Bitcoin
The First Cryptocurrency
Introduction
On October 31, 2008, someone using the name Satoshi Nakamoto published "Bitcoin: A Peer-to-Peer Electronic Cash System." This nine-page document proposed a revolutionary concept: digital money that could operate without banks or governments. In January 2009, Nakamoto launched the network by mining the first block. Fifteen years later, Bitcoin has grown from a cryptographic curiosity into a trillion-dollar asset class.
Understanding Bitcoin requires appreciating both its technical innovation and ideological roots. Bitcoin emerged from decades of work by cryptographers seeking digital cash, combined with libertarian skepticism of centralized monetary control. The 2008 financial crisis provided context that resonated with early adopters.
This lesson explores Bitcoin's design, how it works, and its significance in the broader FinTech landscape.
The Problem Bitcoin Solves
Digital information can be copied perfectly and infinitely—a fundamental problem for digital money. If I email you a photo, I still have the photo. Money can't work that way.
The Double-Spending Problem:
How do you prevent spending the same digital dollar twice? Before Bitcoin, only one solution existed: trusted intermediaries.
Traditional systems solve this through banks:
- Banks maintain account balances
- They verify funds before transfers
- They update ledgers to reflect transactions
- You trust the bank's records
Bitcoin's Innovation:
Bitcoin solves double-spending without trusted intermediaries through:
- A public ledger (blockchain) recording all transactions
- Cryptographic signatures proving ownership
- Proof of Work consensus for agreement
- Economic incentives for honest behavior
Fundamentally New Money:
Bitcoin is unlike anything before:
- Unlike government currencies: No central bank controls supply
- Unlike bank deposits: No institution holds your Bitcoin
- Unlike gold: Exists only as database entries
- Unlike PayPal: No company operates the network
How Bitcoin Works
The Blockchain:
Bitcoin uses a blockchain to record all transactions:
- New blocks added roughly every 10 minutes
- Each block contains thousands of transactions
- All participants can view complete transaction history
- Transactions use cryptographic addresses (not identities)
Ownership and Keys:
Owning Bitcoin means controlling a private key:
- A private key is a large random number (256 bits)
- From this, a public key and address are derived
- The address is like an account number (shareable)
- The private key is like a password (must be secret)
Critical: If you lose your private key, your Bitcoin are lost forever. No password reset exists.
Sending Bitcoin:
To send Bitcoin:
- Create a transaction specifying recipient address and amount
- Sign the transaction with your private key (proves ownership)
- Broadcast to the network
- Miners include the transaction in a block
- Once confirmed, the transfer is complete
Mining and Consensus:
Miners compete through Proof of Work:
- They collect pending transactions
- They race to solve computational puzzles
- First to solve proposes the next block
- Winner receives block reward plus fees
- Other miners verify and build on valid blocks
Bitcoin's Monetary Policy
Bitcoin's supply is mathematically limited to 21 million coins—a hard cap enforced by the protocol code.
Issuance Schedule:
New Bitcoin enter circulation through mining rewards:
- Initial reward: 50 BTC per block (2009)
- Halving approximately every 4 years (~210,000 blocks)
- Current reward: 3.125 BTC per block (after 2024 halving)
- Eventually reaches zero (around 2140)
Current State:
- Over 19 million Bitcoin have been mined
- A significant portion (estimated 3-4 million) are lost forever
- Final coins won't be mined for over 100 years
Deflationary Design:
This design contrasts with inflationary fiat currencies:
- Central banks can create unlimited money
- Bitcoin supply is fixed and predictable
- Proponents argue this provides protection against currency debasement
Security Transition:
As block rewards decrease, transaction fees must increasingly fund security. Whether fee revenue will be sufficient long-term is debated.
Bitcoin's Evolution and Debates
Bitcoin's development has been marked by significant debates:
The Scaling Debate (2015-2017):
How should Bitcoin scale?
- One side favored larger blocks (more on-chain capacity)
- Other side favored keeping blocks small, scaling through Layer 2
- Resulted in Bitcoin Cash fork (larger blocks)
- Bitcoin maintained smaller blocks
Notable Upgrades:
- SegWit (2017): Increased effective capacity, fixed transaction malleability
- Taproot (2021): Improved privacy and smart contract capabilities
Lightning Network:
Bitcoin's primary Layer 2 scaling solution:
- Enables instant, low-fee transactions
- Useful for small, frequent payments
- Growing adoption, though still limited compared to base layer
Use Case Evolution:
Bitcoin's narrative has evolved:
- Early: Peer-to-peer electronic cash
- Current: Digital gold, store of value
- Volatility makes everyday payments challenging
- Increasingly compared to gold rather than currency
Environmental and Social Considerations
Energy Consumption:
Mining's energy consumption generates controversy:
- The network consumes as much electricity as some countries
- Much debate about whether this is "worth it"
- Some argue it secures a monetary network
- Others view it as wasteful
Mining Migration:
Mining has shifted geographically:
- Once concentrated in China
- China's 2021 ban caused massive migration
- Now distributed across North America, Kazakhstan, Russia, and elsewhere
- Incentive to find cheap electricity
Illicit Use Concerns:
Bitcoin's pseudonymous nature has facilitated illicit uses:
- Early association with Silk Road marketplace
- Ransomware payments often demanded in Bitcoin
- However, public blockchain enables law enforcement tracking
- Most Bitcoin activity is legitimate
Wealth Concentration:
Significant wealth concentration exists:
- A small percentage of addresses hold large portions of supply
- Though many large addresses are exchanges holding customer funds
- Distribution more concentrated than traditional currencies
Bitcoin's Place in the Financial System
Bitcoin has achieved mainstream recognition:
Institutional Adoption:
- Major companies (MicroStrategy, Tesla briefly) have held Bitcoin
- Financial institutions offer Bitcoin products
- Bitcoin ETFs launched in multiple jurisdictions
- BlackRock, Fidelity, and others have entered the space
Legal Status:
- Most countries permit Bitcoin ownership
- El Salvador made Bitcoin legal tender (2021)
- Some countries have banned or restricted it
- Regulatory approaches vary widely
Challenges:
Significant obstacles remain:
- Volatility (10%+ daily swings common) limits medium-of-exchange use
- Regulatory uncertainty in major markets
- Environmental concerns
- Limited throughput for base layer
The Debate Continues:
Opinion on Bitcoin ranges from:
- "Greatest monetary innovation in centuries"
- "Speculative bubble with no intrinsic value"
Both sides have sophisticated arguments. Understanding Bitcoin helps you form your own view.
Key Takeaways
- Bitcoin solves the double-spending problem for digital money without requiring trusted intermediaries
- Ownership is controlled through cryptographic private keys, with transactions recorded on a public blockchain
- Bitcoin's supply is limited to 21 million coins, created through mining on a predetermined schedule
- The network has evolved through scaling debates and the development of Lightning Network
- Bitcoin has achieved mainstream institutional adoption while facing environmental and regulatory debates
Summary
Bitcoin introduced revolutionary digital money enabling value transfer without trusted intermediaries through blockchain, cryptographic signatures, and Proof of Work. Its limited supply and decentralized nature distinguish it from traditional currencies. While debates continue about use cases, environmental impact, and regulation, Bitcoin has established itself as a major asset class and the foundation of the cryptocurrency ecosystem.