What is Bitcoin? | How Do Bitcoin and Crypto Work?

Bitcoin's origin, early growth, and evolution

Bitcoin is based on the ideas laid out in a 2008 whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System.

The paper detailed methods for "allowing any two willing parties to transact directly with each other without the need for a trusted third party." The technologies deployed solved the 'double spend' problem, enabling scarcity in the digital environment for the first time.

The listed author of the paper is Satoshi Nakamoto, a presumed pseudonym for a person or group whose true identity remains a mystery. Nakamoto released the first open-source Bitcoin software client on January 9th, 2009, and anyone who installed the client could begin using Bitcoin.

Initial growth of the Bitcoin network was driven primarily by its utility as a novel method for transacting value in the digital world. Early proponents were, by and large, 'cypherpunks' - individuals who advocated the use of strong cryptography and privacy-enhancing technologies as a route to social and political change. However, speculation as to the future value of Bitcoin soon became a significant driver of adoption.

The price of bitcoin and the number of Bitcoin users rose in waves over the following decade. As regulators in major economies provided clarity on the legality of Bitcoin and other cryptocurrencies, a large number of Bitcoin exchanges established banking connections, making it easy to convert local currency to and from bitcoin. Other businesses established robust custodial services, making it easier for institutional investors to gain exposure to the asset as a growing number of high-profile investors signaled their interest.

At its most basic level, Bitcoin is useful for transacting value outside of the traditional financial system. People use Bitcoin to, for example, make international payments that are settled faster, more securely, and at lower transactional fees than through legacy settlement methods such as the SWIFT or ACH networks.

In the early years, when network adoption was sparse, Bitcoin could be used to settle even small-value transactions, and do so competitively with payment networks like Visa and Mastercard (which, in fact, settle transactions long after point of sale). However, as Bitcoin became more widely used, scaling issues made it less competitive as a medium of exchange for small-value items. In short, it became prohibitively expensive to settle small-value transactions due to limited throughput on the ledger and the lack of availability of second-layer solutions. This supported the narrative that Bitcoin's primary value is less as a payment network and more as an alternative to gold, or 'digital gold.' Here, the argument is that Bitcoin derives value from a combination of the technological breakthroughs it integrates, its capped supply with 'built-into-the-code' monetary policy, and its powerful network effects. In this regard, the investment thesis is that Bitcoin could replace gold and potentially become a form of 'pristine collateral' for the global economy.

Another popular narrative is that Bitcoin supports economic freedom. It is said to do this by providing, on an opt-in basis, an alternative form of money that integrates strong protection against (1) monetary confiscation, (2) censorship, and (3) devaluation through uncapped inflation. Note that this narrative is not mutually exclusive from the 'digital gold' narrative.

Read more: How does governance work in Bitcoin?