With headways in technology, there has been a gradual shift from paper currency to cryptocurrencies. Merging coding and cryptography, cryptocurrencies are devoid of any centralized authority and powered by blockchain technology. Despite many bust and boom cycles, they are everywhere, changing the way we transact, invest and perceive money.
What set the ball rolling for cryptocurrencies was the introduction of Bitcoin in 2009. It isn’t just the first cryptocurrency but also the most widely accepted and the largest by market cap, presently valued at $807 billion. It’s even synonymous with cryptocurrency for many.
- Bitcoin Spelled Out (What is Bitcoin?)
- Bitcoin Denominations
- Bitcoin: An Evolution History
- Components of Bitcoin
- Game Theory
- An Insight into the Blockchain Jargon
- Does Bitcoin Make Sense?
- Pros of Bitcoin
- Cons of Bitcoin
Bitcoin Spelled Out (What is Bitcoin?)
It’s a digital currency, meaning it exists only in the digital world. Unlike a dollar bill, you cannot possess it physically or carry it in a physical wallet. Instead, it is generated as data on a digital ledger (blockchain). Any distribution, trading and storage happen exclusively on the blockchain.
The transactions take place at trading sites via compatible digital wallets. The “mining” process kicks in to verify each Bitcoin transaction. However, the verification process is cumbersome, involving considerable computing power and resources.
The physical legal tenders, real paper currencies, are issued by a bank or a government. That means the issuer backs and maintains them. Conversely, the cryptocurrency is decentralized. No single centralized authority holds sway over it.
Instead, Bitcoin relies on a network to issue new coins, and verify and record transactions using cryptography. Cryptography is all about transferring data while ensuring that it is accessed and processed by an authorized person. With cryptography addressing security concerns, the crypto is immune to any modifications.
No individual, organization, bank or country owns Gold 2.0. Yet, it’s open to all. No matter who you are, where you live or what you do for a living, you can be an active participant on the Bitcoin blockchain. Just buy a Bitcoin and be a part of this juggernaut.
However, if your budget doesn’t permit a full Bitcoin, feel free to buy a lower denomination. Eager to buy it? Let’s introduce a caveat. The digital currency is unregulated and denied legal tender status across the world. In some countries, it’s even banned altogether. So, proceed with caution.
The cryptocurrency has ten denominations with megaBitcoin being the highest.
- megaBitcoin (MBTC): 1,000,000
- kiloBitcoin (kBTC): 1,000
- decaBitcoin (daBTC): 10
- bitcoin (BTC): 1
- deciBitcoin (dBTC): 0.1
- centiBitcoin (cBTC): 0.01
- milliBitcoin (mBTC): 0.001
- microBitcoin (uBTC): 0.000001
- finney: 0.0000001
- satoshi: 0.00000001
Bitcoin: An Evolution History
Let’s dial the clock back to 2008. The world economy had plummeted in wake of a global recession and the vulnerabilities of the financial system were laid bare. The time was right for Satoshi Nakamoto to unleash a white paper proposing an alternate system that was devoid of centralized control and featured a new protocol for online transactions.
The conventional financial system is susceptible to altercations by third parties. It involves higher transaction costs that escalate with each transaction. The white paper introduced a flatteringly simple concept to overcome the issues. They called it Bitcoin. Come January 03, 2009, the digital currency made the transition from a concept to reality. With that, an icon was born.
The first-ever Bitcoin was fittingly named Genesis, meaning the origin of something. With Bitcoin, the role of the third-party was eliminated outright. Instead, it leveraged coding and cryptography to uphold the fidelity of the network and restrict transaction fees to a bare minimum. In hindsight, it proved to be an idea whose time had come.
Gold 2.0 had an unassuming start, devoid of any real value in the first few years of its origin. Its possession was restricted only to miners that verified the network. However, an incident changed it all for good.
2010 to Present
In 2010, a Floridan traded his 10,000 Bitcoins for pizzas worth 25 USD. With that, Bitcoin achieved its first-ever monetary value – 4 Bitcoins per penny. Have you heard of Bitcoin Pizza Day? Celebrated on May 22, it commemorates this iconic event.
Had the Floridan kept his Bitcoins intact, they would have been worth over 400 million USD today. By now, the trend of bartering Bitcoins for online purchases had gained traction. As the worth of a Bitcoin was arbitrary, it all boiled down to how well the buyer negotiated.
2010 was an epoch-making year for the digital asset when it made its way into the exchanges. With that, purchasing, disposing of, trading and storing Bitcoin became a breeze. The exchanges also allowed the cryptocurrency to hold its value against the US Dollar. Guess what? El Salvador mainstreamed it as a legal tender to become the first country to do so.
By 2011, Ethereum burst onto the scene as an alternative to the cryptocurrency. That triggered the emergence of several blockchain networks, collectively known as Altcoins. As a side note, the term encompasses all cryptocurrencies, except Bitcoin. In wake of the competition, the digital currency improved its code and enriched the miner community to stay ahead of the curve.
Interestingly, the identity of the inventor, Satoshi Nakamoto is one of the best-kept secrets. He’s an individual for some and an organization for others. There is, however, a consensus that Satoshi Nakamoto is a pseudonym responsible for mining the ‘Genesis’ and holding one million Bitcoins. That makes “him” worth 30 Billion USD approx. (as of May 2022).
Components of Bitcoin
The digital currency doesn’t operate in isolation. There’s an ecosystem to help it function and flourish. Let’s break Bitcoin down into different components for a better understanding.
Bitcoin is nothing but a bunch of codes that govern all characteristics of a Bitcoin, from form and function to mining protocols, transferability and more. The digital currency software had been repeatedly altered and improved to suit different applications.
The software is open-source, meaning anyone can access it but cannot modify it singlehandedly. Modifications are subject to the network consensus. Need we say, it’s operational round the clock.
Wondering how to generate a new Bitcoin or transfer it between two parties? That’s where cryptography steps in, helping overcome the limitations of the software. The software sets the rules for Bitcoin mining and transfers while cryptography makes them happen.
Also, it ushers security into Bitcoin transactions, ensuring that only the intended recipient receives the transaction. Mind you, cryptography is a communication technology, which is innately secure. It’s beyond human intelligence to decode it. Only software can do that.
You need hardware to store and execute the software and cryptography. It has to be trustworthy, scalable and customized to meet the rigors of mining. Remember, mining is an elaborate process, entailing too many computational resources. The CPU has to work overtime to identify Nonce and establish the authenticity of the blocks and hashes.
You are better off offloading to an accelerating system. Don’t try mining with an ordinary smartphone or PC. Or else, the risk of losing your device and raking up power bills runs high.
Miners add a human element to a predominantly digital operation. They are a bunch of individuals that keep the cryptocurrency alive and kicking. You take them out of the equation and the juggernaut will fall apart.
They do the computational part (mining) in anticipation of a few Bitcoin units. Besides helping generate a new unit, the community establishes the fidelity of a transaction. It’s only upon validation that it is incorporated into the blockchain.
Game theory plays a vital role in governing the miners’ behavior, facilitating interaction among them, and more. Call it the mining protocol that all miners need to adhere to. Game theory and Bitcoin mining are inseparable, you need to understand one to get the gist of the other. Let’s elaborate on how it works to make it easy to comprehend.
It all gets underway with the software throwing up a challenge for the miners to solve. The challenge is all about identifying a Nonce that conforms to the particular hash required to complete a block. A miner has to outdo his/her fellow miners to locate it, usually within 10 minutes. Who wins the game is subject to the computational power of the systems involved.
The miner with the best computing resources typically ends up in the pole position. Now, the other participating miners will shift their focus to establishing the authenticity of the newly developed block. The miners who were at loggerheads with each other suddenly join forces to complete the Bitcoin cycle. That’s what makes Bitcoin mining so unique.
Upon validation, the block makes its way to the blockchain where it stays forever, immune to modifications. The winner is in for a big payday, earning 12.5 Bitcoins for his/her effort.
An Insight into the Blockchain Jargon
Now that you know about the components constituting the Blockchain, it’s time to visit the associated jargon.
It is all about making data selectively accessible. Only an authorized individual can access and decipher it by using a password. Cryptography leverages ciphering for encryption, allowing the leading cryptocurrency to resist hacking at any stage. Think of it as the safety armor.
Any currency, including Bitcoin, existing solely in the digital world is a cryptocurrency. Powered by blockchain and cryptography, it substitutes paper money as a medium of exchange. A cryptocurrency can deter counterfeiting and double-spending attempts.
Used only for cryptocurrencies though, it resembles an online wallet in form and function. You need it to park and trade your cryptocurrencies. Even your public and private keys and Bitcoin addresses are storable in a crypto wallet. Whatever you keep in it, it stays safe.
It’s a digital ledger where data once entered stays unalterable. Devoid of any central authority, it operates 24/7 through a massive network. It’s the network that “mints” new units, validates transactions done in Bitcoins and keeps the digital ledger updated.
It is a high-caliber computation system that constitutes the blockchain. All information regarding the blockchain (from the formation of new blocks to new transactions) is stored and processed in a node, making it the lowest functioning unit in the scheme of things.
Like a computer password, a key is a code featuring multiple random digits and alphabets. Think of it as your digital signature required for deciphering encrypted messages through a cryptographic algorithm. It has to be kept anonymous to prevent intrusions.
Non-Fungible Token or NFT is a digital form of collector’s commodity. It is a unique pattern of pixels that leverages blockchain technology.
Does Bitcoin Make Sense?
We lack a consensus on this. For some, it’s the future of currency while for others, it is a fad or even a disaster waiting to happen. The conflicting perceptions can be linked to the short and eventful evolution history of the digital asset. The multiple boom-and-bust cycles didn’t help either.
As a Bitcoin investor, you can build fortunes. And, as a skeptic, you can ward off disasters. But staying aloof to a phenomenon that’s sweeping the world isn’t an option. Here’re the pros and cons to help decide whether to embrace it or keep it at bay.
Pros of Bitcoin
Ushers in Transparency
The third-party is integral to processing a transaction in the incumbent financial system. You have no option but to invest trust in them to complete a transaction. That can be tough given the trust deficit the intermediaries are facing in wake of frequent recessions.
Birthed in response to one such slowdown, Bitcoin ushers in transparency by simply eliminating the intermediaries. It is decentralized with the power to verify a transaction resting with a network of nodes.
Feel free to be a part of the Bitcoin network and carry out transactions with complete confidence. Everything is transparent, reliable, convenient, and smooth.
Resistant to Hacking
A prime reason for the leading crypto to gain traction is an innate ability to withstand any hacking, counterfeiting and double-spending. No paper currency enjoys that luxury. With no third-party involved, you don’t make public any pertinent personal or financial information when transacting in Bitcoins.
The cryptocurrency exists solely on blockchain and is protected by cryptography, making it almost impossible to alter or tweak. If an intruder has to make modifications, the unique key within each block needs to be changed. And, when it changes, the entire block is eliminated from the blockchain. So, peace of mind comes by default with Bitcoin.
Economical Way to Transact
The intermediaries involved in the conventional system charge for transactions. The fee increases in case of repeat transactions, taking a toll on your budget. And, using the bank to move across geographical borders can incur huge expenses.
Let Bitcoin step in, which is perhaps the most economical option to transact. It’s a global, decentralized currency that stamps out the expenses associated with third-party processing. With no expenses on deploying and maintaining systems, the cost of trade finance reduces drastically.
It’s Lightning Quick, 24/7
When it comes to transactions, speed matters. The digital currency fares decently on this front as well. Rather, Bitcoin transactions are lightning quick. The verification process might be tedious with many moving parts to it. However, a vibrant and alert network manages to bring it to pass within 10 minutes with the promise of confidentiality.
The crypto isn’t just speedy but can happen round the clock. As the network works 24×7 to record and verify transactions, you can purchase, dispose of and trade Bitcoins at any time from anywhere.
Helps Beat Inflation
Let’s face it. No paper currency is immune to inflation. Be it Dollar or Euro, all depreciate over time. Typically, paper currencies are dependent on a single economy. Say, the Euro is tied to the European economy.
Conversely, Bitcoin is a global currency. It is independent of any single economy. A change in its price indicates the change of demand in the global market, not the domestic inflation. Like any cryptocurrency, Bitcoin has a capping on the number of units that can be mined. The limited supply wards off inflation.
The Payouts are Staggering
The cryptocurrency presents a lucrative opportunity to coin it. It continues to throw up millionaires with a phenomenal rise in value, despite the bust cycles. The cryptocurrency experienced about a 400 per cent upsurge in value in six months just before the pandemic set in.
Even during the pandemic, Bitcoin maintained a decent growth trajectory, thanks to multiple factors. These include growing institutional adoption and more convenient access to investors. The digital currency’s ability to resist counterfeit attempts also contributes to its growth.
Cons of Bitcoin
Bitcoin is a story of growth, no two ways about it. However, beneath the dazzling success lies a dark side that each Bitcoin enthusiast and investor needs to be aware of.
The leading cryptocurrency is a different beast altogether. No asset class can rival it in complexity. From form and function to transactional modus operandi, there’s more to it than meets the eye.
When jumping into uncharted waters isn’t an option, you have to equip yourself with the nuances of Bitcoin. Or else, the risk of massive losses looms. And, if you are new to the digital world, you have even more catching up to do. You are better off leveraging online resources to beef up your knowledge of all things Bitcoin. That costs you in time and effort.
Volatility is perhaps the prime drawback holding Gold 2.0 back. It can spike and plummet at any given moment and way too frequently for your liking. It follows that stable returns are hard to come by, no matter when you enter or exit the market.
Attribute the volatility to the speculations that surface too frequently in the cryptocurrency market. These speculations benefit the speculators, helping them rake it. But an everyday investor might find it just too difficult to distinguish between an actual trend and a planted speculation.
Susceptible to Risks
Bitcoin doesn’t make sense when the safety of the investment is a concern. Though the worth of the leading cryptocurrency is on the rise, the possibility of a crash cannot be overruled nonetheless.
Remember, the digital asset is a new phenomenon with a limited market size. That makes it highly susceptible to fluctuations. And, when it crashes, your investment is doomed. Worst still, Bitcoin might take forever to stage a recovery, leaving unsuspecting investors to fend for themselves.
Lack of a Regulatory Framework
Wondering why the digital currency is yet to earn the trust of common investors? Well, the answer lies in the lack of a proper regulatory framework. With no regulatory oversight in place, Bitcoin can be just too risky.
Also, cryptocurrency laws vary from one country to another or even from one state to the other. As such, the applicable taxes vary accordingly. Moreover, these laws lack clarity and are often disputable, leaving scope for misinterpretations and scams.
Refunds Not Available
Financial transactions and disputes go hand in hand. Often, senders and recipients are at loggerheads with each other. Also, mistakes happen when transferring funds across wallet addresses.
In either case, the possibility of retrieving the fund is non-existent. You cannot even ask for refunds or cancellations. Imagine transferring funds to a fake wallet address. With no way to access refunds or cancel the transaction, you would suffer major losses.
It’s Energy Intensive
Involving mining, the cryptocurrency isn’t safe on the planet. Mining entails massive computational power, which in turn involves energy consumption at scale. The energy consumption and the associated carbon footprint will escalate in the future with Bitcoin gaining wider adoption and acceptability.
It doesn’t look promising for the ecology, which is already under threat with a huge chunk of miners hailing from countries where power is generated from coal. That’s a big reason for environmentally-friendly companies and individuals to pan the cryptocurrency.
The first and most popular cryptocurrency to date, Bitcoin has been the ambassador of change. It eliminates the shortcomings inherent in the paper currency, providing a more secure, speedy and economical way to transact digitally. Its popularity is undeniable even if it is yet to become a legal tender across the world.