Bitcoin: everything you need to know about the first crypto-currency
Where does bitcoin come from? When was it created, and how does it work? Read our full report.
1/ What is Bitcoin?
Bitcoin is considered to be the first crypto-currency in history.
It all started in October 2008. A few weeks after the collapse of Lehman Brothers, one of the biggest US banks, a mysterious document was uploaded to the internet.
Title of the 9-page document? "Bitcoin: a peer-to-peer electronic payment system."
Author? Satoshi Nakamoto.
Satoshi Nakomoto, whose identity is not yet known, proposed in what is also called the Bitcoin white paper, a way to create a system for a decentralised currency. Bitcoin is referred to as a transparent ledger with no central authority.
This famous formulation gives the very nature of Bitcoin's DNA. It is a project based on transparency, security and disintermediation. On the face of it, you might think it's an interesting project, but it's hard to get a concrete idea of what Bitcoin is.
To give you a better understanding of what Bitcoin offers, let's take a look back at the traditional banking system.
Today, most money is already "digital". Banks essentially manage their own ledgers of transactions. However, the banks' books are not transparent and are stored on each bank's main computer. In other words, it's impossible - or almost impossible - for us to be able to watch what banks do with the money they " secure ".
This is where Bitcoin stands out.
Bitcoin is a transparent ledger. Anyone can take a look at what is happening on the Bitcoin blockchain at any time. This "ledger" is accessible at all times, as long as the Internet is working, and it is possible to see all the transactions and therefore the overall balance. Nevertheless, Bitcoin ensures pseudo-anonymity for its users, since no one is supposed to know the identity of the person executing a transaction on the network.
With Bitcoin, everything is open, transparent and traceable, but you cannot know who originated or received a transaction. Nonetheless, some of the addresses through which these transactions pass are known, which makes it possible to find out how their favourite companies (Tesla, MicroStrategy) acted on the markets.
Speaking of transactions, one anecdote has now acquired the status of a quasi-religious maxim for Bitcoin. In May 2010, a transfer of 10,000 Bitcoins was recorded between two addresses.
This specific transaction was the first purchase made with Bitcoins, carried out by a certain Laszlo. For the record, Laszlo posted a message on the Bitcoin Talk forum in 2010 asking someone to buy him two pizzas in exchange for 10,000 Bitcoins. The post did not go unanswered, as someone bought his two pizzas in exchange for those thousands of Bitcoins. At today's prices, that meal would have cost him several hundred million dollars... That alone.
2/ Bitcoin is a digital asset
Bitcoin is a digital currency, entirely dematerialised. There is no question of gold or silver coins or banknotes whose value depends on the number written on them. We are talking about a single currency built on the blockchain. For information, Bitcoin production is limited to 21 million and each Bitcoin is made up of 100 million Satoshis. In other words, the smallest value that can be bought is one hundred millionth of a Bitcoin.
To which you would almost certainly reply, but Bitcoin is not the only digital currency. Most of our societies today operate using digital money. But what you need to understand is that when you pay with your card, the euros or dollars used do not leave the banks. These euros or dollars are simply digital entries between banks and payment intermediaries (VISA, Mastercard...).
With the advent of credit card payment, now contactless or even with your watch or phone, anyone can transfer money to a loved one without using a specific amount of cash. So many sceptics are asking why Bitcoin is such big news? What's really new?
For the first time since digital money existed, we have a monetary alternative to the current system. Bitcoin is a means of payment that no government or bank can control. Bitcoin is decentralised, dematerialised, transparent and has value.
To put it simply, Bitcoin is the internet of money. It uses blockchain technology to ensure transactions and enables the establishment of a peer-to-peer service on the Internet. To give you an idea, Bitcoin allows you to carry out financial transactions without revealing your personal details. Your name or bank card number is never revealed, because Bitcoin does not need them. The blockchain recognises you as the owner of a Bitcoin address, allowing you to send and receive funds without external trusted third parties. The blockchain by its nature operates as a trusted third party (we explain in detail what blockchain is here).
3/ Why Bitcoin has value?
Many critics of Bitcoin question its value.
What interests us when we talk about value in economics is the idea of exchange value. In short, a good has an exchange value when it is useful and rare. Bitcoin meets both these criteria. Its supply is limited to 21 million and the way it works allows anyone with an internet connection to have control over their money.
To give credence to this idea, the Bitcoin market - although speculative - gives credence to the value of this digital currency. The public is willing to exchange its central bank-issued currencies for Bitcoin.
It is the notions of supply and demand that give value to a good or service. In the case of Bitcoin, it is following the first exchanges that Bitcoin acquires value, beyond utility, the technology works. It's no longer just a question of Satoshi's mysterious project, but of its realisation.
You have now understood the beginnings of the idea of value for Bitcoin. You are now well on the way to understanding how the notions of value and price are inherent to Bitcoin.
A short break, we catch our breath... And here we go again!
When we think of the "price" of Bitcoin, we are actually referring to the price of the last transaction made on a specific trading platform (for example Bitstamp, Binance or Coinbase). Unlike the US dollar, Bitcoin has no set price. It is the market that defines its price.
💡 Back to economics class: supply is an increasing function of price and demand is a decreasing function of price.
Bitcoin is no exception to this rudimentary rule. The value of Bitcoin increases if buyer 2 pays more for his Bitcoin than buyer 1. The opposite happens when the price falls.
You would say, why not, Bitcoin has value because some people buy it, but that's not enough. You would be absolutely right. That's why we're offering to back up 6 attributes that give Satoshi's currency its value.
- Bitcoin is rare
The supply of Bitcoin is limited. There will never be more than 21 million Bitcoins in circulation, which represents a much larger pool of digital currency than any other nation in the world today. Because of its digital nature, Bitcoin holders can use its network from anywhere in the world. All that is required to make the exchange is an internet connection.
Just over 17 million Bitcoins have been mined so far, so there are less than 4 million Bitcoins left to mine. As you will have realised, Bitcoin is rare by nature. But that's not all, as it is becoming rarer. Bitcoin works in cycles. Every 4 years, Bitcoin undergoes a halving (miners' remuneration is halved, editor's note). The first consequence is a decrease in the number of Bitcoin entering circulation on the market. The second is an increase in its price.
- Bitcoin is transparent
Bitcoin is the only currency that allows financial transactions to be broadcast directly to the public in a way that thanks to the blockchain cannot be matched by any other currency. All transactions can be viewed freely.
- Bitcoin is decentralised
Bitcoin is the only digital currency that has even remotely approached a decentralised system. This decentralisation is essential, as it ensures that no single player has total control over the currency. No single computer holds the ledger. With Bitcoin, every computer that participates in the system also keeps a copy of the blockchain. So if you wanted to destroy the system or hack into the ledger, you would have to attack thousands of computers that keep a copy and are constantly updating it. In the thirteen years of its existence, no one has managed to hack Bitcoin. An underlying question arises: can we talk about the power of decentralisation? Possibly.
- Bitcoin knows no borders
As Bitcoin is not a physical currency, it can be used in every country on the planet (if the law allows). What's more, anyone wishing to accept payments in Bitcoin from other countries doesn't have to worry about exchange rates either. The value of Bitcoin is the same wherever you look.
- Bitcoin offers freedom
Although there are an increasing number of Bitcoin exchange platforms requiring KYC (Know Your Customer), it is still possible to acquire Bitcoin anonymously. This freedom can be important for people in countries like China and Argentina, whose national currencies have been exploited by their governments.
- Bitcoin is fungible
The fact that Bitcoin was created to be divisible allows these assets to be traded as fungible. Let's take a simple example to explain what fungibility is. 5 one-euro coins are the equivalent of a 5-euro note. You can't really tell the difference between coins and banknotes; one euro can be exchanged for another, so they are interchangeable and therefore fungible. With Bitcoin, it's a bit different. One bitcoin is equal to another bitcoin, but because of the traceability of this currency via the blockchain, some have more or less value. Bitcoin is said to be tainted or dirty when it has passed through addresses associated with illicit activities. These bitcoins are blacklisted by certain governments, having a de facto impact on their price.
4/ Does Bitcoin pollute?
Crypto-currencies are reputed to be bad for the environment.... But is there a way to do better?
Bitcoin uses the Proof of Work consensus mechanism. PoW is based on a fairly simple system, that of mining. Its obvious weak point is Bitcoin's energy consumption. According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin accounts for 0.42% of global electricity production, whereas Bitcoin mining consumes nearly 85 TWh per year. By way of comparison, gold mining represents 131 TWh each year.
It is undeniable that Bitcoin's high energy consumption poses a problem. Nevertheless, mining is at the very heart of the Bitcoin project, constituting its main feature. Bitcoin mining is the process of validating transactions on the blockchain, without the intervention of third parties. This validation system consumes large amounts of energy, using the computing power of thousands of mining machines.
The entire process used to be possible with home computers, but mining hardware has evolved since the early 2010s, giving rise to chips designed solely for Bitcoin mining. These machines run constantly, resulting in high electricity consumption.
To do this, miners buy electricity, most often produced from fossil fuels. Combustion emits greenhouse gases that warm the atmosphere and cause considerable pollution. According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin emits 47.11 MtCo2e (million tonnes of CO2 equivalent) per year. That's around 0.10% of the world's greenhouse gas emissions.
The problem doesn't stop there, since competition between miners results in energy consumption by the network. What we need to understand about the Bitcoin mining process is that the more its value increases, the more competition there is. In the same sense, the more competition there is, the more complex the calculations to solve the next block are, and therefore the more energy the mining machines require to operate efficiently.
As an indication, in May 2021, the computers in the Bitcoin miners' network were making 180 quintillion guesses per second according to One Earth magazine. At that time, each Bitcoin was selling for around $36,000, rising to $57,000 in December 2021. With amounts like that, it's no wonder that miners are constantly striving to mine more crypto-currencies, even in times of bear market.
The important thing to remember is that blockchain technology and crypto-currencies offer new opportunities for all sectors. From finance to media, entertainment to e-commerce. But unfortunately, the damning statistics about its energy consumption are distracting attention from its many benefits and turning the spotlight on its harmfulness to the environment... Rightly so.
This is currently the biggest brake on the adoption of cryptos. The environmental issue is a matter of public interest and, without real consideration from the entire ecosystem, the general public and its detractors may never adopt Bitcoin and blockchain technologies.
Despite the bad press crypto-currencies have received, some more sustainable mining companies such as Sato Technologies Corp in Canada, are developing projects with the ecological dimension at the heart of their business. Proof that it is possible to reduce one's carbon footprint.
5/ When did Bitcoin explode?
BTC has exploded several times. This is known as a cycle, corresponding to different market phases.
How can we not mention its price when talking about Bitcoin. While one BTC cost $0.003 in March 2010, it was valued at $68,721.93 on 10 November 2021. So it's easy to admit that Bitcoin has exploded in the space of a decade.
However, it's not all smooth sailing. Bitcoin is a particularly volatile asset that has evolved at the pace of cycles. In fact, it is often referred to as a bull market or bear market.
💡 Bull Market: Market conditions are particularly favourable for Bitcoin. There is widespread euphoria which is pulling the Bitcoin price up.
💡 Bear Market: Unfavourable market conditions plus increasing investor disinterest. Prices are deeply bearish.
Let's get back to the point. When did the price of Bitcoin explode?
Your philosophy teacher, no doubt harped on you in high school that there is no one right answer. It's the same with Bitcoin. There have been several phases of price escalation corresponding to the significant democratisation of Bitcoin. You have to go back to 2017 to find the first bull run. The Bitcoin price entered a parabolic phase during which its value increased several times. On 11 December 2017, bitcoin reached its ATH at $20,000. After this peak, the first investors began to sell their positions en masse. It wasn't until late 2020, early 2021 that the market started to rise again... And how! In the spring of 2021, Bitcoin touched $60,000 before correcting and going back to touch its "all time-high" at over $68,000.
6/ Which wallet to use for Bitcoin?
Everyone is telling you to buy Bitcoin, but how do you go about it? There is a real process to follow as before you buy Bitcoin, you need to create a wallet to store them.
Wallets commonly referred to as wallet can be on your mobile, desktop or even physical hardware that you can carry with you. When you set up your digital wallet, you have what's known as a private key, which acts as a password to access your Bitcoins. When you carry out a transaction, you receive what is known as a public key, which is used to link the buyer to the seller by writing the latter onto the blockchain.
There are different types of wallet, we'll talk in particular about cold wallet and hot wallet. The distinction is quite simple, a cold wallet is a physical device that you can carry around with you. This is what the French unicorn Ledger offers. Hot wallets, on the other hand, are wallets that are permanently connected to the Internet. They allow you to store, send and receive cryptos. Hot wallets, in turn, are linked to public and private keys that facilitate and secure transactions.
When you own a crypto-currency, you receive a private key that is identified as yours. Public keys, on the other hand, are similar to account usernames; they identify the wallet so that the user can receive tokens without revealing their identity. Private keys are similar to personal identification numbers and allow you to access the wallet, check balances, carry out transactions, etc. Without either of these keys, the wallet is ineffective.
A hot wallet is connected to a web server. It initiates a financial transaction involving crypto-currencies via browser-based web pages. However, it does not store these cryptos. Instead, its main role is to digitally sign and authorise financial transactions.
Because hot wallets are connected to the internet, they tend to be slightly more vulnerable to hacking and theft than cold storage methods. It should also be noted that the primary difference between these two types of wallet is their use. Cold wallets tend to be used to store large quantities of crypto-currencies over a long period of time. As for hot wallets, they have the particularity of being accessible on different desktops (phones, computers) and therefore have the advantage of allowing transactions to be carried out more quickly.
7/ How to buy Bitcoin?
As you will have realised, the question of buying Bitcoin only arises once you have understood how to store it. It is with what are known as exchanges that Bitcoin can be acquired.
The first to date will remain Bitcoinmarket. In 2010, Bitcoiners were realising the value of this crypto-currency and it was on the Bitcointalk forum that an anonymous individual using the pseudonym " dwdollar " proposed this platform to exchange Satoshi's currency. History will record that the exchange collapsed in on itself after encountering security problems.
However, in 2022, using these Exchanges is still the most widespread way of buying Bitcoin. There are many competing platforms, including the American giants Coinbase and FTX, and Binance of Chinese origin.
The main problem with centralised exchanges is that they are governed by a central authority. This means that it is a for-profit company that controls your funds and data, just like a traditional bank. In addition, centralised exchanges use the order book model found on traditional exchanges. The platform acts as a custodian. In simple terms, it acts as an intermediary between buyers and sellers. In short, custody of assets, listing of assets, liquidity, head office, board of directors and centralised execution of trades are all qualities of a centralised platform.
However, all these elements can be decentralised and this is what dEx (decentralised platforms) propose to do. These are peer-to-peer exchange platforms governed entirely by software and its users. On these decentralised platforms, you simply connect your portfolio, such as MetaMask, and you are ready to trade directly from it. This makes trading private and fast, without going through the tedious process of creating a bank account and a trading account.
It is the protection of users' privacy that is taken into account by these dEx. Intrusive Know Your Customer (KYC) enquiries are limited or even ruled out. This allows users to retain control over their identity, address, income, and much more... The best-known dEx are Uniwap, SushiSwap and Paraswap.
In a very different dimension, it is also possible to invest in Bitcoin by way of more traditional finance. Indeed, the year 2021 saw the first Bitcoin ETF see the light of day with the $BITO. A Bitcoin ETF is an exchange-traded fund. It specifically tracks the price of $BTC and allows traders to buy or sell the security via the exchanges. Like all other ETFs, it is possible to acquire these shares by exchanging them for fiat currencies (dollar, euro). However, one notable difference is that the holder of this ETF has the option of being paid in Bitcoin instead of fiat currencies.
Finally, the last way to invest in Bitcoin is via the traditional stock exchanges. In fact, many companies listed on the various marketplaces are themselves investing in Bitcoin, whether by buying, mining or acquiring a stake in certain Bitcoin start-ups. The best known of these is certainly MicroStrategy, the US firm previously headed by Michael Saylor, a Bitcoin maximalist
8/ How do you mine Bitcoin?
Mining is one of the main features of the Proof of Work (PoW) consensus mechanism used by the Bitcoin blockchain. Mining is the process by which new blocks for the blockchain are discovered and validated. Miners are the validators of the Bitcoin network.
The combined participation of all Bitcoin miners maintains the integrity of the blockchain and guarantees the immutability of transactions. The term "mining" is not used literally, but in reference to the way precious metals are collected. Bitcoin miners solve mathematical problems and confirm the legitimacy of a transaction. They then add these transactions to a block and create blockchains thus giving the blockchain its name.
The miners at the origin are essential to the proper functioning of the blockchain, to encourage them to create new blocks, they are rewarded with crypto-currencies, in this case Bitcoin. The remuneration is currently set at 6.25 BTC per block since the 2020 halving, but most miners generally receive much less due to their collaboration within a mining pool (we'll come back to this later).
When we talk about " halving ", we need to understand that every 210,000 blocks mined, or roughly every four years, the reward given to bitcoin miners for processing transactions is halved. This is Satoshi Nakamoto's way of thinking Bitcoin in order to impose synthetic price inflation until all Bitcoins are released.
You now know what Bitcoin mining technically involves, but how do you get started mining Bitcoin?
Mining Bitcoin as part of a larger miners' pool (miners' club) is the easiest, fastest and most reliable way to ensure your Bitcoin mining operation is profitable. You join forces with other miners to share the rewards.
By joining a pool, you (and everyone else in the pool) agree to share the bitcoins you receive with the full pool of participants. This means that you will receive small payments on a regular basis. That's why, if you opt for this solution, you need to find out which pool best meets your expectations. There are many criteria to consider, but if we had to keep just three, they would be the size of the pool, the fees to be conceded to the pool as well as the withdrawal authorisations.
Nowadays, the best-known method of mining involves the acquisition of dedicated hardware. It is essential to mine Bitcoins with hardware built specifically for the purpose. Indeed, without it, electricity consumption could cost too much in relation to the machine's output.
When it comes to how to mine Bitcoins, it is possible to do it on your own, especially if you have the right hardware to do so. Moreover, this seems like the best idea, as you shouldn't have to share your earnings with thousands of other people. However, it also means that you don't share in the profits of thousands of other miners either. You only get paid if you are the miner who solves the hash. This means that you are not only competing with all the other miners on the planet, but also with all the pools. Getting started in this way therefore seems to be quite complicated.
As you will have realised, it is no longer practical to "solo mine" BTC. Instead, those looking to mine will look to join a pool. As you will have gathered, pools share rewards between miners in exchange for a small commission. This allows miners to earn block rewards on a regular and consistent basis.
The final possible option is cloud mining. Instead of using a Bitcoin mining computer, you can simply sign up to a contract, pay the fee and rent the mining equipment, which runs 24/7 without any action on your part. There are advantages and disadvantages to this type of mining.
Let's start with the positives, you don't need to acquire machines to mine bitcoin. The consequence is that you are not responsible for the hardware used by the cloud provider. The cloud mines for you. As far as the negative consequences are concerned, you have to make a payment to cover the upstream costs of mining. Secondly, you can't be sure of making a profit depending on the Bitcoin price, since you generally sign up for a long period of time, from one to two years. Added to this is the fact that these clouds are the target of many hackers and there are also many scams. So it's important to be very careful about certain providers.
9/ Who uses Bitcoin? Which countries use Bitcoin?
How can we talk about Bitcoin without mentioning El Salvador? In September 2021, President Nayib Bukele gave Bitcoin the status of legal tender. El Salvador received a lot of media coverage following this announcement, because as a legal currency, it is now accepted in all businesses in the country. You can now buy almost everything in Bitcoins, from bottles of water to real estate.
Since the legalization of the crypto-currency in the country, some 3 million of the 6.7 million Salvadorans have downloaded the Chivo app launched by the government to make transactions in Bitcoins, according to official data. However, this use is being questioned by Salvadorans, who are unhappy with the deployment of Bitcoin. Another country to follow El Salvador's lead is the Central African Republic.
However, the vast majority of countries do not recognise bitcoin as a currency. In the majority of cases, Bitcoin as well as other cryptos are considered digital assets. In this sense, the various government authorities consent to individuals being able to buy cryptos for their own use. This also applies to businesses, which have no particular restrictions. They are generally free to accept or not the use of crypto assets in exchange for their goods or services.
However, it has to be said that legislators are taking action to regulate crypto assets and avoid the many abuses. As a relatively new asset class, crypto-currencies are currently being judged against older rulings on earlier digital assets. However, cryptos differ drastically from other digital assets, making them difficult to incorporate into current laws. This is why the European Union has decided to dedicate a specific piece of legislation to it: MiCA.
In conclusion, the technology provided by Bitcoin and crypto-currencies now seems to be recognised, as many of the world's economic behemoths are investing in the web3 and agree on the inescapable innovation provided by these assets and their ecosystems. By way of example, the giants Alphabet - Google's parent company - and BlackRock have invested $1.5 billion and $1.2 billion respectively in start-ups in the sector.