What is Bitcoin?
Why was it invented?
We’ll explain what Bitcoin is in a simple way with illustrations, making it easy for beginners to understand.
Supervisor: Koji Higashi
A pioneering figure in the domestic industry, engaged in Bitcoin-related businesses since the early days in 2014.
Co-founder of Diamond Hands／Operator of the YouTube channel "Bitcoiner's Hanseikai".
This article was written in Japanese and converted to English using a translation tool.
Date of writing (Japanese version): January 2024
This article was created with references to "Bitcoin Explained" and its Japanese translation, "初心者向け：ビットコインとは (Bitcoin Explained 日本語訳)."
Reference date: December 31, 2023.
Why was Bitcoin invented?
I've been hearing a lot about Bitcoin lately.
What exactly is it?
Understanding "why Bitcoin was invented" might help you get a clearer picture of what Bitcoin is.
Bitcoin Can Be Sent Directly to Anyone
Bitcoin is designed to allow the management, sending, and receiving of money without going through banks or credit card companies.
Before Bitcoin was created, it was challenging to send money without using services like banks or credit card companies. This is because there was no way to verify whether the person initiating the transaction actually had the funds without these intermediaries.
Why is it Beneficial to Have a Method to Send Money Without Banks or Payment Services?
Disadvantages of sending money through a bank or company
Sending money through banks or companies has drawbacks, including long processing times and high fees.
For example, foreign workers in Japan often need to send money to their families back home and typically pay high fees, sometimes thousands of yen, for the transaction. Similarly, when donating to disaster areas overseas from Japan, it can take several days to a week for the funds to reach their destination after dropping money into a donation box.
But Payment Services Like Credit Cards Allow Instant Payments with No Fees, Right?
Payment services do have significant costs for merchants.
For businesses, the funds from sales are deposited into their accounts only once or twice a month, and they must pay a transaction fee of about 2% to 10%.
For instance, if a shop has daily sales of 200,000 yen and a transaction fee of 5%, they would pay 10,000 yen in fees each day.
Over a month, with sales totaling 6,000,000 yen, they would incur 300,000 yen in fees.
Can We Really Trust Banks?
Banks are commonly used by many people as safe places to store their money. However, not everyone in the world has the same level of trust in banks.
Banks generate profits by managing (or using) the assets they hold from their customers. However, some banks have failed due to risky management practices that prioritize profit over safety.
For instance, when the major investment bank Lehman Brothers collapsed in 2008, it triggered a global financial crisis.
In Japan, this led to a wave of bankruptcies among small and medium-sized enterprises and a surge in job terminations, becoming a significant social issue.
If a bank goes bankrupt, you might not get your deposited money back…
But everyone in Japan trusts banks, so I'd like to think it'll be okay.
However, some Japanese banks prioritize their profits by selling high-fee services like insurance and investment trusts.
Japan is considered to have low financial literacy (knowledge about money) among developed countries, and there's concern over the general lack of interest in financial matters.
Who Invented Bitcoin?
Honestly, I thought Bitcoin was just a way to make money. But maybe it’s something more.
Who invented it?
The creator of Bitcoin is known as "Satoshi Nakamoto," a mysterious figure.
The Disappearance of Satoshi Nakamoto
In 2008, a person (or group) using the name Satoshi Nakamoto published a paper introducing Bitcoin.
Their age, nationality, and gender are unknown, and it’s unclear whether Satoshi is an individual or a group, or even if they are still alive.
We don't know who created Bitcoin? That sounds suspicious.
Why didn't they reveal themselves?
It's believed that Satoshi Nakamoto chose to remain anonymous to emphasize Bitcoin’s goal of being a decentralized currency that doesn’t rely on any single authority or individual.
Decentralization means the opposite of centralization, where power is concentrated in one place. Instead, Bitcoin is managed by numerous computers around the world.
Traditional centralized currencies can be overissued by governments, leading to inflation (where the value of money decreases), or mishandled by banks, resulting in financial losses. Concentrated power in governments or banks has often led to policies that negatively affect people's lives.
Some believe that Satoshi Nakamoto’s absence actually helps Bitcoin's decentralization.
If Satoshi were around, people might rely on them, centralizing power around Satoshi.
In fact, the first Bitcoin code includes a message referring to "The Times" headline about banks being bailed out for the second time.
This suggests that the financial crisis following Lehman Brothers' collapse influenced the invention of Bitcoin.
Who Operates Bitcoin?
Unlike money issued by banks or governments, Bitcoin does not have a specific manager or central authority. Instead, Bitcoin operates on a decentralized network of over 10,000 nodes (computer terminals) spread across the world. These nodes share data and verify and record Bitcoin transactions.
Anyone can participate as a node operator, and there are even individuals running nodes in Japan.
So, Bitcoin isn't managed by a single person or company!
Exactly. Because there's no central authority like a bank, you won’t be denied account opening, have your account frozen, or be charged high fees.
It's estimated that over 2 billion people worldwide cannot open a bank account. This includes people in countries with underdeveloped identity systems, unstable governments that make obtaining identification documents difficult, and migrants or refugees who, for various reasons, are unable to access basic citizenship rights.
With Bitcoin, anyone with access to a smartphone and the internet can own and use it. This offers a crucial alternative for people who cannot access traditional banking systems.
What is Bitcoin? A Beginner-Friendly Explanation
So, what exactly is Bitcoin?
I understand that it doesn’t have a manager like a bank.
Bitcoin is a unique form of currency with characteristics not found in traditional money systems.
- A "New Money" That Can Reach Anywhere in the World
- Impossible to Counterfeit or Duplicate
- High Security through Encryption
- Limited Supply of 21 Million Coins
- Micro-Payments for Transactions Less Than One Yen
The "New Money" That Can Reach Anywhere in the World
Bitcoin is a completely digital form of money.
Unlike the yen or dollar, Bitcoin is a global currency that can be used by anyone, anywhere, as long as they have internet access. There are no physical coins like a 100-yen piece or paper bills like a 1,000-yen note; it exists only on computers and smartphones.
Because Bitcoin can be sent directly from person to person without using banks, you can transfer money quickly and cheaply, anytime and anywhere.
Impossible to Counterfeit or Duplicate
If no one manages Bitcoin, wouldn’t that mean bad people could create fake coins?
Since it’s digital, couldn’t it be copied easily?
Bitcoin solves the “double-spending problem,” making it impossible to counterfeit or duplicate.
Double-spending refers to the issue of using the same digital currency or electronic money more than once.
For centralized electronic money, a central server managed by the issuing authority keeps track of all balances to prevent the same money from being spent twice. In contrast, Bitcoin, which is decentralized, resolves the double-spending issue by making all accounts and transactions public to users worldwide.
It’s a pretty innovative approach to make transactions public worldwide!
But, I’m worried about personal information like names or addresses being exposed.
Only the wallet address and the amount sent are visible.
The wallet address is what you need to send and receive Bitcoin and is not directly linked to personal information. You can even create a new address for each transaction if you wish.
High Security Through Encryption
I heard that Bitcoin has been stolen through hacking before.
Does that mean Bitcoin is easily stolen?
The Bitcoin code itself has never been hacked.
When hacking incidents involving Bitcoin occur, it’s usually due to problems with how the exchanges store the Bitcoin, not an issue with Bitcoin itself.
Bitcoin uses a combination of multiple encryption technologies to ensure secure transactions. Encryption is a method that uses complex mathematics to protect information, preventing anyone else from using your Bitcoin or changing the recipient without authorization.
However, if Bitcoin is stored improperly, there is a risk that hackers could steal it. For example, in the "Mt. Gox Incident" in Japan, approximately 850,000 BTC (worth about 49 billion yen at that time) were stolen due to weak security measures at the exchange.
It’s unfortunate that hacking incidents give people the impression that "Bitcoin is easily stolen and dangerous."
In reality, it’s the security at the exchanges, which was as fragile as a "door that breaks easily," that was at fault, not Bitcoin itself.
I learned that both cash and Bitcoin may be stolen if stored improperly, but they are safe if managed properly.
Limited Supply of 21 Million Bitcoins
Bitcoin has a fixed supply limit of 21 million coins, which will never be exceeded. Because of this scarcity, Bitcoin is often considered more likely to increase in value compared to regular currencies.
Traditional currencies are issued by governments, which can decide how much to print. When large amounts of currency are issued, it can lead to inflation. Inflation decreases the value of money, meaning that something that used to cost 100 yen could rise to 170 yen, for instance.
Isn't it possible to easily change Bitcoin's supply limit?
Since it's digital money, it seems like developers could just increase the limit with a few clicks.
The 21 million coin limit is a fundamental rule of Bitcoin. Changing this rule would require agreement from a vast majority of computers worldwide.
Because changing the supply limit is extremely difficult, many people believe this adds to Bitcoin's value.
Micro-Payments: Transactions Less Than One Yen
I heard that one Bitcoin is worth several million yen.
That sounds very expensive and difficult for ordinary people to use casually.
Bitcoin can be used in very small amounts.
You can buy or send Bitcoin in units as small as 0.00000001 Bitcoin, allowing for payments even less than one yen.
Micro-payments refer to transactions involving very small amounts of money, and this is one of the areas where Bitcoin is expected to excel.
Traditional payment systems made it impractical to process ultra-small transactions, such as one or ten yen, due to operational costs. However, Bitcoin can be used in units as small as one hundred millionth of a Bitcoin, making it possible to use for extremely tiny payments.
Technological advancements like the "Lightning Network" enable Bitcoin to handle these small transactions efficiently. This innovation could make sub-one-yen payments a reality, potentially creating new markets for AI, IoT, and other emerging technologies.
(IoT: Internet of Things, where various devices are connected to the internet)
For example, imagine paying 0.1 yen to read the rest of an article or tipping 0.1 yen on social media with the same ease as giving a "like."
Such a system for real-time micro-payments could lead to new services that we haven’t seen before.
Being able to use it for payments less than one yen really makes Bitcoin feel like "new money"!
Summary: What is Bitcoin?
Bitcoin is a system that allows people to send money directly to each other without going through banks or payment services.
You can send money quickly and cheaply at any time, and it can reach the other side of the world in no time.
With a limited supply, the ability to be used for micro-payments, and other unique characteristics, Bitcoin is truly a "new form of money" different from traditional currencies.
I always thought of Bitcoin as just a way to make or lose money, but it's more than that.
It's a new system with lots of potential for different uses in the future. It sounds exciting!
People tend to focus on the price, such as how much one Bitcoin is worth, but I would be happy if people also learned about the technology behind Bitcoin.
Development is progressing all over the world, and it may become more familiar to us in the future.
Bitcoin seemed complicated and hard to understand, which made me a bit anxious. But now, I’m curious to learn more about it.
I want to know more about bitcoin!
Writer：Sigeru Minami
Creator of "Bitcoin-zukan.com."
Active as a handmade craftsman of Bitcoin goods.