Understanding the Technology and How Bitcoin Works

Bitcoin (BTC) is a decentralized digital currency distributed and controlled through a peer-to-peer network. Unlike traditional currencies, it is managed entirely by its users with no centralized party such as a central bank or financial institution in control.

As a digital asset, Bitcoin serves as a store of value and can be sent instantly to anyone, anywhere in the world. Each Bitcoin transaction is permanently recorded in a digital ledger known as the blockchain, which ensures a high degree of security and transparency

History of Bitcoin

The Bitcoin network was first launched in 2009. However, the conceptual groundwork for Bitcoin was laid in October 2008 with the publication of a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” by the pseudonymous entity Satoshi Nakamoto, whose true identity remains unknown.

Despite being only sixteen years old, Bitcoin has navigated various phases and experienced significant price volatility since its inception. It has undergone substantial price surges followed by sharp corrections, periods of relative price stability and subsequent cycles of significant increases and steep declines.

Market sentiment surrounding Bitcoin has also evolved considerably. Initially met with skepticism and labeled as an asset lacking intrinsic value and unrecognized by state entities and institutional investors, Bitcoin has gradually gained acceptance as a legitimate asset class among retail, institutional, and even state investors.

How Bitcoin Works

Bitcoin operates using blockchain technology, a distributed digital ledger that records and secures all Bitcoin transactions, ensuring their immutability. The blockchain contains a chronological history of every Bitcoin transaction, from the very first to the most recent. A key feature of the blockchain is its public accessibility, allowing anyone to view all recorded transactions.

The authenticity of each transaction is protected through cryptographic digital signatures. Bitcoin employs a Proof-of-Work (PoW) consensus mechanism to verify transactions and prevent fraudulent activities such as double-spending. This mechanism, known as mining, rewards miners who successfully verify transactions with newly minted Bitcoin.

A Bitcoin transaction begins when a user wishes to send Bitcoin. This transaction is then broadcast to the peer-to-peer network to be verified by miners. Upon successful verification, the transaction is added to a new block in the blockchain. Each new block is cryptographically linked to the preceding block, forming an unbroken and transparent chain of information – hence the name blockchain, a chain of blocks.

Factors Affecting Bitcoin Price

The primary factors influencing the price of Bitcoin are supply and demand. Unlike traditional financial markets with set trading hours, Bitcoin and other cryptocurrencies are traded continuously, 24 hours a day, seven days a week. This constant buying and selling activity contributes to Bitcoin’s price volatility. Increased demand typically leads to a rise in Bitcoin’s price, while decreased demand often results in price corrections.

As previously mentioned, Bitcoin has a finite supply of 21 million coins, creating inherent scarcity in the market. The combination of limited supply and potentially increasing adoption leads many to believe that Bitcoin’s price will continue to appreciate in the future. Bitcoin also has a mechanism called Halving, which occurs approximately every four years and reduces the reward given to miners for verifying new blocks by half. This halving process is designed to gradually decrease the rate at which new Bitcoin enters circulation.

However, it is crucial to acknowledge that Bitcoin investments carry inherent risks, and there is no guarantee of continuous price increases. While fluctuating prices offer the potential for significant profits, they also carry the risk of substantial losses. Therefore, investors should always exercise caution and carefully consider the risks involved before deciding to invest in Bitcoin.

Why is Bitcoin Valuable?

Here are some of the key reasons contributing to Bitcoin’s value:

• Limited Supply. From its inception, Bitcoin’s supply has been capped at a finite limit of 21 million BTC. This scarcity makes BTC a rare asset, potentially commanding a higher value than traditional currencies, especially as demand continues to grow.
• Borderless. Bitcoin’s value is also derived from its borderless characteristic, meaning it can be used for transactions globally without being restricted by national boundaries.
• Transparency and Security. The underlying blockchain technology ensures that Bitcoin transactions are transparent and highly secure due to its decentralized network architecture.
• Hedge Against Inflation. Bitcoin is increasingly being viewed as an alternative for storing wealth and hedging against the devaluation of fiat currencies due to inflation. This has led many to consider Bitcoin as a form of “digital gold.”

Bitcoin as an Investment Asset

Due to its inherent value and unique properties, Bitcoin has gained recognition as a legitimate investment asset class. It now serves as a portfolio diversification option for both retail and institutional investors. Beyond direct purchase and ownership, investors can also gain exposure to Bitcoin’s price movements through Exchange-Traded Fund (ETF) products.

In Indonesia, Bitcoin has also been officially recognized as a tradable crypto asset. The Indonesian government has established regulations governing the trading of digital financial assets, including Bitcoin, through the Financial Services Authority Regulation (POJK) Number 27 of 2024 concerning the Implementation of Digital Financial Asset Trading Including Crypto Assets.