Bitcoin is a very complex and interesting new technology that has the power to reshape the world and economy we live in today. Bitcoin challenges many centralized powers and offers solutions to many economic problems our world faces today such as; Inflation, Dept and imbalanced wealth distribution. With all these potential solutions in mind, it is a shame the majority of the world still asks the question of what is Bitcoin?
To answer this question we have to start at the beginning. Bitcoin was released as open-source software in 2009 and is the world’s first cryptocurrency. Think of Bitcoin as a digital currency that only exists electronically. Bitcoin is decentralized, which means that it doesn’t have a central issuing authority or political institution that controls the amount of bitcoin in circulation. This means that unlike the US dollar no entity or institution can print Bitcoin or take down the network as it is protected by mathematical code.
While it may sound complicated the whole process is actually pretty simple and organized: Bitcoin holders are able to transfer bitcoins via a peer-to-peer network. These transfers are tracked on the “blockchain,” commonly referred to as a giant ledger. This ledger records every bitcoin transaction ever made. Each “block” in the blockchain is built up of a data structure based on encrypted Merkle Trees. This is particularly useful for detecting fraud or corrupted files. If a single file in a chain is corrupt or fraudulent, the blockchain prevents it from damaging the rest of the ledger.
Instead of relying on a government or a centralized entity to print new currency, Bitcoin’s blockchain programming handles when bitcoins are made and how many are produced using a proof of work algorithm which many refer to as “mining”. It also keeps track of where bitcoins are and ensures the transactions are accurate.
There are currently about 17 million bitcoins in circulation. There isn’t a central regulatory agency or government controlling the supply of bitcoins, meaning the supply is controlled by design. The total supply to ever be created is capped at 21 million bitcoins.
This cap raises the argument that Bitcoin could have problems scaling. However, since Bitcoin is essentially infinitely divisible (meaning users can transfer as little as 0.00000001 bitcoins), this counters the scalability argument.
It’s believed that Bitcoin was designed to become a deflationary currency to combat the government’s use of inflation as a hidden taxation to redistribute earned wealth. Many people praise Bitcoin for empowering the people by overthrowing the currency printing powers of transient politicians and the banking industry.
How Does Bitcoin Work?
One of Bitcoin’s most appealing features is its ruthless verification process, which greatly minimizes the risk of fraud. Since Bitcoin is decentralized, volunteers—referred to as “miners”—constantly verify and update the blockchain. Once a specific amount of transactions are verified, another block is added to the blockchain and business continues per usual.
What is Mining?
Instead of a single central server verifying every transaction, essentially every other person on the network verifies each transaction.
Miners are presented with a complicated math problem and the first one to solve the math problem adds the verified block of transactions to the ledger. The calculations are based on a Proof of Work (POW) algorithm.
There aren’t actually human beings hunched over computers with scraps of notebook paper and calculators doing pre-calculus homework; hardware is used to perform Bitcoin mining. The best part about this system is that anyone with a computing device can participate in validating the network or mining to earn rewards in Bitcoin.
Bitcoin’s built-in reward system compensates successful miners with a chunk of bitcoins. The reward changes over time per Bitcoin’s programming, and the block reward halves about every four years. The current reward for each new block of verified transactions is about 12.5 bitcoins.
Mining is not just for software engineers or big corporations. Anyone can easily start mining from their home computer to support the network and earn BTC rewards in the process. Programs such as Nicehash and Honeyminer make it extremely easy for new users to start mining Bitcoin in a matter of minutes.
A Simple Bitcoin Transaction Example;
While Bitcoin’s underlying technology may seem hard to grasp, using Bitcoin does not have to be difficult. Here’s an example of how simple a real-world Bitcoin transaction can be.
Bitcoin Wallets: How to Store Your Bitcoins
There are many useful terms and platforms related to Bitcoin and cryptocurrencies which all help the network run smoothly. Some of these platforms and tools have been outlined below;
Exchange platform: A platform to trade FIAT (money) for cryptocurrencies such as Bitcoin, Ethereum, or Litecoin. It is also a place to trade one cryptocurrency for another.
Wallet platform: Essentially a bank account where your cryptocurrencies are stored. Bitcoin allows people to take back control of their funds and essentially be their own bank.
Hard wallet: A secure “offline” wallet that is not linked to a network making it near impossible for hackers to break into.
Public Cryptographic Key: Your account number. Similar to how someone would send money to your bank account via your account number. A public cryptographic key is the information that allows someone to receive Bitcoin or other related cryptocurrencies.
Private Cryptographic Key: The key/code that allows you to spend your Bitcoins and other cryptocurrencies. You guard this with your life. If someone has access to it, they can transfer (steal!) your bitcoins.
When you hear of bitcoins being hacked, you’re probably hearing about an “exchange platform” being hacked. As Bitcoin’s blockchain structure (wallets) makes it EXTREMELY difficult to hack (borderline impossible), it is considered very secure.
Exchanges, however, are a different story. Perhaps the most notable Bitcoin exchange hack was the Tokyo-based MtGox hack in 2014, where 850,000 bitcoins with a value of over $350 million suddenly disappeared from the platform. However, from the ashes of Mtgox stronger more secure, more user-friendly exchanges and platforms were born. Exchange platforms such as Binance and Coinbase are widely used today for their ease of use and strong security.
Even though most wallet platforms are considered extremely secure, the prospect of hackers makes many users paranoid.
That brings us to hard wallets. A hard wallet is essentially a USB that allows users to store their cryptographic keys offline and off of exchanges. Your cryptographic key only lives on your hard wallet and is impossible to hack (unless someone physically steals your hard wallet).
Why use Bitcoin?
Bitcoin is often hailed as the future of finances for a variety of reasons;
It’s decentralized and brings power back to the people: Launched just a year after the 2008 financial crisis, Bitcoin has attracted many people who see the current financial system as unsustainable. Many people that believe the current financial system is broken due to the rate of inflation increasing and the amount of debt becoming out of control. Many argue that if the current financial system collapses like it almost did in 2008, Bitcoin and cryptocurrencies are the safety net to prevent a complete economic collapse. With these potential outcomes in mind, it’s no surprise there is a huge community of ideologists actively building, buying, and working in the cryptocurrency world.
Freedom: The concept that one could carry millions or billions of dollars in Bitcoin across borders, pay for anything at any time, and not have to wait on extended bank delays or systems crashing is a major selling point.
Security: Bitcoin payments don’t necessarily need to be tied to one’s personal information. Since personal information is left out of the transactions, users aren’t as exposed to threats such as identity theft. Bitcoin can also be backed up and encrypted to ensure the security of your money.
Low Transaction Fees: Banks and companies like PayPal charge to send and receive money. Bitcoin replaces the 2.5% “transaction fee” with one that’s only a fraction of that. Recently someone moved Bitcoin valued at $194 million and only had to pay $0.1 in transaction fees. Using centralized systems through a bank would cost tens of thousands of dollars to send a transaction of this size. This example of moving money with low transaction fees shows off the true potential of blockchain technology and is a direct competitor to big banks and middlemen as a whole.
The Immutable Ledger: Bitcoin’s blockchain public ledger is objective. People trust it to be fair because it is based on pure mathematics, rather than the human error and corruption of questionable politicians and greedy bankers.
What are the disadvantages of Bitcoin?
For all its advantages, Bitcoin does still poses some significant issues.
Perhaps one of the largest reasons everyone hasn’t jumped on the Bitcoin train is because its price is shrouded in uncertainty. Many people are concerned with…
Bitcoin is not backed by any government or entity. Major governments have largely remained on the sidelines and are just starting to try and understand and regulate cryptocurrencies. Bitcoin isn’t backed by a regulatory agency and a government would technically be conceding power by supporting a decentralized currency. The fact Bitcoin is owned and controlled by the network users or the people scares many as society has been used to centralized organizations and powers up until this point.
Volatility. This very reason many speculators are attracted to Bitcoin is the same reason many potential users are hesitant to get involved. Users that look at Bitcoin as a speculative investment option are essentially gambling on the process, and the future price of Bitcoin is largely unknown. There are estimates that Bitcoin will be worth pennies in a few years, while some predict that a single bitcoin will be worth $500k in three years. As new investors continue to invest and the market cap grows, Bitcoin’s price could become more stable.
Lack of adoption by businesses. The price volatility is a large reason that many businesses have yet to adopt Bitcoin as a form of payment. Increased consumer adoption and price stability will eventually mitigate this disadvantage as businesses continue to adopt and accept cryptocurrencies.
Another disadvantage is that while many people have heard of Bitcoin, few understand exactly what it is, how it functions or how to even purchase Bitcoin. Guides like this help to push the needle and build a foundation, but it’s ultimately on the users to seek out more information.
Bitcoin’s strength lies in its networking effect.
Who invented Bitcoin?
Satoshi Nakamoto is credited with designing Bitcoin. Nakamoto claims to be a man living in Japan born on April 5th, 1975 but there are speculations that he is actually either an individual programmer or group of programmers with a penchant for computer science and cryptography scattered around the United States or Europe.
Nakamoto is believed to have created the first blockchain database and has been the first to solve the double-spending problem.
How to Buy Bitcoin?
Over the years as infrastructure has improved and Bitcoin has become more popular, the gateways into cryptocurrency have become much more secure and reliable. Applications like Coinbase and Shakepay which are available on both Android and Apple devices have made it extremely simple for interested parties to invest in Bitcoin with little to no effort.
Coinbase is the most popular application for the majority of the world to buy and sell Bitcoin today. Coinbase offers users a variety of Cryptocurrencies to buy and sell with FIAT such as Bitcoin, Ethereum, Litecoin and Bitcoin Cash. Shakepay, a rivaling Bitcoin platform in Canada offers Canadians a secure and easy to use platform to buy and sell Bitcoin and Ethereum. Both of these platforms are extremely simple to use and also offer secure wallets to store cryptocurrencies. Users can also transfer their funds to a separate wallet where they control their private keys or to an exchange such as Binance or Kucoin where they can exchange their cryptocurrencies on the open market.
Bitcoin is still a relatively young currency but it has achieved substantial user adoption and growth. Bitcoin’s network only grows stronger as more people learn about Bitcoin’s fundamental technology and potential in relation to other methods of stored value.
Bitcoin is considered the “gateway” cryptocurrency. Understanding Bitcoin’s potential is an essential first step to seeing the brilliant solutions being worked on in the cryptocurrency world.
Bitcoin paints a future that is drastically different from the centralized fiat-based world we live in today. Bitcoin is seen as a beacon of hope for many and is either exciting or unsettling for the vast majority. Bitcoin is a solution for many economic problems our world faces today and helps billions of “unbanked people essentially become their own bank. Only time will tell if Bitcoin realizes its full potential and takes humanity into a new age or is killed by centralized corrupt powers and fizzles into oblivion.