Understanding Bitcoin: What is it, How it Works, and Why it Matters

In this article, BitPinas explained what bitcoin is, how ‌it works, and why ‌it matters in the financial system.

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  • In September 2008, when Lehman Brothers, an American global financial services firm founded in 1847, collapsed—the biggest U.S. bankruptcy ever recorded.
  • However, despite the dark days of the global finance sector, a person or group of people using the pseudonym “Satoshi Nakamoto” posted on November 1, 2008, hinting that he has been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party
  • As the world continues to evolve, Bitcoin’s potential to reshape financial systems, empower individuals, and drive technological advancements cannot be overlooked.

It was in 2008, a year after subprime lenders began to file for bankruptcy. Two big hedge funds failed because of the said bankruptcy, and the panic that formed made the global lending system freeze. 

But then came September 2008, when Lehman Brothers, an American global financial services firm founded in 1847, collapsed—the biggest U.S. bankruptcy ever recorded.

However, despite the dark days of the global finance sector, a person or group of people using the pseudonym “Satoshi Nakamoto” posted on November 1, 2008:

“I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party. The paper is available at bitcoin.org/bitcoin.pdf.”

According to Nakamoto, both the central and local banks have breached the trust of the public, who entrusted their money to them, repeatedly.

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust,” the inventor wrote, hinting that everything in the new electronic cash system is based on crypto proof instead of trust.

And on January 3, 2009, at 6:15:05 p.m., Nakamoto created 50 BTCs, the very first known transaction on the Bitcoin network. 

The transaction also had an embedded message, including a timestamp, which reads “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” The message was referring to an article in “The Times” magazine in the United Kingdom. 

Welcome to the Bitcoin Month Series on BitPinas, where we discuss everything Bitcoin. Please check out the other articles:

What is Bitcoin?

As stated in its whitepaper, 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.

In simple terms, Bitcoin is a digital form of money, similar to how ‌physical money is used to buy things. However, Bitcoin exists only in the digital world and is not controlled by any government or central authority like a bank.

How Does Bitcoin Work?

Technically, Bitcoin operates through a combination of cryptography, decentralized networks, and a shared public ledger known as the blockchain (in this article, we also call it the Bitcoin network). 

Known for operating on a decentralized network, which means that no single entity or government has full control over Bitcoin, transactions are instead verified and recorded by a network of computers known as nodes, making it more resistant to censorship or control.

Every transaction involving Bitcoin is tracked on the Bitcoin network, which is similar to a bank’s ledger or a record book of transactions. Since it is a public ledger, anyone can see the transactions that have taken place on the network (the amount of BTC and the addresses of the sender and receiver).

Meanwhile, to maintain the security and integrity of the blockchain, the Bitcoin network uses a consensus mechanism known as “proof of work.” When a user makes a transaction, it is verified by other nodes known as “miners”. Miners compete to solve the mathematical problem, and the first one to find the solution gets to add the next block to the blockchain. This competition makes it computationally expensive to alter past transactions, providing security for the network.

But the information mentioned above is more about background information. To use Bitcoin, individuals just need a crypto wallet, which contains a unique address for the user. This address acts like a bank account number and is used to send and receive Bitcoin.

Why Does Bitcoin Matter?

  • Bitcoin Triggered Innovation. Its existence led to the development of blockchain technology, which is not just about digital currencies. Currently, ‌blockchain technology is now even being considered to be used in automated elections. (Read more: [Exclusive] COMELEC Conducts Session Exploring Blockchain Use in Automated Election)
  • Bitcoin Challenges TradFi Industry: Its decentralized nature and independence from government control offer individuals an alternative to traditional fiat currencies.
  • Bitcoin Offers Financial Freedom: It enables individuals to have full control over their funds without relying on the TradFi industry since it allows peer-to-peer transactions without the need for a third party.
  • Bitcoin Delivers Security and Privacy: It offers a high level of security, making it difficult for unauthorized parties to manipulate or counterfeit transactions. 
  • Bitcoin Allows Borderless Transactions: It is valuable for remittances and international transactions, as it eliminates the need for costly intermediaries and reduces the time and fees associated with cross-border transfers.
  • Bitcoin is the Gateway to Financial Inclusion: Since it operates on the Internet, anyone with an Internet connection can access Bitcoin and participate in the network. This opens up opportunities for individuals who may not have access to traditional banking services to store and transfer value.

Closing Thoughts

As the world continues to evolve, Bitcoin’s potential to reshape financial systems, empower individuals, and drive technological advancements cannot be overlooked. While its future remains uncertain, the ongoing development, adoption, and exploration of Bitcoin and blockchain technology promise an exciting and transformative journey ahead.

The impact of Bitcoin, not just in the crypto space, but in the whole world, cannot be denied. It has ignited a global conversation about the future of money, financial sovereignty, and the power of decentralized systems.

With Bitcoin being the eye-opener of a decentralized financial system, what other industry do you think would perform better if it were decentralized? 

This article is published on BitPinas: Understanding Bitcoin: What is it, How it Works, and Why it Matters

Disclaimer: BitPinas articles and its external content are not financial advice. The team serves to deliver independent, unbiased news to provide information for Philippine-crypto and beyond.

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