Bitcoin 101 Part 1: Introduction to Bitcoin
Bitcoin 101 Part 1: Introduction to Bitcoin
What is Bitcoin?
A Decentralized Digital Currency
Bitcoin is the first widely adopted cryptocurrency – a form of electronic cash that isn’t controlled by any government or central bank (iShares Bitcoin Trust (IBIT) | Spot Bitcoin ETP | BlackRock). It was created in 2009 by a pseudonymous person or group (“Satoshi Nakamoto”) to allow peer-to-peer online payments without intermediaries. In essence, Bitcoin serves as digital money that users can send directly to each other over the internet.
Key Characteristics
Bitcoin runs on a public, distributed ledger called the blockchain, where all transactions are recorded transparently. New bitcoins are issued through a process called mining, in which a global network of computers competes to validate transactions and secure the network. The supply is mathematically capped at 21 million coins, introducing artificial scarcity (iShares Bitcoin Trust (IBIT) | Spot Bitcoin ETP | BlackRock). This fixed supply means no more Bitcoin can be created after this limit, distinguishing it from fiat currencies that can be printed in unlimited quantities.
Trust Through Cryptography
Instead of trusting a central authority, Bitcoin relies on cryptographic proof. Transactions are verified by miners and agreed upon by the network through consensus rules. Once confirmed, a transaction is extremely difficult to reverse or alter, which prevents fraud. In over a decade of operation, the Bitcoin network itself has never been hacked thanks to this robust design.
How Does Bitcoin Work?
Blockchain Technology
All Bitcoin transactions are grouped into blocks and added to the blockchain, which is often described as a distributed ledger. Each block links to the previous one, forming a chronological chain secured by advanced cryptography. This ensures transactions cannot be forged or double-spent. Every participant on the network has access to a copy of the ledger, making the system transparent and tamper-resistant.
Mining and Consensus
Bitcoin uses a mechanism called Proof-of-Work to reach consensus on the ledger state. Miners (specialized computers) race to solve complex mathematical puzzles, and the first to solve each puzzle earns the right to add the next block of transactions to the blockchain and collect a reward in newly minted bitcoin. This process not only introduces new coins into circulation but also secures the network by making attacks computationally expensive. As more miners join, the network becomes even more secure and difficult to disrupt.
Peer-to-Peer Transactions
When you send Bitcoin, your transaction is broadcast to the network, verified by miners, and, once confirmed, added to the blockchain ledger. This design allows value to be transferred globally, 24/7, without relying on banks or payment processors. According to BlackRock, Bitcoin “allows it to be sent between any two parties without requiring a bank” (iShares Bitcoin Trust (IBIT) | Spot Bitcoin ETP | BlackRock). Transactions typically settle within minutes and can involve any amount of value, large or small. Users hold bitcoins in digital wallets secured by private keys (passwords), which grant ownership of the funds. Maintaining control of one’s private keys is essential, as anyone with access to the key can spend the associated bitcoins.
Why Does Bitcoin Matter in the Global Financial System?
Digital Scarcity as “Sound Money”
Bitcoin’s built-in scarcity (only 21 million will ever exist) positions it as a form of “digital gold.” Like gold, it cannot be debased by inflation of supply. This has led investors to view Bitcoin as a potential store of value or hedge against currency debasement and inflation. In fact, the CEO of BlackRock (the world’s largest asset manager) recently likened Bitcoin to “what gold represented over thousands of years” – an asset that can protect wealth in times of uncertainty (BlackRock CEO Larry Fink says Bitcoin "Is An Asset Class That Protects You" | Nasdaq). Bitcoin’s independence from central bank policies means it is insulated from the monetary policy risks that affect fiat currencies.
Global and Censorship-Resistant
Bitcoin is inherently global and borderless. It enables anyone with an internet connection to send money worldwide, nearly instantly, with no need for currency conversions or bank intermediaries (iShares Bitcoin Trust (IBIT) | Spot Bitcoin ETP | BlackRock). This is particularly impactful in regions with limited banking infrastructure or where cross-border transactions are slow and costly. Bitcoin transactions are resistant to censorship – no central party can block a transaction or freeze an account, which is valuable in scenarios where traditional financial access is restricted.
Growing Scale and Adoption
What began as a niche experiment is now a significant asset on the world stage. The total network value of Bitcoin (market capitalization) surpassed $1 trillion again in early 2024 (Bitcoin market cap crosses $1 trillion as buyers flood in | Reuters), reflecting the value market participants place on it. At its 2021 peak, Bitcoin’s market cap reached about $1.28 trillion (Bitcoin market cap crosses $1 trillion as buyers flood in | Reuters). For context, that’s larger than the market cap of most publicly traded companies and even exceeds the monetary base of some major economies. Bitcoin alone now represents roughly half of the entire $2 trillion cryptocurrency market by value (Bitcoin market cap crosses $1 trillion as buyers flood in | Reuters). Moreover, hundreds of millions of people globally have used or invested in crypto – an estimated 400 million+ individuals are part of the crypto ecosystem as of 2023 (Report shows uptick in startups using Bitcoin in their balance sheet). This broadening adoption by retail users, investors, and institutions signals that Bitcoin is here to stay as a part of the financial landscape.
Implications for Finance
Bitcoin’s rise has sparked the emergence of a new asset class (digital assets) and inspired innovation in financial services. It demonstrated the viability of decentralized networks for transferring value, leading to a wave of developments (from other cryptocurrencies to central bank digital currency experiments). In the global financial system, Bitcoin matters not only as a speculative investment, but also as a catalyst for payment innovation, financial inclusion, and discussions about the future of money. Many see it as an uncorrelated alternative that could complement traditional assets (a theme we will explore in Part 5). Overall, Bitcoin introduces a new paradigm: a non-sovereign, internet-native form of money that operates outside the legacy banking system, which is a concept with far-reaching implications.