What is Bitcoin, and what is BTC used for?

Formally, Bitcoin is “a purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution”.

That’s the first line of the Bitcoin whitepaper, which is a call for the overthrow of the entire world financial system that devolves into a very complex technical manual.

What it means is Bitcoin is a way of sending and receiving money – “transferring value” is the favored term – that is entirely outside the banking system and does not use the pounds, dollars, euros, yuan, pesos, or other national currencies created and controlled by governments. 

What is Bitcoin?

To explain Bitcoin, start with the fact that it is the first cryptocurrency – a decentralized digital currency that two people can use to send or receive payments without the need for a middleman like a bank. 

Every Bitcoin transaction is recorded on a publicly accessible digital ledger called a blockchain that effectively cannot be changed once an entry has been made.

At its core, Bitcoin’s meaning is to provide one thing: trust.

Because Bitcoin transactions are peer to peer, there is no need for a trusted – and potentially untrustworthy – intermediary. That can be a bank if you’re paying with a debit card or cheque, Mastercard or Visa if you’re paying by credit card, a payment processor like PayPal if you’re transferring funds digitally, or the government if you’re using the banknotes they print. 

Instead, the Bitcoin system relies on mathematics, and cryptographic proof that the transaction is valid, to make the system “trustless” – which means that the sending and receiving parties do not need to rely on a middleman. (The use of the term “trustless” to mean “trustworthy” also means you should never, ever allow computer scientists to name things normal people might use.)

Bitcoins are digital tokens with a value influenced by supply and demand, the cost of mining, and levels of adoption. Each Bitcoin can be divided into 10 million units called a satoshi, just like there are 100 pennies in a dollar or a pound. This was necessary because there is a finite number of Bitcoin – no more than 21 million will ever exist. As their value grows, it will be necessary to divide them into smaller and smaller units of currency if they are to be used for day-to-day payments.

What is Bitcoin used for?

If you ask the general public – including many elected officials and law enforcement leaders – Bitcoin is primarily a tool that criminals use to launder money, evade taxes, pay for illegal things like guns and drugs, or use to blackmail people and companies with ransomware.

While it is used that way sometimes, data from blockchain intelligence firm Chainalysis suggested in 2020 that just 0.34% of all Bitcoin transactions are for illicit purposes – and that number is falling steadily.

While it is possible to spend Bitcoin, it is only directly accepted by a few merchants. Practically, the only way is to use a Bitcoin debit card issued by financial intermediaries like Mastercard and Visa that trade your BTC for fiat at the time of a transaction. This opens the door to use crypto anywhere these two big brands are accepted.

Bitcoin is increasingly seen as a “store of value” – an asset that retains its value over the years – just like gold. 

The reason Satoshi Nakamoto limited the total supply to 21 million Bitcoin was to prevent it from being inflationary like national fiat currencies. 

Fiat is inflationary because a government can raise money simply by printing more – the U.S. government alone printed $3 trillion during the coronavirus pandemic – which devalues the currency. Basic economics says that if you increase the supply of something, its value goes down. 

This is why big institutional investors such as hedge funds, corporations, and wealthy individuals are starting to pile into Bitcoin. If you have £100 million sitting in the bank, even an inflation rate of a few percent a year is a mighty big loss. Some of the biggest publicly listed companies that hold BTC in reserve include MicroStrategy, Tesla, and Coinbase.

The same applies to small individual investors, to an extent. But really, most individual investors buy Bitcoin because they expect its value to rise far beyond the rate of inflation, or because its volatility means there’s big money to be made – or lost – as a Bitcoin trader. That’s why tens of billions of dollars bitcoin price is traded every day. 

The main advantages of Bitcoin

What are Bitcoin’s advantages? First off, the decentralized currency operates outside of the financial system and is not government-controlled, so it is free from outside interference.

Bitcoin transactions are also private. It’s hard for an authoritarian government to spy on people’s activities, and it’s nearly impossible for corporations to mine personal spending data for every detail of your life.

These payments are also irreversible, meaning that institutions and governments cannot interfere in someone’s spending habits. But on the flip side, this also means that they can’t intervene to help if something goes wrong.

And while there have been some high-profile hacking incidents in the past, Bitcoin is secure. Storing cryptocurrency offline, with private keys in your possession, can be a safe way of protecting your investment.

The speed, low cost, and need for nothing but a mobile phone and a digital wallet also mean Bitcoin can provide financial access for many of the world’s 1.7 billion unbanked people.

Is Bitcoin the future?

So what does Bitcoin mean for financial freedom? 

Well, one answer is that they are the first draft of peer-to-peer electronic cash that has the potential to cut banks and other financial middlemen out of the payments market. Another is that Bitcoin has created enormous wealth – $1 trillion in 12 years – and do so outside of the control of the wealthy and powerful world of big finance.

Bitcoin also holds the promise of privacy. Not total anonymity, but enough privacy to keep corporations from mining your personal data and governments from tracking your activities without the time and expense of an individual investigation.

And finally, Bitcoin introduced the world to blockchain technology, which other cryptocurrency creators have used to go one better – creating things like decentralized finance and utility tokens with a specific purpose.

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