Bitcoin 101
Background & origin of Bitcoin
Bitcoin's origins can be traced back to the pseudonymous Satoshi Nakamoto, whose true identity remains a mystery over a decade after Bitcoin's invention. In late 2008, Nakamoto published a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”1, which proposed a decentralized, peer-to-peer electronic cash system using a proof-of-work system to verify transactions and solve the double-spending problem that had plagued previous digital currency attempts. Bitcoin was officially launched in 2009.
How Bitcoin works
Unlike traditional fiat currencies controlled by governments and central banks, Bitcoin operates as a decentralized system with no single entity responsible for its operation and maintenance. As the first and most recognizable cryptocurrency, it introduces a straightforward concept: a form of digital money that allows people to send and receive money over the internet without needing a middleman.
Bitcoin transactions work by allowing users to send and receive payments using a digital wallet and a public key, similar to an email address. This process is secured through allowing miners to solve cryptographic puzzles, ensuring that transactions are verified and recorded on a shared public ledger called the blockchain. The blockchain serves as the foundation of the Bitcoin network, enabling transparent and tamper-proof record-keeping.
Learn more about Bitcoin mining in our Bitcoin Mining 101 article.
Economic design of Bitcoin
Bitcoin’s design includes a fixed supply of 21 million, with around 20 million Bitcoins currently in circulation. In contrast to the supply of traditional fiat currencies, which can be adjusted arbitrarily by governments or central banks, Bitcoin's capped supply is coded into the protocol which ensures its scarcity is preserved over time. Approximately 71%2 of Bitcoin is held by long-term investors, reinforcing the notion of scarcity that is central to Bitcoin's value proposition.
Beyond its fixed supply, Bitcoin's blockchain is underpinned by three key concepts: block reward, block size, and block time. The block reward is a form of compensation given to miners for validating transactions, incentivizing them to maintain the network. The block size refers to the data capacity of each block, which is limited to preserve efficiency. And the block time is the average duration required to create a new block. For Bitcoin, around 10 minutes of block time is set as it is necessary to maintain the integrity of the network. Hence, the difficulty of the puzzles are adjusted according to the speed of the blocks being added.
The significance of Bitcoin
Bitcoin remains the most valuable cryptocurrency, often referred to as "digital gold." It has established itself as a recognized store of value, boasting a market capitalization of approximately $1.3 trillion3. Currently, it accounts for around 53% of the total cryptocurrency market capitalization, significantly outpacing Ethereum, which accounts for around 13%4. This dominance has increased notably since November 2022, when Bitcoin represented roughly 37% compared to Ethereum's 17%5. Bitcoin's substantial market presence underscores its importance not just as a digital currency, but as an increasingly crucial asset in the broader financial market.
Mainstream adoption
The launch of Spot BTC ETFs in January 2024 by major financial institutions such as BlackRock, Fidelity, VanEck, and Invesco marked a pivotal moment for Bitcoin's mainstream acceptance. These ETFs have attracted significant interest from both retail and institutional investors, including hedge funds and pension funds. Currently, approximately 1,110 institutional investors are involved in Bitcoin ETFs, managing a total of ~$55 billion in assets4. Recently, the SEC also approved options trading on BlackRock's $17 billion Bitcoin ETF on Nasdaq's ISE exchange6. This increasing interest highlights Bitcoin's growing recognition as a legitimate investment, further embedding it within traditional financial systems.
1 “Bitcoin: A Peer-to-Peer Electronic Cash System” (https://bitcoin.org/en/bitcoin-paper)
2 Glassnode; Long- and Short-Term Holder supply is defined with respect to the entity's averaged purchasing date with weights given by a logistic function centered at an age of 155 days and a transition width of 10 days
3 CoinMarketCap as of 30 Sep 2024
4 Coingecko as of 30 Sep 2024
5 Coingecko as of 26 Nov 2022
6 Gemini as of 26 Sep 2024, "BlackRock's Spot Bitcoin ETF Receives Green Light for Options Trading, Crypto Moves Higher, and Congress Grills SEC Head Over SAB 121" (https://www.gemini.com/blog/blackrocks-spot-bitcoin-etf-receives-green-light-for-options-trading-crypto)
