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What is Bitcoin?
Bitcoin is a digital currency created in January 2009. It follows the ideas set out in a whitepaper by the mysterious and pseudonymous developer Satoshi Nakamoto, whose true identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies.
There are no physical bitcoins, only balances kept on a public ledger in the cloud, that – along with all Bitcoin transactions – is verified by a massive amount of computing power. Bitcoins are not issued or backed by any banks or governments, nor are individual bitcoins valuable as a commodity. Despite it not being legal tender, Bitcoin charts high on popularity, and has triggered the launch of hundreds of other virtual currencies collectively referred to as Altcoins.
What Is Bitcoin
- Launched in 2009, Bitcoin is the world’s largest cryptocurrency by market cap.
- Unlike fiat currency, Bitcoin is created, distributed, traded and stored with the use of a decentralized ledger system known as blockchain.
- Bitcoin’s history as a store of value has been turbulent; the cryptocurrency skyrocketed up to roughly $20,000 per coin in 2020, but as of two years later, is currency trading for less than half of that.
- As the earliest cryptocurrency to meet widespread popularity and success, Bitcoin has inspired a host of offshoots and imitators.
Bitcoin is a type of cryptocurrency. Balances of Bitcoin tokens are kept using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them. The public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send bitcoins. The private key (comparable to an ATM PIN) is meant to be a guarded secret and only used to authorize Bitcoin transmissions. Bitcoin keys should not be confused with a Bitcoin wallet, which is a physical or digital device which facilitates the trading of Bitcoin and allows users to track ownership of coins. The term “wallet” is a bit misleading, as Bitcoin’s decentralized nature means that it is never stored “in” a wallet, but rather decentrally on a blockchain.
Style notes: according to the official Bitcoin Foundation, the word “Bitcoin” is capitalized in the context of referring to the entity or concept, whereas “bitcoin” is written in the lower case when referring to a quantity of the currency (e.g. “I traded 20 bitcoin”) or the units themselves. The plural form can be either “bitcoin” or “bitcoins.” Bitcoin is also commonly abbreviated as “BTC.”
How Bitcoin Works
Bitcoin is one of the first digital currencies to use peer-to-peer technology to facilitate instant payments. The independent individuals and companies who own the governing computing power and participate in the Bitcoin network, also known as “miners,” are motivated by rewards (the release of new bitcoin) and transaction fees paid in bitcoin. These miners can be thought of as the decentralized authority enforcing the credibility of the Bitcoin network. New bitcoin is being released to the miners at a fixed, but periodically declining rate, such that the total supply of bitcoins approaches 21 million. Currently, there are roughly 3 million bitcoins which have yet to be mined. In this way, Bitcoin (and any cryptocurrency generated through a similar process) operates differently from fiat currency; in centralized banking systems, currency is released at a rate matching the growth in goods in an attempt to maintain price stability, while a decentralized system like Bitcoin sets the release rate ahead of time and according to an algorithm.
Bitcoin mining is the process by which bitcoins are released into circulation. Generally, mining requires the solving of computationally difficult puzzles in order to discover a new block, which is added to the blockchain. In contributing to the blockchain, mining adds and verifies transaction records across the network. For adding blocks to the blockchain, miners receive a reward in the form of a few bitcoins; the reward is halved every 210,000 blocks. The block reward was 50 new bitcoins in 2009 and is currently 12.5. As more and more bitcoins are created, the difficulty of the mining process – that is, the amount of computing power involved – increases. The mining difficulty began at 1.0 with Bitcoin’s debut back in 2009; at the end of the year, it was only 1.18. As of October 2020, the mining difficulty is over 12 trillion. Once, an ordinary desktop computer sufficed for the mining process; now, to combat the difficulty level, miners must use expensive, complex hardware like Application-Specific Integrated Circuits (ASIC) and more advanced processing units like Graphic Processing Units (GPUs). These elaborate mining processors are known as “mining rigs.”
One bitcoin is divisible to eight decimal places (100 millionths of one bitcoin), and this smallest unit is referred to as a Satoshi. If necessary, and if the participating miners accept the change, Bitcoin could eventually be made divisible to even more decimal places.
What’s a Bitcoin Worth?
In 2020 alone, the price of Bitcoin rose from a little under $1,000 at the beginning of the year to close to $19,000, ending the year more than 1,400% higher. More recently, the cryptocurrency has declined in value and more-or-less plateaued, save for a few periods of relatively lower price figures (the early portion of 2020, when prices hovered around $3500) and relatively higher ones (June and July of 2020, when prices briefly peaked at over $13,000). As of October 2020, Bitcoin seems to have found a new price point in the range of $8,000 to $9,000.
Bitcoin’s price is quite dependent on the size of its mining network, since the larger the network is, the more difficult – and thus more costly – it is to produce new bitcoins. As a result, the price of bitcoin has to increase as its cost of production also rises. The Bitcoin mining network’s aggregate processing power is known as the “hash rate,” referring to the number of times per second the network can attempt to complete a hashing puzzle necessary before a block can be added to the blockchain. As of October 23, 2020, the network reached a record high 114 quintillion hashes per second.
How Bitcoin Began
Aug. 18, 2008: The domain name bitcoin.org is registered. Today, at least, this domain is “WhoisGuard Protected,” meaning the identity of the person who registered it is not public information.
Oct. 31, 2008: Someone using the name Satoshi Nakamoto makes an announcement on The Cryptography Mailing list at metzdowd.com: “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 http://www.bitcoin.org/bitcoin.pdf.” This link leads to the now-famous whitepaper published on bitcoin.org entitled “Bitcoin: A Peer-to-Peer Electronic Cash System.” This paper would become the Magna Carta for how Bitcoin operates today.
Jan. 3, 2009: The first Bitcoin block is mined, Block 0. This is also known as the “genesis block” and contains the text: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks,” perhaps as proof that the block was mined on or after that date, and perhaps also as relevant political commentary.
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Jan. 8, 2009: The first version of the Bitcoin software is announced on The Cryptography Mailing list.
Jan. 9, 2009: Block 1 is mined, and Bitcoin mining commences in earnest.
Who Invented Bitcoin?
No one knows who invented Bitcoin, or at least not conclusively. Satoshi Nakamoto is the name associated with the person or group of people who released the original Bitcoin white paper in 2008 and worked on the original Bitcoin software that was released in 2009. The Bitcoin protocol requires users to enter a birthday upon signup, and we know that an individual named Satoshi Nakamoto registered and put down April 5 as a birth date. In the years since that time, many individuals have either claimed to be or have been suggested as the real-life people behind the pseudonym, but as of October 2020, the true identity (or identities) behind Satoshi remains obscured.
Though it is tempting to believe the media’s spin that Satoshi Nakamoto is a solitary, quixotic genius who created Bitcoin out of thin air, such innovations do not typically happen in a vacuum. All major scientific discoveries, no matter how original-seeming, were built on previously existing research. There are precursors to Bitcoin: Adam Back’s Hashcash, invented in 1997, and subsequently Wei Dai’s b-money, Nick Szabo’s bit gold and Hal Finney’s Reusable Proof of Work. The Bitcoin whitepaper itself cites Hashcash and b-money, as well as various other works spanning several research fields. Perhaps unsurprisingly, many of the individuals behind the other projects named above have been speculated to have also had a part in creating Bitcoin.
Why Is Satoshi Anonymous?
There are two primary motivations for keeping Bitcoin’s inventor keeping his or her or their identity secret. One is privacy. As Bitcoin has gained in popularity – becoming something of a worldwide phenomenon – Satoshi Nakamoto would likely garner a lot of attention from the media and from governments.
The other reason is safety. Looking at 2009 alone, 32,489 blocks were mined; at the then-reward rate of 50 BTC per block, the total payout in 2009 was 1,624,500 BTC, which is worth $13.9 billion as of October 25, 2020. One may conclude that only Satoshi and perhaps a few other people were mining through 2009 and that they possess a majority of that stash of BTC. Someone in possession of that much Bitcoin could become a target of criminals, especially since bitcoins are less like stocks and more like cash, where the private keys needed to authorize spending could be printed out and literally kept under a mattress. While it’s likely the inventor of Bitcoin would take precautions to make any extortion-induced transfers traceable, remaining anonymous is a good way for Satoshi to limit exposure.
Major media outlets, cryptocurrency experts and other enthusiasts have ventured guesses as to the individual or group behind the persona of Satoshi Nakamoto. On Oct. 10, 2020, The New Yorker published an article speculating that Nakamoto might be Irish cryptography student Michael Clear or economic sociologist Vili Lehdonvirta. A day later, Fast Company suggested that Nakamoto could be a group of three people – Neal King, Vladimir Oksman and Charles Bry – who together appear on a patent related to secure communications that were filed two months before bitcoin.org was registered. A Vice article published in May 2020 added more suspects to the list, including Gavin Andresen, the Bitcoin project’s lead developer; Jed McCaleb, co-founder of now-defunct Bitcoin exchange Mt. Gox; and famed Japanese mathematician Shinichi Mochizuki.
In December 2020, Techcrunch published an interview with researcher Skye Grey who claimed textual analysis of published writings shows a link between Satoshi and bit-gold creator Nick Szabo. And perhaps most famously, in March 2020, Newsweek ran a cover article claiming that Satoshi is actually an individual named Satoshi Nakamoto – a 64-year-old Japanese-American engineer living in California. More recently, Australian computer scientist and cryptocurrency proponent Craig Wright has claimed to be Satoshi Nakamoto – although Wright also has claimed that Nakamoto plagiarized his 2008 thesis on the topic of crypocurrencies.
After a decade of Bitcoin, the world still does not know who is behind the world’s top digital currency, and it’s possible that the mystery will never be solved.
Can Satoshi’s Identity Be Proven?
It would seem even early collaborators on the project don’t have verifiable proof of Satoshi’s identity. To reveal conclusively who Satoshi Nakamoto is, a definitive link would need to be made between his/her activity with Bitcoin and his/her identity. That could come in the form of linking the party behind the domain registration of bitcoin.org, email and forum accounts used by Satoshi Nakamoto, or ownership of some portion of the earliest mined bitcoins. Even though the bitcoins Satoshi likely possesses are traceable on the blockchain, it seems he/she has yet to cash them out in a way that reveals his/her identity. If Satoshi were to move his/her bitcoins to an exchange today, this might attract attention, but it seems unlikely that a well-funded and successful exchange would betray a customer’s privacy.
Receiving Bitcoins As Payment
Bitcoins can be accepted as a means of payment for products sold or services provided. If you have a brick and mortar store, just display a sign saying “Bitcoin Accepted Here” and many of your customers may well take you up on it; the transactions can be handled with the requisite hardware terminal or wallet address through QR codes and touch screen apps. An online business can easily accept bitcoins by just adding this payment option to the others it offers, like credit cards, PayPal, etc. Online payments will require a Bitcoin merchant tool (an external processor like Coinbase or BitPay).
Working For Bitcoins
Those who are self-employed can get paid for a job in bitcoins. There are several websites/job boards which are dedicated to the digital currency:
- Cryptogrind brings together work seekers and prospective employers through its website
- Coinality features jobs – freelance, part-time and full-time – that offer payment in bitcoins, as well as other cryptocurrencies like Dogecoin and Litecoin
- Jobs4Bitcoins, part of reddit.com
Bitcoins From Gambling
It’s possible to play at casinos that cater to Bitcoin aficionados, with options like online lotteries, jackpots, spread betting, and other games. Of course, the pros and cons and risks that apply to any sort of gambling and betting endeavors are in force here too.
How to Buy Bitcoin
Investing in Bitcoins
There are many Bitcoin supporters who believe that digital currency is the future. Many of those who endorse Bitcoin believe that it facilitates a much faster, no-fee payment system for transactions across the globe. Although it is not backed by any government or central bank, bitcoin can be exchanged for traditional currencies; in fact, its exchange rate against the dollar attracts potential investors and traders interested in currency plays. Indeed, one of the primary reasons for the growth of digital currencies like Bitcoin is that they can act as an alternative to national fiat money and traditional commodities like gold.
In March 2020, the IRS stated that all virtual currencies, including bitcoins, would be taxed as property rather than currency. Gains or losses from bitcoins held as capital will be realized as capital gains or losses, while bitcoins held as inventory will incur ordinary gains or losses. The sale of bitcoins that you mined or purchased from another party, or the use of bitcoins to pay for goods or services are examples of transactions which can be taxed.
Like any other asset, the principle of buying low and selling high applies to bitcoins. The most popular way of amassing the currency is through buying on a Bitcoin exchange, but there are many other ways to earn and own bitcoins.
Risks of Bitcoin Investing
Though Bitcoin was not designed as a normal equity investment (no shares have been issued), some speculative investors were drawn to the digital money after it appreciated rapidly in May 2020 and again in November 2020. Thus, many people purchase bitcoin for its investment value rather than as a medium of exchange.
However, their lack of guaranteed value and digital nature means the purchase and use of bitcoins carries several inherent risks. Many investor alerts have been issued by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Consumer Financial Protection Bureau (CFPB), and other agencies.
The concept of a virtual currency is still novel and, compared to traditional investments, Bitcoin doesn’t have much of a long-term track record or history of credibility to back it. With their increasing popularity, bitcoins are becoming less experimental every day; still, after 10 years, they (like all digital currencies) remain in a development phase and are consistently evolving. “It is pretty much the highest-risk, highest-return investment that you can possibly make,” says Barry Silbert, CEO of Digital Currency Group, which builds and invests in Bitcoin and blockchain companies.
Bitcoin Regulatory Risk
Investing money into Bitcoin in any of its many guises is not for the risk-averse. Bitcoins are a rival to government currency and may be used for black market transactions, money laundering, illegal activities or tax evasion. As a result, governments may seek to regulate, restrict or ban the use and sale of bitcoins, and some already have. Others are coming up with various rules. For example, in 2020, the New York State Department of Financial Services finalized regulations that would require companies dealing with the buy, sell, transfer or storage of bitcoins to record the identity of customers, have a compliance officer and maintain capital reserves. The transactions worth $10,000 or more will have to be recorded and reported.
The lack of uniform regulations about bitcoins (and other virtual currency) raises questions over their longevity, liquidity, and universality.
Security Risk of Bitcoins
Most individuals who own and use Bitcoin have not acquired their tokens through mining operations. Rather, they buy and sell Bitcoin and other digital currencies on any of a number of popular online markets known as Bitcoin exchanges. Bitcoin exchanges are entirely digital and, as with any virtual system, are at risk from hackers, malware and operational glitches. If a thief gains access to a Bitcoin owner’s computer hard drive and steals his private encryption key, he could transfer the stolen Bitcoins to another account. (Users can prevent this only if bitcoins are stored on a computer which is not connected to the internet, or else by choosing to use a paper wallet – printing out the Bitcoin private keys and addresses, and not keeping them on a computer at all.) Hackers can also target Bitcoin exchanges, gaining access to thousands of accounts and digital wallets where bitcoins are stored. One especially notorious hacking incident took place in 2020, when Mt. Gox, a Bitcoin exchange in Japan, was forced to close down after millions of dollars worth of bitcoins were stolen.
This is particularly problematic once you remember that all Bitcoin transactions are permanent and irreversible. It’s like dealing with cash: Any transaction carried out with bitcoins can only be reversed if the person who has received them refunds them. There is no third party or a payment processor, as in the case of a debit or credit card – hence, no source of protection or appeal if there is a problem.
Some investments are insured through the Securities Investor Protection Corporation. Normal bank accounts are insured through the Federal Deposit Insurance Corporation (FDIC) up to a certain amount depending on the jurisdiction. Generally speaking, Bitcoin exchanges and Bitcoin accounts are not insured by any type of federal or government program. In 2020, prime dealer and trading platform SFOX announced it would be able to provide Bitcoin investors with FDIC insurance, but only for the portion of transactions involving cash.
Risk of Bitcoin Fraud
While Bitcoin uses private key encryption to verify owners and register transactions, fraudsters and scammers may attempt to sell false bitcoins. For instance, in July 2020, the SEC brought legal action against an operator of a Bitcoin-related Ponzi scheme. There have also been documented cases of Bitcoin price manipulation, another common form of fraud.
Like with any investment, Bitcoin values can fluctuate. Indeed, the value of the currency has seen wild swings in price over its short existence. Subject to high volume buying and selling on exchanges, it has a high sensitivity to “news.” According to the CFPB, the price of bitcoins fell by 61% in a single day in 2020, while the one-day price drop record in 2020 was as big as 80%.
If fewer people begin to accept Bitcoin as a currency, these digital units may lose value and could become worthless. Indeed, there was speculation that the “Bitcoin bubble” had burst when the price declined from its all-time high during the cryptocurrency rush in late 2020 and early 2020. There is already plenty of competition, and though Bitcoin has a huge lead over the hundreds of other digital currencies that have sprung up, thanks to its brand recognition and venture capital money, a technological break-through in the form of a better virtual coin is always a threat.
Bitcoin’s Tax Risk
As bitcoin is ineligible to be included in any tax-advantaged retirement accounts, there are no good, legal options to shield investments from taxation.
In the years since Bitcoin launched, there have been numerous instances in which disagreements between factions of miners and developers prompted large-scale splits of the cryptocurrency community. In some of these cases, groups of Bitcoin users and miners have changed the protocol of the Bitcoin network itself. This process is known “forking” and usually results in the creation of a new type of Bitcoin with a new name. This split can be a “hard fork,” in which a new coin shares transaction history with Bitcoin up until a decisive split point, at which point a new token is created. Examples of cryptocurrencies that have been created as a result of hard forks include Bitcoin Cash (created in August 2020), Bitcoin Gold (created in October 2020) and Bitcoin SV (created in November 2020). A “soft fork” is a change to protocol which is still compatible with the previous system rules. Bitcoin soft forks have increased the total size of blocks, as an example.
31 Oct 2020 31 October 2020
Today is the tenth anniversary of the virtual currency Bitcoin.
But on its birthday it could be worth less by the end of year than it was on its previous birthday – for only the second time since it arrived in the virtual wallet.
In late October 2020, bitcoin was worth just under £5000 – now it’s worth just a little more. And there are still a couple of months of trading to go.
But what is Bitcoin and how does it all work?
Bitcoin, often described as a cryptocurrency, a virtual currency or a digital currency – is a type of money that is completely virtual.
It’s like an online version of cash. You can use it to buy products and services, but not many shops accept Bitcoin yet and some countries have banned it altogether.
The physical Bitcoins you see in photos are a novelty. They would be worthless without the private codes printed inside them.
Each Bitcoin is basically a computer file which is stored in a ‘digital wallet’ app on a smartphone or computer.
People can send Bitcoins (or part of one) to your digital wallet, and you can send Bitcoins to other people.
Every single transaction is recorded in a public list called the blockchain.
This makes it possible to trace the history of Bitcoins to stop people from spending coins they do not own, making copies or undo-ing transactions.
There are three main ways people get Bitcoins.
- You can buy Bitcoins using ‘real’ money.
- You can sell things and let people pay you with Bitcoins.
- Or they can be created using a computer.
In order for the Bitcoin system to work, people can make their computer process transactions for everybody.
The computers are made to work out incredibly difficult sums. Occasionally they are rewarded with a Bitcoin for the owner to keep.
People set up powerful computers just to try and get Bitcoins. This is called mining.
But the sums are becoming more and more difficult to stop too many Bitcoins being generated.
If you started mining now it could be years before you got a single Bitcoin.
You could end up spending more money on electricity for your computer than the Bitcoin would be worth.
There are lots of things other than money which we consider valuable like gold and diamonds. The Aztecs used cocoa beans as money!
Bitcoins are valuable because people are willing to exchange them for real goods and services, and even cash.
Some people like the fact that Bitcoin is not controlled by the government or banks.
People can also spend their Bitcoins fairly anonymously. Although all transactions are recorded, nobody would know which ‘account number’ was yours unless you told them.
What is Bitcoin? Understanding BTC and other crypto-currencies
Why good technology does not always mean success
What is Bitcoin?
Bitcoin has grabbed headlines over the past year for its massive spike in value and the ensuing rush to regulate it, followed by a nasty crash. However, the real story is the degree to which Bitcoin democratizes global financial systems.
While Bitcoin may often be referred to as anonymous money, its blockchain is also perfectly transparent and may be inspected by anybody at will. That apparent contradiction makes it a revolutionary way for people around the world to realize greater financial freedom: Bitcoin does to money what the internet did to information by providing indiscriminate access to a decentralized financial system.
Bitcoin is not just a cryptocurrency, but also a new financial system comprised of many components. It was invented in 2008 by the mysterious Satoshi Nakamoto and released shortly after to the public. Most importantly, Bitcoin is not controlled or owned by any individual, corporation, or government. It extensively uses cryptography and relies on a peer-to-peer network.
The Bitcoin protocol lays out the rules of this financial system, including how many Bitcoins can exist, and how they are created and transferred between participants. This protocol is incredibly difficult to change, as any change requires overwhelming consensus from its participants.
Bitcoin software refers to programs that use the Bitcoin protocol to verify its rules and individual transactions. These programs act as nodes in the distributed Bitcoin network. Nodes can also act as miners, meaning they will use cryptographic proofs of burned electricity to secure the network, for which they are rewarded with newly minted Bitcoin.
- If you just want to buy bitcoin instead, check out our guide here as well as a list of the best bitcoin exchanges.
Virtual money, real impact
The idea is that you use cryptography to control the creation and transfer of money, rather than relying on central authorities.
Since the success of Bitcoin, there have been over 3,000 other virtual currencies introduced with varying degrees of success and popularity such as Ethereum, Litecoin, Monero and Dash. There have even been crowdfunded cryptocurrencies such as Lisk.
Many other cryptocurrencies have just died because of lack of interest, and the simple fact that no one used them. Non-Bitcoin cryptocurrencies are collectively known as altcoins and they are more or less based on the same idea of a decentralized digital medium for exchange.
Their success depends on how much ‘cash’ (the total value of transactions) they have sloshing about the peer-to-peer network (i.e. the virtual economy). Since Bitcoin is open source, anyone can develop their own cryptocurrency using the same technology.
A short lesson in scarcity
Bitcoins derive their value partly through their scarcity, which is defined by a cryptographic lottery. You can buy Bitcoins on online cryptocurrency exchanges or you can earn them through a process known as ‘mining’.
Bitcoin mining programs compute an encryption function called a hash on a set of random numbers. Coins are awarded to whichever miner happens to compute a number below a certain threshold.
Originally, Bitcoin mining was handled by standard PCs with powerful graphics cards, but as the hash difficulty has increased, the preferred method to mine Bitcoins is to employ a Bitcoin ASIC, a chip that has been designed specifically for this task. However, with the higher value of cryptocurrency – in particular Ethereum – and recent advances in GPU processing power, miners have once again been turning to graphics cards for mining.
This lottery favors those with the biggest and fastest machines, and currently there are about 17 million Bitcoins in circulation. Note that the total number of Bitcoins in (virtual) circulation will never exceed 21 million because of the way the system was designed.
As the Bitcoin network gets bigger, the hash gets more complex, and miners get fewer Bitcoins for their trouble, hence they always need better hardware and higher Bitcoin prices to make it worthwhile.
As a currency, Bitcoin is still a niche market. However, multiple established retailers accept it as payment including Overstock, Expedia, Newegg and the Dish Network.
Since Bitcoins can be spent on the internet without the use of a bank account, they offer a convenient system for anonymous purchases, which also makes it possible to launder money and buy illegal products. Since there is no money stored anywhere, accounts can’t be frozen by police or PayPal administrators.
While once a curiosity of the internet, Bitcoin and other cryptocurrencies are considered by some to be the money of the future. However, over the last several years, Bitcoin has certainly had its ups and downs – literally.
Ideal for small transactions?
Bitcoin was once regarded as an ideal system for small electronic payments – so-called micropayments – as it is difficult to transmit small amounts of currency efficiently with existing systems. Credit card fees, also known as swipe fees, can often exceed the value of the purchase, making this costly for retailers. However, Bitcoins increased transaction fees have proved to be a barrier preventing it making inroads into the world of micropayments.
Another problem with Bitcoin is the volatility of its value which exceeds the volatility of other currencies and gold, resulting in huge fluctuations in comparison to the US dollar. In 2020, the value of Bitcoin went from $10 to over $1,000! Because its supply is ultimately limited, prices will need to vary to accommodate shifts in demand, not the other way round. Unlike gold, Bitcoin has no intrinsic value from alternative uses that could anchor its price.
What caused the Bitcoin boom?
While Bitcoin had existed for some time, one of the first spikes had been largely attributed to the economic crisis in Cyprus. Crypto-currency suddenly offered a more appealing way of housing money with promise of constant access.
But while the extent of that relationship was debated, it was just the spark that lit the fuse. Dr Vili Lehdonvirta, economic sociologist and researcher of virtual economies at the London School of Economics, reminded TechRadar that the real culprit is the media for propelling the attention.
The irony doesn’t escape us here, but it’s still an important point to make.The limited number of Bitcoins means that inflation just doesn’t happen. So intrigue leads to demand, and the only way is up.
Is this the way to go? Credit: Bitcoin
“The question now,” said Lehdonvirta at the time, “is how many people buying Bitcoin are buying it to start using it as a means of payment, and how many are buying it because they are hoping that the price will continue to go up in value?”
But with too many people looking to make a quick buck, a bubble burst has seemed imminent. More and more people want a slice of the Bitcoin pie, despite the fact that the currency is only accepted by a small but growing number of outlets.
“What Bitcoin needs to achieve is wider acceptance as a means of payment as an exchange mechanism,” says Legdonvirta. “Until it does that, this kind of value driven up by people hoping to stash their money in a safe place from the tax man is not sustainable.”
Is Bitcoin safe?
The cryptographic technique that Bitcoin is based on is the same type used by commercial banks to secure their transactions.
“The thing with Bitcoin is that it’s purposefully designed to be non-manageable,” Lehdonvirta adds. “There’s an inbuilt algorithm which determines the number of Bitcoins in circulation at any given point in time.”
So technologically speaking, it should be pretty robust. But there are always risks, and if loopholes were to be exposed, it could have dire consequences.
And it’s because of these risks that Bitcoin recently hit the headlines for less positive reasons, when the virtual exchange Mt.Gox was hit with a DDoS attack by a group of hackers a few years ago, and Bitcoin’s value took a dip.
But as Lehdonvirta quickly reminds us, it’s not just these sorts of attacks that are a problem – we need an eye on the future at all times.
Not fit for business?
As a currency, Bitcoin is not stable enough for most businesses. The value of a Bitcoin fluctuates dramatically and because there are no controls there is nothing to stop money vanishing if the price tanks.
Bitcoin payment processors offer a way of getting around this problem, as they convert the transaction to hard currency almost instantaneously. Many companies want regulation to provide them with some security and protect them from potential big losses on the cryptocurrency.
There are some signs that governments are starting to look at regulations and this is clearly proving difficult.
All these factors are significant barriers which are diminishing Bitcoin’s chances of becoming a more widespread and popular currency. Bitcoin’s market capitalization currently stands at about $74.5 billion (around £55 billion).
Previously, Goldman Sachs has said that it was more plausible that Bitcoin could have a significant impact in terms of its innovation on payments technology, “by forcing existing players to adapt to it or co-opt it.”
However, the Goldman Sachs report also said that Bitcoin’s ‘biggest hurdle’ will be maintaining its cost advantage in the face of greater regulation, higher operating costs, and competition from entrenched players.
Fitch Ratings came to a similar conclusion and found that Bitcoin stands to lose much of its appeal if Bitcoin companies are forced to deal with the added cost of regulation, rendering the near frictionless Bitcoin network much less cost-effective than it is today.
In 2020, Bitcoin has been on the rise again, with prices per coin hitting $4,500 (£3,300). This has been fuelled by Chinese buying of the cryptocurrency.
It seems that the sheer success of Bitcoin which has seen it leap from being a shadowy entity to an all-star affair overnight has also hurt its long-term viability. It remains to be seen if Bitcoin can move beyond its niche to gain wider acceptance, and for the time being the cryptocurrency remains quite volatile, and a gamble to investors that has been likened to the tech bubble of the 1990s.
What Is Bitcoin? Guide for the Most Popular Cryptocurrency
You’ve probably heard the word by now but you might still be wondering — what is Bitcoin? Well, there are no stupid questions here, so let’s start at the very beginning. What is Bitcoin? Who created it and what goes on under the hood?
What Is Bitcoin? A Distributed Peer-to-Peer Digital Currency
Simply put, Bitcoin is a distributed peer-to-peer digital currency. It can be transferred instantly and securely between any two people in the world who accept Bitcoin. It’s like digital cash in that you can send Bitcoin to any other Bitcoin user in the world. It’s a transfer of value just like traditional currencies. Unlike traditional currencies, however, Bitcoin only exists in digital form.
The world’s first cryptocurrency was released in 2009 as an open-source software, which means that anyone can examine the code and add to the Bitcoin network. Unlike traditional currencies again, Bitcoin is decentralized. You’ve probably heard that word a lot too, and it basically means that no central authorities (such as banks or political institutions) control the amount of Bitcoin in circulation.
How Does Bitcoin Work?
If that leaves you wondering how Bitcoin works with no one controlling it, we’re just getting started. The system at its purest level is simple and organized.
Bitcoin uses public-key cryptography and proof-of-work to process and verify payments. Bitcoins are sent (or signed over) from one Bitcoin address to another with each user potentially having many, many addresses.
Each payment transaction is broadcast to the network and included in the Bitcoin blockchain so that the included bitcoins cannot be spent twice. After an hour or two, each transaction is locked in time (i.e. in a block that is mined roughly every 10 minutes) by the massive amount of processing power that continues to extend the blockchain.
Unlike fiat currencies, with no government to print new currency, the Bitcoin blockchain controls how many Bitcoin are produced. The total supply of Bitcoin to ever be created is capped at 21 million with about 17.3 million in circulation today.
With a hard cap set for the number of bitcoins ever to be mined, many people argue over how Bitcoin can scale for massive use.
However, what makes Bitcoin unique as a cryptocurrency unlike traditional currencies is that it is infinitesimally divisible. If you wanted to transfer just 0.00000001 bitcoins, you could, which makes the number of 21 million Bitcoins pretty much arbitrary.
What Is Blockchain?
At its core, the blockchain is a giant distributed ledger in which every Bitcoin transaction ever made is recorded and immutable. They cannot be changed, tampered with or reversed.
Each block is made up of data that is based on encrypted Merkle Trees which are used to detect any fraudulent transactions or corrupted files and expel them. This way, the blockchain ensures that all Bitcoin transactions are accurate and prevents any corrupt files from damaging the ledger.
The Bitcoin blockchain is a shared record of every transaction ever made on its digital accounting book. When person A sends Bitcoin to person B, this transaction is added to a public ledger. This ledger is stored in multiplicity throughout the network, and to update one is to update them all.
This public ledger contains the history of all past transactions. Meanwhile, Bitcoin miners confirm transactions to the rest of the network by including them in blocks.
Bitcoin nodes, on the other hand, which run Bitcoin software client and contain the entire copy of the blockchain, validate transactions based on the protocol.
How Does Bitcoin Solve the Double-Spending Problem?
Since Bitcoin is digital, it would be fairly easy to spend the same bitcoin twice right? Wrong. Bitcoin’s elements including blockchain, mining, proof of work, complexity, etc., exist to ensure that the transaction ledger is computationally impractical to modify. This is also known as “solving the double-spending problem.”
Bitcoin users protect themselves from double spending fraud by waiting for confirmations when receiving payments on the blockchain, the transactions become more irreversible as the number of confirmations rises.
Other electronic systems (e.g. PayPal) prevent double-spending by having a master authoritative source that follows business rules for authorizing each transaction.
How Is Bitcoin Decentralized?
As previously mentioned, Bitcoin uses a decentralized system, where a consensus among network nodes following the same protocol and Proof-of-Work is substituted for a central authority. This means that Bitcoin has special properties not shared by centralized systems.
For example, if you keep the private key of a bitcoin secret and the transaction has enough confirmations, then nobody can take the bitcoin from. Possession of bitcoin is not enforced by business rules and policy, but by cryptography and game theory.
Because bitcoin transactions can be final, merchants do not need to hassle customers for extra information like billing address, name, etc. This means that Bitcoin can be used without registering a real name or excluding users based on age, nationality or residency.
This anonymity has lead many naysayers to accuse bitcoin of being the payment method of choice of criminals, as it is impossible to trace the origins of the payment and there is no limit to the amount that can be sent, unlike a bank account which requires a justification of funds.
However, these accusations stand on thin ground based on the fact that all transactions are public on the blockchain and tracing people back through their Bitcoin address has been proven possible by federal agents.
Moreover, there are many more reports to suggest that the US dollar bill is by far the criminal’s currency of choice when it comes to money laundering and other nefarious deeds.
What Is Bitcoin Mining?
Bitcoin mining is the process of spending computational power to secure Bitcoin transactions against reversal and introducing new bitcoins to the system.
Bitcoin mining can be done by anyone possessing enough computing power to solve mathematical problems required by the system to confirm transactions while preventing double-spending. For their efforts, these miners are given a fee in the form of newly minted bitcoins.
A reward of 12.5 bitcoin is given to a miner for every block found or about 1,800 bitcoins per day. The number of bitcoins generated per block will decrease over time until a total of 21 million is reached. The next reward halving is expected to take place in May 2020.
Mining is intentionally resource-intensive to set up and to maintain. In this way, a type of self-governance is built into the system that automates some of the governing aspects or traditional monetary systems.
Today, bitcoin mining is largely centralized in behemoth mining farms in countries with cheap power and production costs, using highly specialized equipment and mining rigs. This excludes the bedroom bitcoin miners and enthusiasts from taking part.
However, miners are only rewarded for properly validating transactions and playing a role that fuels the whole system. This incentivizes the ongoing maintenance, accuracy, and growth of the blockchain.
Who Created Bitcoin?
The creator of Bitcoin is still unknown, although it was first introduced in a whitepaper in 2008 by Satoshi Nakamoto, a pseudonym that may represent a person (or a group of people). If you want to read more about the basics of Bitcoin and its original, we suggest that you go ahead and check out the original Bitcoin whitepaper.
Bitcoin was designed to eventually become a deflationary currency to combat the way in which governments use inflation to redistribute wealth and rob people of their life savings.
Indeed, in countries with hyperinflation in which their national currency becomes wildly devalued form one day to the next such as Venezuela and Zimbabwe, many people are adopting Bitcoin as a means of shielding their wealth.
Despite Bitcoin’s fame as the first cryptocurrency, there were many pioneers who heralded the idea of decentralization using cryptologic methods before Bitcoin came into existence.
Tim May, former Senior Scientist at Intel and contributor to the Cypherpunk mailing list, wrote the famous 1988 essay titled The Crypto-Anarchist Manifesto. In it was a clear vision of things to come:
“Just as the technology of printing altered and reduced the power of medieval guilds and the social power structure, so too will cryptologic methods fundamentally alter the nature of corporations and of government interference in economic transactions.”
Later in 1991, Stuart Haber and W. Scott Stornetta proposed a secure blockchain for storing documents using Merkle Trees. It was not quite known as blockchain then, but rather a ‘chain of blocks’.
Other key technologies like David Chaum’s DigiCash (1989), Adam Back’s Hashcash (1997), and Nick Szabo’s Bit Gold (1998), also served as important stepping stones in the progression of Bitcoin technology.
Why Does Bitcoin Have Value?
If Bitcoin does not physically exist, you might be wondering how it can have any value.
First, Bitcoin is a technology just like alternating current or the internet. Like any new technology, it is not yet well-understood by the old guard and general public who are used to government fiat money.
However, Bitcoin has several properties that make it the securest form of money to date. As mentioned, its supply is capped at 21 million bitcoin and every participant in the Bitcoin network tacitly agrees to this rule. This not only makes the monetary policy predictable but also introduces the novel concept of digital scarcity.
Scarcity is an important property for any store of value. But unlike the historic store of value, gold, Bitcoin makes it possible to not only easily store, but also transport value and transact with anyone in the world without a trusted third-party.
This makes Bitcoin a revolutionary technology for three main reasons:
- Decentralized money enables individuals to accept Bitcoin, easily store it themselves in Bitcoin wallets and BTC wallets reducing dependence on third-parties, i.e. banks. This also eliminates the risk of account freezes, honeypot data hacks, confiscation, and empowers individuals to be their own bank.
- Money becomes neutral, apolitical and truly borderless as transactions are final and cannot be censored by the network.
- Hard money provides a monetary policy that is transparent and predictable incentivizing users to seek more quality investment in the future.
How to Buy Bitcoin?
There are a variety of ways to acquire bitcoin. These include:
- Buy bitcoin from a reputable online Bitcoin exchange (the most common) or conversion services.
- Buy bitcoin using physical Bitcoin ATMs located in your area.
- Accept bitcoin for goods or services (e.g. salary in bitcoin) straight to your Bitcoin wallet.
- Trade in-person using online services like LocalBitcoins.
- Visit sites that provide free samples and offers.
- Join a mining pool. (However, this depends on your location and access to cheap power. Mining from your PC has not been viable for years now and is not profitable unless you have a lot of hardware.)
How to Store Bitcoin?
You may be wondering if Bitcoin only exists in digital form, what the need for storage is. After all, it’s not something that will ever end up in your back pocket. However, where you keep your bitcoin is important as, while the technology has proven to be extremely secure, secondary software, such as bitcoin wallets and exchanges are vulnerable to hacking attacks.
There are various ways to store your bitcoin and useful terms that you need to know about before deciding the best method of storage for you:
Exchange platforms: On an exchange platform, you can buy and sell Bitcoin for fiat currency or for another cryptocurrency such as Ethereum or Litecoin. Many of these exchanges offer storage and Bitcoin wallet services, however, these have not proven to be 100 percent safe. They also often charge high transaction fees to use the platform.
Bitcoin wallet platform: You can think of this as a bank account where your bitcoins are stored, again these have not been without issues.
Hard wallet: This is an offline wallet that is not connected to a network, making it far more hacker-resistant.
Public Cryptographic Key: This is your Bitcoin address or BTC address. Just like when people send money to your bank account number, you use your public cryptographic key to give people when you want to receive bitcoins.
Private Cryptographic Key: This key is for you only and should never be given out to anyone else. This will allow you to access your bitcoins that are sent to your public cryptographic key (or address).
What’s the Best Way to Store Bitcoin?
By now, you’ve probably heard of plenty of cases in which a Bitcoin exchange platform has been hacked, perhaps the most notable of all was the Tokyo-based Mt Gox hack in 2020. A giant total of 850,000 bitcoins disappeared from the platform, wiping out the business pretty much overnight and leaving many bitcoin users out of pocket.
Remember, Bitcoin itself is extremely secure. But exchanges and digital wallet providers are often vulnerable. When you buy and sell Bitcoin online, you must be extremely careful, and this makes hard wallets, without doubt, the safest alternative.
Bitcoin hard wallets are essentially like a flash drive that allows you to store your cryptographic keys offline and well away from exchanges. You’re never really storing your “Bitcoin” as such in a hard wallet. What you are storing is your private key that allows you to access your funds when you connect online.
The downside with hard wallets? Just like a regular wallet, if it gets lost or stolen, you can run into headaches, although providers like Trezor and Ledger give you a chance to recuperate your keys by making you write a backup phrase and pin number and keep it in a safe place when you configure your hard wallet in the beginning.
Is Bitcoin Legal?
There is no complete answer to the question of whether bitcoin is legal since the answer depends on various factors, most notably, what part of the world you are in. Most governments around the world have sat on the sidelines and neither declared Bitcoin legal or illegal, however that has also caused a shadow of uncertainty and doubt.
To be sure, Bitcoin does not have the backing of any regulatory agency, government, or central authority since it is a decentralized currency. This in itself makes it hard to be regulated by authorities whose powers change in each jurisdiction.
The price of Bitcoin tends to respond to the latest decisions from the United States’ SEC or to other governments’ reactions toward it, however.
Countries like Malta, Singapore, and Gibraltar are either incorporating new laws to provide a framework for Bitcoin and blockchain companies or adapting existing laws. Even the United States is beginning to warm to Bitcoin and reportedly both the US government and the Chinese government have invested in Bitcoin.
What Are the Disadvantages of Bitcoin?
Governments have yet to decide how to regulate Bitcoin as it poses a direct threat to the government-central bank monopoly on money creation.
As such, one of cryptocurrency’s biggest hurdles is government regulation. Therefore, it is no surprise that there are clampdowns on fiat-bitcoin onramps, KYC regulations, and other barriers being imposed, all under the guise of anti-money laundering and anti-terrorism.
The bad news for governments, however, is that Bitcoin cannot be theoretically shut down. Since it is a borderless protocol, the most government can do is restrict access to it (just like China with the internet) but the network itself, which currently has 99.98% uptime, will continue running.
There is a saying that is passed around the Bitcoin community and that is, “you can take your country out of Bitcoin but you can’t take Bitcoin out of your country.” This is particularly true as we have seen that in countries where it has been banned, Bitcoin has continued to be used.
On the technology side, Bitcoin might not yet be ready for mass adoption due to scalability issues. A heavy load on the network today would result in higher fees and longer confirmation times as seen in December 2020.
For example, today Bitcoin can handle only under 10 transactions per second on-chain whereas VISA can handle 24,000. Luckily, Bitcoin is not a static technology and solutions are being developed to solve scaling issues.
Capacity increasing solutions like SegWit have already been implemented, quadrupling block weight. Meanwhile, other scaling solutions such as sidechains and Lightning Network (LN) are being actively developed on top of Bitcoin to make transactions instant at almost zero cost.
There is also the question of usability, transaction fees, and criminal association that is off-putting currently to a wider audience.
What Are the Alternatives to Bitcoin?
10 years on from the Satoshi whitepaper and there are plenty of alternatives to Bitcoin, depending on your beliefs and needs. These alternatives are known as “altcoins” (alternative coins) to Bitcoin.
When we saw a wider public interest in Bitcoin in late 2020, transaction fees and transaction times grew very high. In many ways, Bitcoin looked to evolve from a quick and easy payment method to a speculative asset, as people began to buy expecting the bitcoin price to rise.
Despite the price volatility and periods of higher fees with rising price, the number of merchants that accept bitcoin worldwide has been rising steadily since 2020. (Though, some big-name companies like Expedia and Microsoft have reportedly dropped the option.)
One can find all types of altcoins like Ethereum, Litecoin, Bitcoin Cash, Dash, Monero, Ripple, Stellar Lumens, and more, according to Coinmarketcap, with well over 2,000 cryptocurrencies in existence today.
While each has some benefits over Bitcoin, they also have their own complexities and pitfalls. Bitcoin Cash takes a different approach to scaling from Bitcoin and has increased the block size limit well beyond bitcoin’s 4MB ‘block weight’ limit as a scaling method. This could position Bitcoin Cash as eventually faster to scale, although this approach has yet to be proven.
Monero, NEO, Litecoin, and Ethereum face scaling issues of their own, as well as other problems.
To be sure, the journey into cryptocurrencies involves a steep learning curve, but once you fall down the rabbit hole, you just can’t help but want to know more.
Got more questions? Find out about Ethereum versus Bitcoin in our beginner’s guide here.
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