Beginner's Guide to Bitcoin

What is Bitcoin?

• Bitcoin is a digital currency that involves peer-to-peer transactions.

  • ‘Peer-to-peer’ means that transactions between users happen with a third-party (like a bank) involved.

  • Before Bitcoin’s creation, there has never been digital money that governments cannot control.

• Bitcoin’s transactions occur on the internet, and are transferred through a database (also known as a ledger) called a blockchain.

  • A bank’s ledger is controlled by a single entity meaning it is centralised, whereas Bitcoin’s blockchain is decentralised as it is verified by a thousands of computers (also called nodes).

Who created Bitcoin?

• Bitcoin was created by someone, or a group of people, called Satoshi Nakamoto, in January 2009.

  • We do not know the identity of Satoshi.

How are new Bitcoins mined?

• As opposed to a central bank or government controlling the supply, the issuance of new Bitcoins is governed by Bitcoin’s code.

  • New Bitcoins are mined with computers that use up significant amounts of energy.

  • Miners receive Bitcoins every 10 minutes, which is when new blocks are produced, after carrying out ‘work’ (expending energy).

  • The maximum amount of Bitcoins that can ever be created is 21 million, which means there can only be 2 million left to enter the supply, due to there being around 19 million in supply at the moment.

• The halving occurs every 4 years, which is when the mining reward for miners becomes cut in half, so Bitcoin’s supply becomes halved.

  • In 2012, new Bitcoins entering the supply every 10 minutes was halved from 50 to 25, then in 2016 it was halved from 25 to 12.5, then in 2020 it was halved from 12.5 to 6.25.

Why does Bitcoin have value?

• The reason why fiat money has value can be attributed to the following properties: Scarcity, durability, portability, divisibility, fungibility and acceptability.

  • Bitcoin possesses all of these properties, but it has a clear advantage over fiat money in some properties, such as scarcity and divisibility (as there can only ever be 21 million whilst there can be infinite fiat money created), and divisibility ().

• Scarcity

  • There can only ever be 21 million Bitcoin created.

  • Governments can create an infinite amount of fiat money, which can hence be devalued over time, so fiat money is not scarce.

  • There are some scarce assets other than Bitcoin, like gold and silver, but if these assets rise in price, this can lead to an increase in production, which is not the case with Bitcoin. In addition, we do not know exactly how much gold and silver exists. Therefore, these assets are less scarce.

• Divisibility

  • One Bitcoin is divisible to eight decimal places.

  • Bitcoin could eventually be made divisible to even more decimal places assuming that miners accepted the change in the scenario that it was necessary.

  • Most fiat money is only divisible to two decimal places