One of the first things that people ask when learning about Bitcoin is why. Why was Bitcoin created? We already have “digital” currencies that we can send online for free through the existing financial system. So how is Bitcoin any different and why should anyone even care about it? It’s a good question and the answer has to do with trust and also, trust.
Why Was Bitcoin Created?
Bitcoin was created to be an online version of physical cash. A digital form of cash that removes the need for trusted third parties like banks or other intermediaries like PayPal or central banks. The original whitepaper is literally titled “Bitcoin: A Peer-to-Peer Electronic Cash System“.
When discussing this “trust”, two different types were explicitly referred to:
- Trust in intermediaries like banks or other financial institutions
- Trust in central banks like the Federal Reserve or European Central Bank
Physical cash can be used without anyone’s permission, without a bank being in between and without anyone invading your privacy, forcing you to “setup an account” or register for an account.
You simply hand a $5 bill to the other person.
They don’t need to know who you are or verify your identity or involve anyone else, you just give them the cash and the transaction is settled instantly (what’s called final settlement).
Online however, this wasn’t possible before Bitcoin. To send money online you would need trusted third parties like a bank or other licensed companies that you would need to register with and prove your identity to first. Even then, while it might seem like you’re sending money from one person to another and that the transaction is settled once it’s “gone through” this isn’t the case.
Banks and other institutions can reverse transactions literally months after the fact. These transactions are privacy invasive, tracked, slow and not final. The costs of these online transfers via trusted third parties also increase as you transfer more money or the further from home you go.
Currency conversion fees, banking fees, the other sides banking fees – that usually grow as a percentage of the amount being transferred – not to mention the sheer time it can take all have severely limited our online capabilities over the past decades that the Internet has grown.
You cannot send $0.001 to someone overseas or send $1 to 10,000 people at once. These things are just not practical or possible with the legacy financial rails.
But at the end of the day, all this involvement with banks and other institutions requires you to trust them with your money. Trust that they won’t just steal it, that they won’t illegally gamble it away trying to get huge returns or just trust that they won’t go bankrupt as many Americans learned recently with the collapse of SVB.
Bitcoin enables you to completely avoid all of this by sending your payment directly to the other person without anyone in between. The transaction is also final – after 10 minutes or so – and thus prevents charge back fraud. No involvement of other third parties means no accounts, no identity requirements and no permission seeking or privacy invasion.
Trusting Central Banks
The other type of trust Bitcoin helps avoid is the trust all people using fiat currencies have to have in their central bank. With the release of the whitepaper Satoshi wrote:
The root problem with conventional currencies is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.Satoshi Nakamoto
Debasement of the currency refers to the central bank printing more of the currency, which in turn devalues the money of everyone else.
For example, if the entire money supply is $1,000,000 and I print $1,000,000,000 more, that original money supply isn’t going to be as valuable as it was before. This printing has historically always lead to inflation and hyperinflation which has horrible consequences for everyone involved.
This debasement has happened all throughout history from the Roman Empire all the way up until right now with both the Federal Reserve and the European Central Bank printing trillions over the past few years (they call it Quantitative Easing or QE). This debasement reduces the value of the currency that the people hold without them having any say over it.
As Bitcoin has a set schedule that dictates when and how many new bitcoins are created, it cannot be debased. There is also no “central Bitcoin bank” as all its monetary policies are controlled via its code that is almost certainly never going to be changed. As such, there is no need to trust banks or central banks with Bitcoin.
Who Invented Bitcoin?
A person or group of people under the pseudonym Satoshi Nakamoto authored and released the first copy of the Bitcoin Whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System.
To this day it’s still not know who this person or persons were. While many have claimed to be Satoshi, none have been able to do the one thing that would prove beyond a shadow of a doubt that they were actually them: spend Satoshi’s bitcoins.
As Satoshi started Bitcoin, they were the first to mine it, which allowed them to build up a huge amount of bitcoins from all the block rewards. It’s estimated that they mined at least 1 million bitcoins between January of 2009 and January of 2010 which would now be worth tens of billions of dollars.
Since it was originally mined all those years ago, these bitcoins have never moved. Any person wishing to prove beyond any reasonable doubt that they are Satoshi should have access to, and thus be able to spend / send those original bitcoins. So far, no one has stepped forward and proven their claim.
When Was Bitcoin Created?
Satoshi Nakamoto released the famous Bitcoin Whitepaper in October of 2008. On the 3rd of January, 2009 the first Bitcoin block was mined, called the “genesis block” or Block 0. They continued working on the project with other developers until 2010 when they left the project.
Who Owns / Runs / Controls Bitcoin?
No one owns, runs or controls Bitcoin.
While someone (or multiple someones) under the pseudonym Satoshi Nakamoto were the ones who originally invented Bitcoin by publishing the whitepaper for it, no one, not even Satoshi, owns, runs or controls it.
What Are The Benefits Of Bitcoin?
Like any technology Bitcoin can be used for good or evil and has both benefits and drawbacks. While going through these pro’s and con’s it’s good to remember that you can’t make something that does everything the best or that satisfies everyone completely.
Throughout history, virtually all currencies evolved over large periods of time without anyone really sitting down and designing them (for examples see sea shells or glass beads). Even the fiat currencies we use today have been hap haphazardly cobbled together and altered over a century by bickering nations (all with their own agendas) during the throws of global financial crises or world wars.
As such, none of them were cohesively designed by a single entity with a clear goal of bringing the best money possible to all of the world and without any desire to benefit from it like Bitcoin was.
Because of this, Bitcoin is one of the hardest, most modern, unique and custom engineered monies in history. It has a number of world class benefits including:
- Limited Supply: There will only ever be 21 million bitcoins
- Distributed: All transactions are stored on thousands of computers all across the world
- Always Open: Unlike legacy banks, you can buy, sell, send or receive it globally, 24/7/365
- Transparent: The Bitcoin Blockchain is public and viewable to anyone world wide
- Peer-To-Peer: No banks are involved, transactions go from one person to the other
- Permissionless: It can be used without having to ask anyone for permission
- Censorship Resistant: You’d have to stop the Internet to stop it
- Easily Divisible: 1 BTC can be divided into 100 million pieces called “Satoshi”
- Protected: The worlds biggest supercomputer made up of miners protect every Bitcoin
- Final Settlement: Bitcoin transactions, once confirmed in a block are irreversible
- Pseudo-Anonymous: There are no names or accounts. It should be noted that it’s still possible to link Bitcoin addresses to real life names if care is not taken to protect your Bitcoin Privacy
What Are The Drawbacks Of Bitcoin?
Bitcoin was built to do a few things exceptionally well. Those few things include being decentralised and distributed, requiring no trusted third parties, being open and secure, having a limited monetary supply and being extremely resistant to censorship.
As such, to prioritise these goals it meant that other factors needed to be sacrificed such as speed. Everything is a balancing act and Bitcoin is no different. Con’s of Bitcoin include:
- Energy Use: The Proof-of-Work (PoW) mechanism that not only controls the issuance of new bitcoins but also secures the network and confirms new transaction onto the blockchain uses a massive amount of power. Many compare it to small countries like Sweden which sounds like a lot, but it’s important to consider how much energy a global monetary system should use. Many global monetary systems, such as the USD, not only use energy for the many institutions, banks, ATMs, data centres but also for the huge military presence required to “back it”. This total energy use far outstrips Bitcoin’s meagre energy use for an arguably worse quality monetary network, something we cover more in Bitcoin Myths. High energy use is also separate to high carbon emissions and Bitcoin is estimated to be anywhere from 39% to 73% renewable making it one of the cleanest industries in the world. Importantly, this energy is a feature, not a bug, as it ties Bitcoin to a real world, limited resource which is what truly enables its scarcity.
- It’s Young: Bitcoin debuted in 2009 and as such, is still an incredibly young and evolving asset class. As there has never been anything like it in the world before, there is uncertainty over its future as well as how it will react to varying degrees of stresses such as depressions, regulation, quantum computers or hacking.
- Its Hacking Exposure: While it’s impossible for online hackers to steal your physical gold or cash stored in a draw, Bitcoin is entirely digital meaning it has a much bigger surface attack area for hackers to exploit. With the rise of centralised exchanges, this further increases the risk to people loosing their bitcoins to hacks, the exchanges going bankrupt or scams.
- Its Speed: Due to Bitcoins consensus rules, it can only process around 7 transactions per second (TPS) which is about 605,000 per day. While this may sound like a lot, Visa claims to be able to do 24,000 transactions per second making Bitcoin seem quite slow by comparison. However it should be noted that comparing Bitcoin and Visa to each other is like comparing apples to koalas. Thanks to Layer 2 scaling protocols like the Lightning Network (which has no fundamental limits to the amount of transactions per second it can handle) and other upgrades such as batched transaction Bitcoin is gradually overcoming its speed issue. For more info, check out our detailed piece How Long Does Bitcoin Take To Send?
- Its Criminal Use: A drawback of having an unstoppable, uncensorable network is that good as well as bad actors can use it. The most famous example was the Silk Road website that got shut down in 2014 which sold illegal substances using bitcoins as payment. While it’s indeed true that criminals use Bitcoin, in reality they have been able to use cash for centuries. On top of this, the legacy financial system has been shown to allow far more illegal drug money or money laundering than anything close to what’s happened on the Bitcoin network as also covered in our Bitcoin Myths piece, so this isn’t something unique to Bitcoin. As the ledger is entirely public, it may even make criminal activities even harder to get away with.
What Are The Risks Of Investing In Bitcoin?
To begin with, you should always consult a registered financial professional on whether or not you should invest in anything, even Bitcoin, as only they will have access to your full financial situation, personal details and thus be able to make a properly informed opinion on whether it is a good investment for you or not.
As Bitcoin has seen phenomenal growth over the past decade – going from under $100 to more than $20,000 USD per bitcoin at a growth rate of 200%+ per year – there has been a huge rush to speculate and day trade with it. As such, it should be made clear that speculating is very different to investing.
Speculative Trading refers to the act of conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain or other major valueInvestopedia
Investing, broadly, is putting money to work for a period of time in some sort of project or undertaking in order to generate positive returnsInvestopedia
One of the key differences between the two is how long you trade/invest for. For the purposes of this piece, we are exclusively referring to the risks of investing in Bitcoin, not day trading / speculating. We believe that this is basically just gambling and shouldn’t be done unless you’re 100% happy to lose all your money. Risks of investing in Bitcoin include:
- Volatility: Bitcoin’s still a highly volatile asset that changes price every second, every day
- No Insurance: Deposits in banks are usually insured by the government in case the bank goes bankrupt, Bitcoin has no backup or insurance policy
- Protocol Risk: Although the Bitcoin network, protocol and cryptography that secures it have been battle tested over the past 10+ years, it’s still always possible that someone, somewhere finds a design flaw. Quantum computers could also succeed where classical computing has so far failed to crack its encryption which may shatter the worlds faith in Bitcoin. That being said the protocol and code behind Bitcoin is quite possibly the most reviewed and hardened in existence. With a Market Cap of hundreds of billions of dollars, this effectively serves as a “bug bounty” which anyone able to compromise the network would be able to claim. So far, no one seems up to the task.
- Fraud / Bankruptcy: While holding your own Private Keys secures you against this risk, many users still allow other third parties to custody their funds for them (or hold the private keys on their behalf). This trust in a third party such as a centralized exchange then exposes them to other risks such as Crypto Exchange Bankruptcies, being a victim of hacking, being shut down by a government or simply doing fraudulent things. To avoid this, it’s recommended you always remove your bitcoins from any exchange and hold your own private keys. This also greatly increases your Bitcoin Privacy too.
- Regulation: As Bitcoin is still very new, regulations are still quite unknown and are evolving as time goes on. As Bitcoin grows and draws more attention upon itself, regulation is expect to increase
- Hacking: While this is a risk with virtually all assets in today’s modern world, Bitcoin is often stored by the user and not a financial institution and as such, may not be secured as well if the user isn’t very technical. This can lead to users losing their bitcoins to any number of hacking tricks that wouldn’t otherwise be possible. It should be noted though that using a dedicated Hardware Crypto Wallet can significantly eliminate this risk.
- Fungibility: While the Bitcoin network sees all bitcoins as equal, countries, governments or even private companies may mark certain bitcoins. This mark may mean they don’t get processed by them or are otherwise censored in some way by merchants. You could still send/receive them using your own Bitcoin Wallet, but this marking reduces the fungibility of bitcoins and could potentially strand your asset if this happened to you. This risk could potentially be solved via Bitcoin Mixers and coin mixing protocols such as CoinJoin, but again this is a risk that will likely evolve over time as Bitcoin grows.
To help mitigate these real risks we recommend:
- Always taking full control of your private keys and never trusting third parties
- Start small with an amount of money you’re fully willing to lose
- Like with everything online, assume everyone (including us!) is a scammer
- Learn as much as you can about Bitcoin from us and others. The more you understand Bitcoin, the more confidence you’ll have and the higher a level you’ll achieve
- Don’t get greedy. Don’t buy shitcoins. Don’t try and time the market
The Athena Assessment
While it’s not uncommon for engineers or inventors to try and solve real world problems or gaps in the market when creating a new product, few aim as high as Satoshi did. Completely overhauling the entire global financial system with its trillions of dollars and immensely powerful world wide governments is about as big as you can go!
To take it one step further they did this all for free, making the code fully open source software (FOSS) and further helping to grow the Internets capabilities and all our privacy in one go. This in turn also created a whole new asset class and industry now worth hundreds of billions itself.
Bitcoin, and its blockchain technology that runs it, is a world changing invention that will be remembered throughout history and we’re all just at the very start of it. So if you want to go deeper into Bitcoin, check out our free 5,000+ word piece that thoroughly explores What Bitcoin Is.
What Are Bitcoins Made Of?
There is no such thing as a physical “bitcoin” and as such, bitcoins aren’t made of anything. Although you may see physical gold or silver “coins” with the Bitcoin symbol on them in pictures quite often, actual bitcoins don’t have any physical presence. That doesn’t mean they aren’t real though as outlined in our piece Is Bitcoin Real?
They only exist on the Bitcoin blockchain, which is stored on every Bitcoin Full Node. As there are tens of thousands of these nodes, you could say bitcoins exist everywhere on Earth, and also no where, all at the same time.
Can I Mine Bitcoin On My Phone?
No. Bitcoin Mining cannot be done on any phone (iPhone or Android) as they cannot perform the hashing task that is core to bitcoin mining fast enough. While you could easily mine bitcoins on your home laptop years ago, now it’s really only possible since 2013 using custom designed pieces of hardware called application-specific integrated circuit or ASICs.
These take the form of dedicated pieces of mining hardware (for example the Antminer S19 XP) that get packed into anything from single boxes in peoples homes, all the way up to thousands of units in a data centre. For more information, check out our piece, What Is Bitcoin Mining?
What Is The Main Reason To Use Bitcoin?
There are many good reasons someone might want to use Bitcoin. Some of the most common things people use it for are to:
– Store monetary value over time
– Store monetary value without anyone’s permission
– Store monetary value beyond the reach of a government
– Send money overseas instantly and cheaply
– Send free and instant Remittance
– Transact without being banned or censored
– Take their wealth with them when fleeing a country
You can also spend your bitcoins at hundreds of thousands of stores, resorts, online websites and more. For a full list have a look at What Can You Do With Bitcoin?
Can Bitcoin Be Hacked?
The core technology of Bitcoin is built on the SHA-256 cryptographic algorithm which is what safeguards much of the Internet, including existing legacy financial institutions. As such, it is for all intents and purposes impossible to hack.
Many people have had their bitcoins stolen through many other (more traditional) ways such as social engineering scams, exchanges going bankrupt or being hacked, ransomware, fires, physical duress or simply forgetting their private keys.
While these things do pose a risk to your bitcoin, these risks are no different to many other legacy systems such as banks which deal with hacking, fraudulent transaction or identify theft daily.