was released back in January 2009.

Nakamoto wanted to create an electronic payment system based on mathematical proof. The idea was to produce a means of exchange, independent of any central authority, that could be transferred electronically in a secure, verifiable and unchangeable way to anyone across the globe.

How does it differ from a normal currency or visa transaction?

Bitcoin does have quite a few similar traits to a normal currency. It has a value (which you can check at CoinMarketCap), and as long as both parties are willing to accept Bitcoin as a payment it is used in the same way as Euros, Dollars or any other currency.

Also it is rather similar to a Visa transaction as it is sent digitally between one account to another in the basic terms.

But it differs from normal currencies both online and offline in several important ways:

Decentralisation

One of Bitcoin’s most important characteristics that makes it differ from other currencies is that it is decentralized. It is maintained by a group of coders who volunteer to keep the system flowing. These coders and their computers are spread all over the world, meaning that it is extremely hard to hack or disrupt the system. Other currencies are centralised and controlled by banks or government institutions.

Through it’s cryptography and economic incentives Bitcoin solves the “double spending problem” that is an issue with most digital currencies.

In electronic transactions such as Visa, this function is fulfilled by banks, which gives them control over the traditional system. With bitcoin, the integrity of the transactions is maintained by a distributed and open network and therefore is owned by no-one.

2. Limited supply

Normal currencies that we use on a daily basis have an unlimited supply. Central banks can issue as much of a currency as they want and also can (and do) manipulate a currency’s value relative to other ones that are in the market. This process only impacts the citizens holding that currency and have very little option but to bear the brunt.

This is different with Bitcoin. The supply is limited and tightly controlled by the it’s underlying algorithm. Only a small number of new bitcoins are released every hour and this will only continue until the maximum of 21 million has been reached.

Because of this in theory, if demand grows and the supply remains the same, the value of each Bitcoin will increase.

3. Pseudonymity

While senders of traditional electronic payments are usually identified (for verification purposes, or to comply with anti-money laundering and other financial legislation), users of bitcoin in theory operate in semi-anonymity. Since there is no central “validator” due to decentralisation, users do not need to identify themselves when sending Bitcoin to another user. When a transaction request is submitted, the protocol checks all previous transactions to confirm that the sender has the necessary amount of Bitcoin as well as the authority to send them. The system does not need to know his or her identity.

In practice, each user is identified by the address of his or her wallet (Where the Bitcoin is stored, think of it similar to a bank account without detailed information). Transactions can, with some effort, be tracked this way.

Furthermore, most exchanges are required by law to perform identity checks on their customers before they are allowed to buy or sell bitcoin, facilitating another way that bitcoin usage can be tracked. Since the network is transparent, the progress of a particular transaction is visible to all.

This makes Bitcoin not an ideal currency for criminals, terrorists or money-launderers as there are still checks in place. Also because of the lack of identity, it elevates the issue of identity theft that is an issue to normal currency transactions.

4. Immutability

Once a transaction is initiated in Bitcoin it cannot be reversed, whereas Visa transactions can be. This is because there is no central control structure who can simply return the Bitcoin. If the transaction is recorded on the network and if more than an hour has passed it is impossible to change.

Although this might not sit well with everyone as people can make mistakes when making transactions, it does mean that any transaction on the network cannot be tampered or changed with.

5. Divisibility

Bitcoin is divisible down to one hundred millionth of a bitcoin (known as a satoshi). At current price 1 Satoshi is worth 0.0000625718 of a dollar. This could conceivably enable micro-transactions that traditional electronic money cannot preform.

So there you have it! That is the first part of our Crypto 101, in the next article we will focus on what a Wallet is and How you are able to purchase Bitcoin.

Also if you are interested in getting hold of some free crypto, you can read our article on “How to earn cryptocurrency without investing or mining”.