The Internet radically transformed the way people store, process and share information. Similarly, cryptocurrencies, like bitcoin, are radically transforming the way we store, process and exchange value.
What is bitcoin?
Put simply, bitcoin is digital money that lives on the Internet. It was the first cryptocurrency and is the largest by market cap. It was founded by a person or group of people calling themselves Satoshi Nakamoto in 2008 and was designed to enable secure and transparent peer-to-peer transactions over the Internet.
Bitcoin has been a force of innovation since its invention – creating a new type of digital asset that may become one of the biggest technological developments since the Internet. Because it is not correlated to traditional assets like stocks and bonds, bitcoin offers the potential for diversification, but it also offers the potential for growth.
Consider the advantages of bitcoin:
- It’s scarce – there will only ever be 21 million bitcoin in existence (to date, 18.5 million of the total supply has been issued).
- It’s a democratized digital currency – there is no government or macro control and bitcoin is created, distributed, stored and verified by a decentralized ledger system (see how does bitcoin work below).
- It’s borderless – it is divisible into smaller units and can travel across borders in the same manner that other information is shared across the Internet.
- It cannot be counterfeited – the source code of the blockchain and the decentralized blockchain ledger system verifies the authenticity of each bitcoin.
As the world continues to become more digitized, bitcoin should continue to differentiate itself further from traditional assets.
Blockchain technology – how does bitcoin work?
Movement of bitcoin is facilitated by a digital, transparent ledger – known as a blockchain – that enables the rapid transfer of value across the Internet without the need for centralized intermediaries, like banks.
Now, a blockchain is really a technological protocol, or a set of rules, that combine cryptography and economic incentives to enforce collective agreement on information in computer networks. Each computer in the network maintains a copy of the information, only updating it when new information is collectively agreed upon.
Blockchain technology provides an official record of every bitcoin transaction (including the creation or “mining” of new bitcoin) and every bitcoin address is associated with a quantity of bitcoin. Here’s a simplified view of how it works:
- Transactions on the bitcoin blockchain are processed and validated by “miners” – a distributed group of economically motivated actors running specialized computers.
- Miners are responsible for solving complex cryptographic puzzles before they can add a new block to the blockchain.
- Miners are rewarded with bitcoin (currently one block reward is 6.25 BTC) for every new block they validate.
- The other computers on the network, known as nodes, also verify the block that is being added to the blockchain.
Source: Galaxy Digital
Once complete, bitcoin transactions are cryptographically secure, immutable and non-reversible.
How and where is bitcoin stored?
To spend bitcoin requires a private key to move the bitcoin from its public bitcoin address. As you may suspect, keeping private keys safe is critical to prevent the theft of bitcoin (remember, transactions are non-reversible). So, most individuals keep their private keys in either “hot wallets” or “cold storage.”
Hot wallets are connected to the Internet, while cold storage is completely offline in order to keep assets safe. Bitcoin private keys can be moved from cold storage to hot wallets as they are ready to be spent.
Read up on crypto
Technology has already had an irreversible impact on the investment industry, and the growth of digital assets is likely to only get stronger. Learn more about cryptocurrencies and the role they can play in an investment portfolio.
You can also check out our next installment, where we discuss why now may be the right time to consider investing in bitcoin.
Source: Galaxy Digital