Bitcoin is back in the news.
As a wave of institutional liquidity pours into Bitcoinâ€™s markets, even some of its staunchest critics are finding it hard to dismiss the 12-year-old asset as its price surges to new all-time highs.Â
At the very least, these past three years have proven that Bitcoin is certainly not dead. At the most, it gives credence to the investment thesis of its most bullish proponents: that it is one of the most revolutionary technologies of its time.
But what makes bitcoin so unlike any other investment (or cryptocurrency) that blue-chip insurance funds, hedge funds and asset managers are now comfortable with buying it?
Read more: Over $20K? Why Is Bitcoin Worth Anything at All?
Bitcoin is a synthesis of decades of cryptographic technology and research with numerous precursors and false starts that predate it. For all of its predecessors, Bitcoin was the first attempt at digital cash that laid out a (more or less) completely decentralized system.
For those of you who are new, hereâ€™s what that means and the technical features that make bitcoin such a standout.
Fact #1: Bitcoin is cryptographic money
Contrary to common misconception, Bitcoin transactions arenâ€™t kept secret or encrypted â€“ in fact, theyâ€™re quite public.
But Bitcoinâ€™s system is built on public-key cryptography, a branch of computer science that uses complex math (via a system of digital keys) to encode data and keep it hidden from those who donâ€™t have the right key to decode it.
Read more: What Is Bitcoin?
With Bitcoin, users have a public key (from which they can create public addresses to receive bitcoin) and a private key; as their names suggest, the former is meant to be shared while the latter must be kept secret (if revealed, your bitcoin can be stolen, but more on that later).
The private key is what gives you a claim to the bitcoin you own. Technically speaking, wallets store private keys and not â€œbitcoin.â€ Every bitcoin exists on the blockchain â€“ wallets just hold the keys that give users access to them.
You need your private key to approve transactions, and you need someone elseâ€™s public address to send a transaction.
If youâ€™re familiar with PGP encryption, you may see how Bitcoin transactions are similar. The same principles that make encrypted communications so secure are baked into Bitcoinâ€™s code, except instead of messages, Bitcoinâ€™s design secures the bitcoin currency.
Like sending an encrypted message, Bitcoin transactions are peer-to-peer and (because of the mining process, which weâ€™ll cover later) they canâ€™t be obstructed by anyone.
Fact #2: Bitcoin is permissionless and censorship resistant
Because bitcoin can be sent as freely as a message, Bitcoin is inclusive.
When Satoshi Nakamoto, Bitcoinâ€™s creator, designed the system, he made it â€œpermissionless,â€ meaning anyone can use Bitcoin to hold and transfer value. He also designed it to be â€œcensorship resistant,â€ meaning no one can block you from joining the network and making transactions. Nobody can freeze the funds in your wallet, and no one can stop you from making a transaction with Bitcoin.
Because of the way bitcoin transactions are processed, no central party has control over your payments. Unlike PayPal, Venmo, or any other electronic transfer, bitcoin payments are made directly between the payer and recipient, thanks to the cryptography we touched on above.
The foundation of this system, Bitcoin Core, is an open source software which is an all-in-one wallet and server for the Bitcoin network. Anyone with the proper hardware can download and run Bitcoinâ€™s software; it keeps a copy of the Bitcoin blockchainâ€™s transaction ledger and broadcasts transactions to other servers in the network.
â€œRunning a full node,â€ as this is called, is the ultimate exercise in Bitcoin control because you can fully audit the Bitcoin ledger yourself and broadcast your own transactions.
Even without running a full node, Bitcoin users can use the network at their will when they use a wallet that lets them control their own private keys, though this means that they are trusting someone elseâ€™s network node to broadcast their transactions for them.
Fact #3: Bitcoin transactions are forever
The Bitcoin blockchain â€“ the digital ledger which stores a record of all the networkâ€™s transactions â€“ is immutable. It cannot be altered by a central party, and nobody can cheat the network to spend coins they donâ€™t own.
Bitcoin transactions are processed into the ledger by a global network of â€œminers,â€ individuals and collectives who run machines to â€œmineâ€ (maintain) the Bitcoin blockchain. Miners receive bitcoin as a reward for mining in the form of a â€œblock reward,â€ a payout that goes to the miner(s) who finds the next block in the blockchainâ€™s sequence and records the latest pending transactions in it.
Read more: How Do Bitcoin Transactions Work?
If youâ€™ve know anything about mining, you probably know that it requires *a lot* of energy because mining competition is fierce. When you take bitcoinâ€™s price into account, this makes sense â€“ theyâ€™re not giving these things away for free!
This competition and energy expenditure helps secure the network. Miners are incentivized to process transactions and not interfere with the transaction ledger â€“ otherwise, they risk their payday and, in the case of the big mining firms, tens of millions of dollars in hardware and operational expenses.
If a miner did want to cheat, the only way to alter Bitcoin transactions that have been recorded in the blockchain is to perform more work than roughly half of all other miners in the network â€“ and the older the transaction, the longer you will have to work. To give you an idea of how much energy youâ€™d need to attack Bitcoin, the network annually consumes, on average, as much electricity as a nation the size of Austria or Switzerland.
Read more: How Bitcoin Mining Works
So altering a transaction from, say, three years ago would require several hundreds of millions of dollars. Rollbacks are not theoretically impossible, but when you factor in the cost to mine with Bitcoin miningâ€™s decentralization, theyâ€™re highly improbable (and have never happened in Bitcoinâ€™s existence).
Fact #4: Bitcoin is (practically) unconfiscatible
Of course, bitcoin can be stolen or seized if youâ€™re not careful.
But if you take the right precautions, you can make your coins practically impervious to seizure, because so long as you keep your private key (or, the password that controls your bitcoin) in your custody and away from the eyes of others,your coins are in your complete control.
Read more: Unconfiscatable? Using Bitcoin to Resist Police Extortion in Nigeria
For increased security, you can set up â€œmulti-signatureâ€ wallets that distribute access to your funds across multiple devices. Some wallets even include safety features like dummy passwords you can enter to show a blank account if you are at risk of being extorted, for example.
You can even memorize your private key in the form of a 12-to-24 word seed phrase, destroy the wallet associated with it, and store your bitcoin in your brain. When you want to access them again, you can download just about any Bitcoin wallet (all the good ones support these â€œseed phrasesâ€), plug your seed phrase in, and you can access the bitcoin in your â€œbrainwallet.â€
You can also store your seed phrase on a piece of paper or (more to the taste of hardcore Bitcoiners) on metal sheets to protect them from the elements, or you can encrypt it on a USB drive and store it in an airgapped laptop â€“ a computer that is never connected to the internet.
Itâ€™s even possible to send a bitcoin transaction without being connected to the internet via satellites and mesh networks.
Read more: GoTenna Partners With Blockstream Satellite to Make Using Bitcoin Without an Internet Connection Simpler
Fact #5: Bitcoin is a decentralized, digital monetary system
Bitcoin is both a peer-to-peer payment network and a personal digital bank. Its economy is driven by consumers who purchase bitcoin, miners who process transactions and mint new bitcoin for circulation, node operators who audit the network and broadcast transactions, businesses who build on bitcoin and everyone in between.
This economy is also self-regulated. Every four years, a self-executing mechanism cuts the number of bitcoin that is minted via mining in half. This reward will eventually dwindle until the last bitcoin is mined over one hundred years from now. This â€œhalving cycleâ€ ensures that Bitcoinâ€™s supply will never exceed 21 million and makes its inflation rate predictable.
Satoshi Nakamoto titled the Bitcoin white paper â€œBitcoin: A Peer-to-Peer Electronic Cash System.â€ In the strictest since, Bitcoin *is* digital cash that you can spend as freely as physical cash, but some have taken this branding by Bitcoinâ€™s creator as a signal that bitcoin is primarily meant to be used as a currency.
Bitcoin can be used this way, and new scaling technologies like the Lightning Network are providing infrastructure to process these transactions in faster, cheaper ways.
Read more: What Is Bitcoinâ€™s Lightning Network?
But Bitcoin doesnâ€™t care what you use it for, ultimately. Companies including Square and MicroStrategy are using it as a treasury for their companyâ€™s savings. At the same time, everything that makes Bitcoin censorship resistant and permissionless makes it an attractive donation source for dissidents protesting abusive governments, or a financial lifeline for citizens living in financially sanctioned (and economically battered) countries.
Yes, Bitcoinâ€™s technology makes it attractive for criminals, but thatâ€™s only a small fraction of the networkâ€™s real users. (Criminals use cash, too, after all!) And since all bitcoin transactions are public, sometimes itâ€™s easier than not to pin illicit transactions on their transactors. Of course, there are also privacy-preserving technologies to make your blockchain footprint less traceable.
Bitcoinâ€™s core technology is rooted in principles of user freedom and financial liberty. Branching from this is a plethora of softwares, wallets, protocols and other dodads that developers are working on to make bitcoin more functional and sustainable for the long haul.
The rabbit hole is deep. If youâ€™re ready to dive in and learn more, weâ€™ve got you covered.