What Bitcoin Is and the Problem It Tries to Solve
Understand what Bitcoin is, which problems with money it tries to address, and what it does not solve.
What you will learn
- What money does and why trust in the issuer matters
- What Bitcoin is: a digital asset with a fixed supply rule and no central operator
- What decentralisation means and why it has trade-offs
- Why a fixed supply does not mean a stable price
Explanation
Money has three classic jobs. It is a medium of exchange (you can pay with it), a unit of account (prices are written in it) and a store of value (it keeps purchasing power over time). The euro does all three jobs well in daily life. It is issued by the European Central Bank (ECB) and commercial banks, and you trust these institutions to manage it.
Inflation is the general rise in prices over time. With inflation, the same amount of money buys less each year. Central banks aim for low, stable inflation, but they can change the money supply. Some people worry about this power.
Bitcoin (often written BTC) is a digital asset that runs on a public network of computers. It was described in 2008 in a paper published under the name Satoshi Nakamoto, and the network started in January 2009. Bitcoin tries to offer three things:
- Scarcity: the protocol (the set of rules all participants follow) limits the total supply to 21 million bitcoin.
- Decentralisation: there is no company, bank or government that runs the network. Thousands of independent computers, called nodes, check the rules.
- Direct transfer: people can send value to each other without a bank in the middle.
Decentralisation has trade-offs. There is no customer service, no one can reverse a mistaken payment, and if you lose access to your bitcoin, nobody can restore it. Rules can only change if a broad majority of users accepts the change.
Bitcoin's price in euros is set by supply and demand on markets. Because demand changes quickly, the price has been very volatile. Volatility means how strongly a price moves up and down. A fixed supply does not protect you from falling prices.
Worked example
Hypothetical example: this example shows the problem Bitcoin's designers focused on. It is not a forecast for the euro or for Bitcoin.
Assumptions: you keep €1,000 in cash for 5 years. Prices rise by 3% every year. No interest is paid. Taxes and fees are excluded.
- Price level after 5 years: 1.03 × 1.03 × 1.03 × 1.03 × 1.03 = 1.03^5 ≈ 1.1593.
- Purchasing power of your cash: €1,000 ÷ 1.1593 ≈ €862.61 in today's money.
- Loss of purchasing power: €1,000 − €862.61 = €137.39 (about 13.7%).
Now the other side. Assume you had put the €1,000 into bitcoin instead, and its price fell 50% in one year. Your holding would be worth €500. A fixed supply did not prevent that loss. Both risks are real: slow loss through inflation and fast loss through price swings.
Common mistake
Practice activity
On paper, make a table with three rows (medium of exchange, unit of account, store of value) and two columns (euro, Bitcoin). For each cell, write one strength and one weakness in a few words.
Show solution
| Job of money | Euro | Bitcoin |
|---|---|---|
| Medium of exchange | Accepted almost everywhere; but payments rely on banks | Can be sent directly; but few shops accept it and fees vary |
| Unit of account | Prices are stable day to day; but slowly lose value | Very few prices are set in BTC; volatility makes it hard |
| Store of value | Low short-term risk; but inflation reduces purchasing power | Fixed supply; but large price swings and possible total loss |
Other sensible answers are fine if they name a real strength and a real weakness.
Limitations: real inflation varies from year to year; a constant 3% is a simplification.
Key takeaways
- Money needs trust; Bitcoin replaces trust in an issuer with public rules checked by many computers.
- The supply limit is 21 million bitcoin, and there is no central operator.
- Decentralisation means no one can reverse mistakes or restore lost access.
- Scarcity does not mean price stability; Bitcoin can lose value quickly.
Next step
In the next lesson, you will see how the blockchain records transactions and how miners secure it.
Self-check
Answer the questions, then check your answers. You can retry as often as you like.
Automatic self-check for your own revision. Your answers are checked in your browser and are not seen or assessed by us. It is not an exam and not a qualification.
Your progress
“Complete” only means you marked the lesson as done. It is not a test of your understanding. Progress and notes are saved only in this browser on this device — not in an account.