What is Bitcoin?

Bitcoin is the first cryptocurrency ever created and the most famous to this day. Bitcoin, which does not exist in physical form, is a decentralised currency; there is no authority, such as a central bank, state, or government, that controls and manages it.

On the contrary, it is based on cryptography. The foundation of the functioning of this cryptocurrency - or electronic token - is blockchain technology, a decentralised virtual register that is shared among all users and where every transaction is recorded.

Bitcoins, therefore, are digital assets that are exchanged through cryptographic protocols on the blockchain: the exchanges take place without intermediaries and are only registered after they have been verified by a shared cryptographic system.

Once recorded on the blockchain, transactions become immutable, guaranteeing their security. Bitcoins are stored in a digital wallet from which people can send and receive them.

How does the technology behind Bitcoin work?

As anticipated, transactions in bitcoins are anonymous and encrypted. Each transaction is validated through mining, which is also the process by which new bitcoins are created.

The total amount of bitcoins that can be generated, however, is not infinite: Satoshi Nakamoto himself - the mysterious creator of this cryptocurrency - set the maximum number at 21 million. Today there are already 19 million bitcoins around.

For bitcoin transactions to be verified and inscribed on the blockchain, miners must validate them through highly complex mathematical calculations. This is termed mining, the process that allows the system to function, a job that is rewarded with new bitcoins.

Miners are computer experts and cryptographers who work on the blockchain from all corners of the world, ensuring its security. At the beginning of cryptocurrency history, it was primarily individuals. In contrast, nowadays, due to the high costs of buying and maintaining the computers needed to perform these complex calculations at high speed, it is mainly groups of people or large companies.

Bitcoin, therefore, uses a network of miners who do not know each other and receive an identical copy of the same blockchain on which they then verify other miners' work. The fact that there are so many copies is what protects the system from a hacking attack. If a hacker were to try to alter the blockchain, he could only change his copy, which would then be different from the documents stored on the other computers in the network and would not be validated.

How did it start?

The story of the first cryptocurrency is almost fictional. It all began on 31 October 2008 when Satoshi Nakamoto, a pseudonym for an inventor (or a group of inventors) whose identity has never been revealed, published the paper 'Bitcoin: a peer-to-peer electronic payment system'. In this paper, Nakamoto illustrated his idea of an electronic currency, which could allow people to exchange money without going through a financial institution, thus avoiding not only transaction costs but also possible fraud and disputed transaction problems.

Bitcoin wanted to offer, as Satoshi Nakamoto writes, "an electronic payment system based on cryptographic evidence", and a few weeks later, on 16 November, the first code, the so-called Bitcoin Pre-Release, was released. A few months passed, and on 3 January 2009, he coined the first 50 bitcoins, while on 9 January, he released the first official version of the software.

At that time, bitcoins had no value, because they were hardly known to anyone except a small number of developers and crypto enthusiasts. At first, therefore, they were not on the market, since the economic value of this cryptocurrency (and of all the others that would come later) is created by the supply-demand dynamic, i.e. by the number of people who are interested in buying it compared to how much is available on the market. However, it only took a short time for many people to realise that they were perfect to be used as an anonymous, secure and globally functioning form of payment.

Fun fact: the first purchase made in bitcoin took place in May 2010 for two pizzas (probably the most expensive in history), which were bought for 10,000 bitcoins.

Its growth

Slowly the value of the cryptocurrency began to increase along with its market price, which was around $0.06 that year. The following year, in 2011, a bitcoin was already worth over $30, a growth of 53,000%, triggering global interest in the cryptocurrency. At that point, bitcoins seem to be a very promising investment, and this drove its price even higher and determined its success.

Today, bitcoin is used not only as a form of virtual currency exchange but also to purchase goods and services. There are even debit cards loaded with bitcoins. In addition, this virtual currency is a form of investment. Because the total number of bitcoins that can be mined is limited, this cryptocurrency is considered almost as a form of 'digital gold', a haven asset that, however much its price may fluctuate, will always be protected from inflationary dynamics.

Added to this are the other revolutionary advantages of the Bitcoin system: the network is protected against attacks thanks to encryption and it is extremely transparent since every transition that has ever taken place is inscribed forever on the blockchain and accessible to everyone.

The beginning of something great

After bitcoin, so many other cryptocurrencies have sprung up that today it is estimated that there are over 17,000 of them. Each of these relies on a blockchain. Some are very well-known and successful, such as Ether, which runs on the Ethereum blockchain and also allows for decentralised digital applications and the creation of 'smart' contracts written in computer code.

Or Litecoin, created by Charlie Lee as a derivative version of bitcoins, which, unlike bitcoins, can be mined faster, thus making the system faster and cheaper, and with a maximum number of available coins four times larger, at 84 million.

Or SOL, with its hybrid consensus algorithm, this cryptocurrency can process up to 50,000 transactions per second at a very low average cost.

And there is also DOT, which was created to stimulate the establishment of cross-chain projects, i.e. using different blockchains together.

The list of possibilities forfinancial cryptography is theoretically limitless.Consequently, we may witness furtherfascinating developments over the coming years.

Cryptocurrencies are unregulated assets with no investor protection. Oval doesn't provide financial advice.