In order to understand what Bitcoin is, it is necessary to go back to its origins and the reasons that led the inventor to conceive this system. On 31 october 2008, Satoshi Nakamoto, the pseudonym of Bitcoin’s inventor, whose identity is unknown (it is not even known whether he is a single person or a group of people), published the Bitcoin protocol on a Cryptography mailing list. In 2009, the article ‘Bitcoin: A Peer-to-Peer electronic cash system’ and the software that implements what is described in the article were published.
It is important to place the birth of Bitcoin in time: 2008 is the year of the economic crisis triggered by subprime mortgages, a crisis which also made its effects felt in the following years and which not only caused the failure of several banks, but also eroded trust in organisations in the financial sector.
Bitcoin was thus created as a system designed to disintermediate and, in its own way, democratise financial services, in particular the system of currencies and payments. According to the Bitcoin philosophy, there is no need for an intermediary (the bank) and transactions take place directly between the parties, in a peer-to-peer system that is designed to provide trust in the counterparty, through the use of mathematics. Bitcoin doesn’t need central banks, normally issuers and guarantors of traditional, so-called fiat currencies.
Bitcoin is thus designed, if not to replace, at least to offer an alternative economic network that should have the potential to create a better financial system for society.
Despite these positive intentions, Bitcoin has encountered many acceptance difficulties. Difficulties partly induced by the reaction of the traditional financial system and partly due to the prejudices of use for illicit purposes, with which it has long been cloaked. This is because Bitcoin has often been seen as a potential tool for money laundering and anonymity for illicit purposes. A few years later,
the situation has radically changed. 2020 in particular has seen the consecration of Bitcoin by institutional investors who have started to include it in their investment portfolios, as digital gold and an asset now cleared of previous skepticism. In the consumer sphere, the most important case among many has been that of Paypal, the well-known online payment system, which has announced that it will integrate Bitcoin from 2020 for US customers and from 2021 for other countries.
How does Bitcoin work?
Bitcoin is a network-based system consisting of a large number of computers (nodes) scattered around the world and connected to the Internet. A specific software operates on each node. This software keeps a copy of the transaction records of the entire network in a file on each node. The file in question is the so-called Blockchain. The Bitcoin computer network is public, i.e. anyone can add their own computer to the network and thus participate in the operation of the cryptocurrency. On the other hand, any node can be turned off or removed from the network without impacting its functioning. This is possible because within the network there is no central computer that governs the system, all nodes are of equal level and perform the same functions, therefore it is a decentralised system.
The way of recording transactions is based on cryptography and algorithms such that a certain block of transactions, once validated and stored in the blockchain, can’t be modified: anyone wishing to make changes would have to violate most of the nodes of the network itself, since there is a copy of the transactions on each node.
Who prints bitcoins?
As there is no central authority, the system itself has to produce new money. This is regulated by a specific algorithm that leads to the production of a progressively smaller amount of new bitcoins: the amount that is produced halves approximately every 4 years until 2140, when production will end. The production of new Bitcoins is done through a mining process involving a large number of network nodes in a competition to solve a mathematical problem within the transaction validation mechanism. The winner receives new bitcoins as a reward.
Who wants to buy bitcoins and then use them for payments, how should proceed?
On the Internet, there are various sites, known as “Exchanges”, which allow you to exchange fiat currency into Bitcoin. Payments made on the Bitcoin network give rise to transactions that spend the bitcoins and update the balance of the two parties involved. In reality, no transfer actually takes place, only the balances of the coins in storage in the accounts involved are updated in the ledger (blockchain).
To allow secure access to the account there is a cryptographic system based on the use of public keys and private keys, which are always alphanumeric codes.
Whoever owns the private key of an account is in fact the owner, being able to access it and make transactions.
On the Bitcoin network there is therefore no information on either the payer or the receiver.
Since the credentials for accessing one’s account consist of the private key, forgetting it or disclosing it to third parties or having it fraudulently stolen would be fatal. According to recent statistics, the amount of bitcoins in accounts that are now inaccessible due to the loss of the private key is about 4 million, which, at the current exchange rate of about 20,000 dollars, is about 80 billion dollars.
Wallets, both software and hardware, make it easy to store such private keys and always suggest good backup practices to keep your coins safe.
Bitcoin brings with it new opportunities. Bitcoin was the first of the cryptocurrencies and has since been followed by many others, even if none has been able to match its value and strength.This process is now underway and can be observed in the growing number of initiatives undertaken in both public and private institutional settings, and by the gradual increase in Bitcoin investments. We are witnessing a historical moment of transition, where Bitcoin is becoming a key asset of reserve and value accretion.