1) What is Bitcoin?
The first thing to know about Bitcoin, is that it is not a coin. Bitcoin is a decentralized, private money. In order to better understand this, it may helpful to discuss money more generally.
A coin is a token of value. If you provide someone something of value, like say mowing their lawn, they will give you a token or tokens representing the value you provided them. The metal in a modern coin has almost no value, unlike silver and gold coins, so they are nothing but a token or place holder of value you provided. Your hope is that you can exchange these coins (bills) for something else of value, such as a cheese burger and fries. It is a common misconception that US dollars are backed by gold or silver. This has not been true since president Nixon stopped the convertibility of the dollar for gold (by countries only) in 1971.
In today’s world most people do not actually pay with coins or bills, they pay with credit/debit cards. The cards are used to credit one person account at their bank and debit the other person’s bank account. No bills or coins are moved from one person’s account to the other person’s account. In fact, your bank account is nothing more than a number in a database. In the US around 90% of all currency is just a digital entry in a database and this percentage is increasing every year.
There are no physical coins or bills with Bitcoin, it is just an entry in a very specialized database, called a pubic blockchain. Your equivalent of a coin/bill or credit/debit card in Bitcoin is pair of public and private addresses. You can think of this pair of public/private addresses as your bank account number or your credit card number.
Your private address is necessary to transfer (spend) your Bitcoin to another person and your public address is needed to receive Bitcoin from another person. These transactions are stored in the specialized database, I mentioned before, called a public blockchain.
Bitcoin is a private money system, which means that it is not backed by any government. This may sound odd, but gold and silver coins were originally a private money system, not backed by an governments. Then governments understood the power of controlling money and passed legal tender laws that gave them monopoly control over gold and silver coins.
Bitcoin is considered a public blockchain because anyone can access the Bitcoin blockchain. Bitcoin is also considered decentralized because no one person or group of people control the blockchain. This is part of why Bitcoin cannot be shut down by a government.
2) Can I buy a fraction of a Bitcoin?
Yes you can buy or receive as little at 1/100 millionth (10E-8) of a Bitcoin. This unit is called a Satoshi, which is named after the inventor of Bitcoin. If Bitcoin is worth $10,000 this means one Satoshi is worth 1/100th of a penny.
3) Who created Bitcoin?
Satoshi Nakamoto is the pseudonym of the inventor of Bitcoin. This is the author’s name used on the Bitcoin white paper first published on October 31, 2008. To this day no one knows who Satoshi Nakamoto is or whether they are one person or a group of people. Honestly it does not matter who Satoshi is, what matters is whether the code works. On that score, Bitcoin has never been hacked, despite the fact that there is over $200 billion of value in Bitcoin as of the writing of this post.
4) What is the Bitcoin halving (aka halvening)?
The Bitcoin halvening is when the supply of newly created Bitcoin by miners is reduced by half.
Bitcoin has a maximum supply of 21 million. Bitcoins come into existence by the “mining” of Bitcoins. Bitcoin miners are people who solve a complex mathematical problem that secures the Bitcoin network. When a Bitcoin miner solves one of these maths problems they are rewarded with a certain number of Bitcoin. These are newly “minted” Bitcoin.
The original block reward in 2009 was 50 Bitcoin. The Bitcoin code is setup so that a new block is created about every 10 minutes. This is maintained by changing the difficulty the mathematical problem the miners need to solve.
Approximately, every 4 years (every 210,00 blocks) this reward is halved. So in 2012 the reward was reduced to 25 Bitcoin and then in 2016 the reward was reduced to 12.5 Bitcoin and in 2019 the reward was again reduced to 6.25 Bitcoin.
This makes it unique as a form of money. The total maximum supply ever is fixed and the rate at which Bitcoin are created is set and known. This a major factor why many people think Bitcoin is a good investment.
5) Can’t they just change the Bitcoin code and add more Bitcoin?
A common question for people just learning about Bitcoin is can’t the coders just change the Bitcoin code to add more Bitcoin?
The short answer is no. The Bitcoin cannot just be changed by coders or any group of people to alter the maximum number of Bitcoin. The reason for this is based on the brilliant game theory baked into Bitcoin. A number of groups have a strong economic interest in Bitcoin’s supply being fixed at 21 million. For instance, the miners would love to cheat the system and get a bigger block reward. However, if they succeed in cheating the system then they destroy the value of the Bitcoin they presently hold and likely the value of the mining equipment they have purchased.
Bitcoin’s code is open source so anyone can create a new bitcoin and they can make changes to the code such as increasing the supply. In fact, there have been a number of Bitcoin knockoffs that have changed the total supply or changed the block size or block time to speed up the number of transactions that can be processed. Some of the better known examples are Litecoin, Bitcoin Cash, and Bitcoin SV.
However, the market ultimately decides which form of private money will be used and so far the original Bitcoin is the overwhelming choice of the market. This is in fact what you want in a free market. People decide what they want to use for money, rather than a government dictating to them what they must use as money
6) How do I get Bitcoin?
There are now a number of ways to acquire Bitcoin. For instance, you can purchase Bitcoin through numerous exchanges, such as Coinbase, or through Square’s cash app and through Robinhood or through many traditional brokerages, such as Fidelity, or through a Bitcoin ATM. A number of traditional banks around the world are now selling Bitcoin and providing custodial services.
Alternatively, you can accept Bitcoin in payment for your services or for something you are selling. There have been houses, cars, pizzas and almost anything sold for Bitcoin. Overstock.com was one of the first large companies to accept Bitcoin, but the number of places accepting Bitcoin keeps growing.
7) What is a Bitcoin wallet?
A Bitcoin wallet is a software program that allows you to sign a transaction with your private key (private address). An example is the electrum wallet – click here for the official electrum wallet website. This is necessary for you to transfer your Bitcoin to another person. By signing your transaction, your private key is never exposed and the Bitcoin network only recognizes signed transactions.
A Bitcoin wallet may in addition hold you private address(es) and your public address(es). Confusingly, Bitcoin paper wallets are printed pieces of paper with your private and public address, but do not have the ability to sign a transaction. In order to spend your Bitcoin you will still need a wallet app like the electrum wallet.
8) Is Bitcoin anonymous?
Bitcoin is not anonymous, but it is pseudonymous. Your name or other personal information is not stored on the Bitcoin blockchain. However, if you ever acquired some Bitcoin through an exchange or other institution that does have your name, then your identity can be associated with your Bitcoin address.
For this reason, there have been developed a number of other cryptocurrencies that have additional privacy features, such as Monero, Zcash, and Dash as well as a number of techniques such as CoinJoins that obscure your identity.
9) Why do Bitcoins have value?
Why do Bitcoins have value? Because Bitcoin performs the functions of money better than most alternatives.
This is often one of the most complex questions about Bitcoin. The purpose of money is to be a store of value. Secondarily money should be a medium or exchange and a unit of account according to economists.
Proponents of gold will tell you that gold has value because it is scarce and cannot be counterfeited. National currencies have value because “men with guns” say it does according to the economist Paul Krugman. In the case of nation currencies, such as the US dollar the US government takes numerous steps to make sure that private people cannot counterfeit the dollar. However, with national currencies you have to trust the government will not print (counterfeit) too much of their currency. The overwhelming evidence is that governments cannot resist the temptation to print more of their currency. Note in today’s world most money is just an entry in a computer database, so printing more money just involves altering an entry in a database.
While gold and silver cannot easily be counterfeited or more created through mining, there have been many cases of people passing off fake gold and these are becoming more difficult to detect. For instance, 83 tons of gold bars were found to be fake in China in 2019. For more click here. In addition, the introduction of gold futures and other derivatives have been used to create huge supplies of so-called paper gold.
Bitcoin’s code makes it “impossible” to be counterfeited. Bitcoin has the equivalent of over 800,000 supercomputers securing its network and this power is increasing all the time. In addition, the maximum supply of Bitcoin is set by the code that anyone can review, since it is open source. This makes Bitcoin more scarce than any other asset and so-far impossible to counterfeit.
In addition, your Bitcoin is almost impossible for a government to confiscate like the US government did with gold in 1933. As long as your keep your Bitcoin in your own wallet and securely store your private addresses, no government can confiscate or freeze your Bitcoin. Bitcoin cannot be frozen like your bank account, because Bitcoin is decentralized, so there is no one they can order to freeze your Bitcoin.
It is also almost virtually impossible for a government to stop you from spending (transferring you Bitcoin). When the US government pressured Visa, MasterCard, and PayPal from processing funds for Wikileaks, people started sending them Bitcoin. This turned out to be a great investment for Wikileaks.
All of this makes Bitcoin the best devised money as a store of value.
But what about Bitcoin’s ability to act as a medium of exchange. In order for money to be a good medium of exchange, beyond it being a store of value, there are two properties you want: easily divisible and easily transportable.
As explained above, Bitcoin is divisible down to 1/100 million of a Bitcoin, which is called a Satoshi. This makes Bitcoin more divisible than the US dollar and infinitely more divisible than gold. While gold can theoretically be divided into smaller units, it is difficult to do on the fly and most people will not accept gold that is not in a standard coin form.
You want money that can easily be transported/transferred, for instance so you can take your money to the store to buy food. If you needed a wheel barrel to have enough money to buy food, like they did in Wierman Republic in Germany to buy food that would be very inconvenient.
Gold has a lot of value for the volume and weight, so it is fairly easily transportable. However for large commercial transactions over long distances transporting gold is expensive and carries a high risk of theft. This is in fact why banks and checks were created. Rather than transporting the gold, a buyer would give the seller a check that when presented to their bank by the seller would result in the buyer’s bank account being debited and the seller’s account being credited.
In today's world this process is all electronic, however banks charge outrageous fees for wire transfers and credit cards to do this simple electronic book keeping. If you try to send money overseas, you face a whole additional set of fees and regulatory nightmares. The result is that if your government “allows” you to send or receive the money it can take days or weeks and result in huge fees.
Bitcoin can be transferred anywhere almost instantaneously for very small fees. Over a billion dollars of Bitcoin has been transferred for under $2.00. Part of the reason Bitcoin can be transferred anywhere is that Bitcoin is not in any physical location. If you want to transfer your Bitcoin to the Caymans or Switzerland, then all you need to do is move to the Caymans or Switzerland.
The last property of money economists talk about is that money should be a unit of account. As long as governments have legal tender laws, nothing is going to compete with national currencies as a unit of account. However, as Bitcoin matures I think you will see more contracts denominated in Bitcoin.
Bottom line, Bitcoin has value because it is an excellent form of money.