Bitcoin informationguide

What is Bitcoin?

Bitcoin is the mother of all cryptocurrencies; it is the coin that started the crypto revolution. In 2008, someone using the pseudonym ‘Satoshi Nakamoto’ published the so-called Bitcoin white paper. The digital coin quickly gained traction afterwards. On January 3, 2009, the Bitcoin network went live, with Nakamoto himself mining the first block and receiving 50 bitcoins in return. Even though the concept of a decentralised cryptocurrency had already been envisioned by Wei Dai in 1998, no one had managed to successfully adopt it before. Bitcoin thus became the first successful application of the concept.

What is particularly remarkable about Bitcoin, is that it for the first time in history enabled the transfer of bits and pieces of digital value without the use of an intermediary. One of the problematic aspects of digital transfers is that, in principle, they can be copied infinitely. Therefore, in order to establish a successful digital payment system, you would first have to find a solution to the problem of copying digital currencies, as this loophole would allow for undesirable double expenditure. Such concerns are currently mitigated by central authorities, who process and control financial transactions. A drawback of this system is that it inherently relies on an element of trust. Essentially, the central authority holds all power.

With Bitcoin, however, the formula no longer contains this element of trust. It is effectively a protocol processing transactions through mathematics. A system that depends on trust is not necessarily undesirable, but it does bring about certain vulnerabilities. The system’s reliability is completely dependent on the integrity of the people sustaining it. History has repeatedly shown that people are susceptible to financial incentives. The Bitcoin protocol removes this weakness from the system and separates the monetary system from the financial institutions. The crypto revolution, spearheaded by Bitcoin, indeed has the potential to radically transform the monetary system in just a couple of years! Hence, Bitcoin is not only a digital currency: it also stands for financial freedom and sovereignty. This consideration is also a core element of the mission and vision of SATOS. And indeed, our name already reveals the source of our inspiration.

Why should I buy Bitcoin?

The Bitcoin price and exchange rate is notoriously subject to fluctuation; ups and downs of hundreds of euros per day are by no means an exception. You can earn a lot of money in a short period with it, but you can just as easily lose as much. Hence, it is advisable to read up on Bitcoin in advance and to become aware of the risks that naturally accompany investments in cryptocurrencies. Aside from the significant currency fluctuations, Bitcoin also makes for an interesting investment opportunity, because it is the most well-known and biggest cryptocurrency in the world. It contains an enormous user network and is much more advanced in terms of decentralisation than its competitors. You will come across many reasons on the internet as to why you should buy Bitcoin or sell Bitcoin, but the most important advice we can give you is to do proper research before you engage in the world of cryptocurrencies. Reading these kinds of articles is certainly a perfect step in the right direction!

Who came up with Bitcoin?

The real person hiding behind the ‘Satoshi Nakamoto’ pseudonym remains unknown. This might be the biggest digital mystery of our age. The Bitcoin white paper was published under this pseudonym in 2008, and ever since then, no one managed to uncover his or her identity. Meanwhile, there have been plenty of people claiming that they are hiding behind this pseudonym and that they have first conceived Bitcoin, but no one has ever managed to provide convincing proof for such claims. You could argue that it is perhaps advantageous that we have no clue concerning the real identity of Satoshi Nakamoto. The uncovering of his or her identity could bring about major political and economic trouble for Bitcoin. The existence of a demonstrable leader could hurt the democratic potential of a decentralised digital currency.

Actually, the mystery surrounding Satoshi’s real identity perfectly fits the ideals that formed the basis for Bitcoin. The digital currency was first presented at the height of the economic crisis, which had put the entire financial world at unease. In 2008, Satoshi made headlines with the white paper. He launched the network not much later, before disappearing from the stage in 2011. With this short performance, the person using the pseudonym has offered mankind an instrument that carries the potential to radically alter global power relations. The democratisation of our money; an unstoppable digital currency.

What is the history of Bitcoin?

The story behind the first successful decentralised cryptocurrency commenced in 2008 when Satoshi Nakamoto published the Bitcoin white paper. In this publication, Bitcoin was described as a peer-to-peer electronic money system. And indeed, there is no better way to put it. Bitcoins can be transferred without the need for any intermediaries, just like with the transfer of physical coins.

It is perhaps interesting to mention here that Bitcoin was not the first attempt at creating a digital currency. Already in 1983, computer scientist David Chaum conceived Ecash, a form of electronic money with foundations in cryptography. It was not much of a success; the currency was not widely used, and the company went bankrupt in 1998. Chaum argued that the project failed because of a lack of privacy awareness among internet users at that time.

It only took Satoshi a couple of months following the publication of the white paper to launch the first version of the software, and to bring the network online. Satoshi mined the first block already more than ten years ago, on January 3, 2009. He or she received a reward of 50 bitcoins in return. After publishing the white paper, Satoshi continued to work on the protocol’s construction with a group of developers, before disappearing from the stage in 2011, without any prior notice.

How does Bitcoin work?

We already discussed previously in this article that Bitcoin marked the first successful application of a protocol allowing the digital transfer of value without the need for an intermediary. This is quite special, because transferring digital objects without an intermediary may cause a variety of issues. It is best to explain this using an example.

Imagine that it is a hot summer day, and we are sitting on a bench in the park. I carry two apples in my backpack, and because I feel particularly generous today, I decide to share my apples with you. I give you one of my apples. As soon as you lay your hands on it, you become aware that you now own this specific apple, and that you could basically do with it whatever you want. I am no longer able to exercise any power over the apple.

Now, we slightly alter the situation. We are still sitting on the park bench, but this time we exist in a virtual reality. My virtual backpack contains two digital apples, and I decide to give you one of them. How can you be certain that I did not hand you a copy of the digital apple? Perhaps I had made 100 different copies of the digital apple shortly before our transaction, and handed these to everyone around me. In this case, the act of offering you my digital apple would end up being far less special. Now, giving away digital apples is not really problematic, but you can imagine that such scenarios may cause much uncertainty and major issues when applied to digital money transactions.

We nowadays solve this issue by appointing or embedding a central authority, who keeps track of everyone’s stock of digital apples. This authority carries the power to verify every transaction, and to assess whether I indeed do possess a digital apple. The same problem of course also pops up in the financial world, where we are dependent on banks and other intermediaries who verify our transactions and basically hold all power. With one press of a button, these authorities can create 1,000 new apples (or euros). As you probably understand by now, transferring digital apples is quite a bit more difficult than handing over possession of a physical apple.

Now that we have offered you a sketch of the problem of digital value transfer, it is time to discuss the solution that Bitcoin offers. Because, indeed, what if we would not grant one central authority the power over the property register of digital apples, but make it available to everyone instead? Everyone can participate in the verification and validation of digital apple transactions.

If we divide the property register up and hand it to multiple individuals, i.e. decentralisation, we are no longer dependent on one central authority. It is also no longer necessary to put all our faith in this central authority. By allowing everyone to participate, we can effectively verify each other, and only allow the dispatch of a digital apple if more than 50% of all participants agree with the transaction. Now, verifying all these transactions will cost much time and money, which is why those participating in the verification process will obtain a reward, in the form of new digital apples. This reward also serves as the only mechanism used to create new digital apples. It is thus not possible for one central authority to single-handedly approve transactions, or to create new digital apples. To alter the property register, more than 50% of the network needs to agree with the proposed change.

This is perhaps a heavily simplified explainer of the Bitcoin protocol, but if you exchange the digital apples with bitcoins, you already possess a basic understanding of how Bitcoin and other cryptocurrencies work.

Which problem does Bitcoin solve?

First off, Bitcoin solves the problem mentioned above of the impossibility of digital object transfer without the use of an intermediary. Even though it might still be possible without Bitcoin, the protocol ensures that everything is processed in a just and reliable manner. By decentralising the management of the property register, and by only allowing alterations with majority support, Bitcoin allows the reliable transfer of digital value without the need for an intermediary. Nevertheless, we would not do Bitcoin justice if we stop here.

Aside from the interesting technology that it offers, Bitcoin is also a political movement. It stands for the decoupling of the monetary system from the traditional financial institutions that have historically sustained it. It is no coincidence that the white paper was published at the height of the most recent economic crisis, to offer an alternative to the existing financial system. The protocol enables everyone to freely and independently manage their finances. The rules have been defined beforehand, and they can only be altered if a majority of the network agrees. No one can unilaterally decide to print additional bitcoins. This is what democratisation of money looks like. In short, you are in complete control over your credits. This notion and vision also inform our operations at SATOS. It is not possible for customers to store their purchased cryptocurrencies at SATOS.

What are the pros and cons of Bitcoin?

The biggest advantage of Bitcoin compared to other cryptocurrencies is its popularity, which has also brought about the coin’s network effect. Bitcoin is the oldest, biggest and most well-known cryptocurrency on the market. Although Bitcoin is not a company, it did manage to achieve a certain brand reputation in the past ten years. It is by no means exceptional to come across people who have never heard of ‘cryptocurrencies,’ but who are familiar with Bitcoin.

The popularity of the mother of all cryptocurrencies is further underlined by the nearly ten thousand nodes populating its network. The Bitcoin network is the most decentralised network, and it has amply outpaced any competition in this regard. There are also not many projects that manage to even approach Bitcoin in terms of active users per day, or when considering the value flowing through the network on a daily basis. This also makes it more interesting for developers to work on this particular project. Unsurprisingly, possible solutions to the scalability problem this entails, such as the Lightning Network, are primarily developed from within the Bitcoin community.

This immediately brings us to an important disadvantage of Bitcoin. Its blockchain is currently only able to process a limited number of transactions each second. You can probably imagine that the decentralised management of the property register is susceptible to delay. Validating transactions with such a big group of people is time-consuming, and as a result, the network is currently only able to process 7 transactions per second. By way of contrast, Visa on average processes 1,700 transactions per second. To realise the promise of a global decentralised payment network, the network will need to be scaled up significantly. Considering all the developments that are currently ongoing in the industry, it appears to be a matter of time before the network can operate on a global scale.

Another disadvantage is the lack of privacy on the Bitcoin network. It is a common misunderstanding that transactions taking place on the Bitcoin blockchain are fully anonymous and guarantee user privacy. Unless you take preventive action yourself, there are plenty of ways to reveal the identity behind a Bitcoin wallet. Privacy remains an essential precondition for the realisation of the ideals of financial freedom and sovereignty. Indeed, there is a certain irony to the fact that up to this day, Satoshi Nakamoto’s real identity remains unknown.

What makes Bitcoin unique?

To properly understand the value of Bitcoin, it is necessary to go back in history a bit. Alternatives for Bitcoin have been on offer ever since 2011, but up to this day, not a single cryptocurrency has managed to dethrone Bitcoin. They all promise to contain that one unique feature that would render Bitcoin irrelevant, but the reality is that Bitcoin remains the number one cryptocurrency. What then are the unique aspects that have enabled Bitcoin to become the quintessence of the crypto revolution? We believe that the aforementioned network effect plays a major role here, as it gets perpetually reinforced by its enormous popularity and network size. More and more people become aware of Bitcoin, and in the past ten years, its blockchain has proved to be very solid. The other coins are all much younger and still have to prove themselves as a safe alternative.

Another unique aspect of Bitcoin is that it is much more decentralised than other cryptocurrencies. Almost every other currency is backed by identifiable founders, who support the project and wield considerable influence over its development. Centralisation certainly carries certain benefits, such as the possibility to alter the protocol rather quickly, but it also contravenes the original ideals behind Bitcoin’s foundation.