The basics of Bitcoin: Vulnerable software and a valuable asset

Bitcoin is an open-source software project that operates as the world’s largest cryptocurrency. An entire ecosystem of other cryptocurrencies and blockchain projects have stemmed from its 2009 creation.

Bitcoin was created in 2009, and has been on a historic rise in value (with some “hiccups” along the way) ever since. Consistently questioned by traditional investors and institutions, it now has global attention as a store of value. Everyone from banks, to hedge funds, to nation states are paying close attention, whether they admit it or not.

Bitcoin is a peer-to-peer payment network and a digital asset, created with open source code that includes incentives for various parties to participate in a “trustless” system, ensuring that no single party can fully control Bitcoin. Even the original creator of Bitcoin, Satoshi Nakamoto, is an anonymous figure whose identity has never been revealed, and he is no longer an active participant in the project.

Bitcoin’s design pattern makes it harder to acquire over time; there will never be more than 21,000,000 total coins, and they are “mined” by computers that do work to confirm transactions, receiving bitcoin as a reward for their service as the third party confirming the transaction. The authenticity of each transaction is protected by cryptographic security principles, and upon confirmation, placed in the underlying blockchain — an immutable ledger of all transactions. Undoing the chain requires massive computing power, most unlikely to occur.

The design system used by Bitcoin is open to change by developers that work on the source code, and the source code is adopted by users and miners; if users and miners choose not to adopt the changes by Bitcoin core developers, or they adopt another version of the source code, the forked versions of Bitcoin can “replace” Bitcoin core as the primary chain and store of value, or at least exist as alternative currencies and blockchains.

When Bitcoin is forked — either hard forks or soft forks — the source code is changed, intentionally by core developers intending to make changes to Bitcoin core, or by other parties that create new cryptocurrencies. In a soft fork, Bitcoin core maintains compatibility for users; a hard fork is a greater challenge that requires changes by those creating the ecosystem that surrounds Bitcoin. The Bitcoin ledger can be maintained in either scenario, but in the case of a new currency being created, the historical ledger could be maintained, but the new currency would have a separate ledger from Bitcoin core going forward.

Today, there are thousands of cryptocurrencies. The majority of them are forks designed off of Bitcoin, but have added their own changes and created new use cases. Or they offer themselves as a testbed for potential future Bitcoin core features. Others have significant design changes, or are based on completely different design principles. A few are more malicious and want to replace Bitcoin core and become the “true” Bitcoin. There is a risk that the Bitcoin most users hold today will be replaced, or lose significant value if another chain and coin takes prominence with interested parties.

The cryptocurrency space is a vast and complicated ecosystem, designed to excel by interested parties acting in a self-interested — but perhaps not malicious — way. The biggest threats to Bitcoin over the years have historically been due to malicious rather than selfish behavior, and that will likely continue.

It is impossible to cover the full design, history, and politics of Bitcoin and cryptocurrencies broadly in a single article. But hopefully you are now at least aware that Bitcoin is malleable as software and valuable as a digital asset. Over time, it has become more resistant to manipulation and malicious behavior, but it is still vulnerable, as any software is.

Bitcoin is far from perfect, and changes to the core software are typically done so that it can be improved as a currency, as a store of value, or applied as a tool for broader use. The changes are typically aimed at making it able to confirm more transactions, be more efficient, more hardened against malicious attacks, capable for managing different types of transactions, and other reasons that are similar to all software improvements.

The developers, miners, and users who are supporting the Bitcoin core software often have more fundamental goals than investor goals. Many participants in the cryptocurrency space want to create something that a nation state cannot control.

Many newer participants are more interested in bitcoin for its investment value. The question most investors have is: Is bitcoin as good or a better store of value than traditional currencies and commodities? More and more people believe so, or are at least willing to put some of their capital at risk on the chance that it is. The global market capitalization for Bitcoin and all other cryptocurrencies combined is well over $100 billion dollars now — $150 billion at the moment.

Fundamental to understanding Bitcoin is to read the white paper, written by Satoshi Nakamoto. The abstract reads as follows:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.

Even for people interested for investment purposes should take the time to understand bitcoin in a way that goes deeper than its historical price versus traditional “fiat” currencies.

My goal with this website is to describe the entire cryptocurrency and blockchain ecosystem from both the investment and fundamental perspectives. Self interest, no matter the participant, should be a satisfactory incentive no matter what; that is, after all, an underlying principle in Bitcoin’s architecture.