What is Bitcoin – The New Currency To Rule Them All

bitcoin

Bitcoin is the first ever cryptocurrency of the world and it is by far the most popular, most expensive and most widely accepted cryptocurrency as well. It has the biggest market capitalization among all the coins, at $71Billion with 21 million total bitcoin’s that can ever exist. This bring the current price to $4325.97, on October 5th, 2017. Bitcoins are denoted by the symbol BTC, just like American Dollars are demoted with $.

As Bitcoin is a rather large unit, smaller units like millibitcoin, microbitcoin and Satoshi are used, with Satoshi being the smallest Bitcoin unit at 0.00000001. Altcoins, which are all other cryptocurrencies besides Bitcoin, are usually read in Satoshi’s to help visualize the small value better.

Bitcoin in Brief
Credits to satoshinet.com

Bitcoin is a completely open-source project and thus, anybody can check the codes. It totally changed the scenario of online wealth. They introduced a completely new evaluation, multiple new technologies like blockchain and mining. It even provided us with a super-fast, super-secure and very inexpensive mode of money transfer.

 

History of Bitcoin

The inventor of Bitcoin was or were Satoshi Nakamoto but nobody knows their real identity nor whether it was one person or a group of developers. The real identity is allegedly with NSA but they don’t officially comment on it.

Bitcoin was originally released in January 2009 by Satoshi Nakamoto and they mined the first Bitcoin. He continued to mine and mined over 1 million Bitcoins before he retired as a multi-millionaire. Contrary to popular belief, Nakamoto’s wallet consists of 1 million Bitcoins but they were not pre-mined like most people think. Bitcoin Foundation was formed in September 2012 to take care of Bitcoin ecosystem as the network was witnessing an explosive growth. Presently, it is headed by Llew Claasen.

Bitcoin gave birth to many derivative coins, called Forks in the development circle. However, the two most popular variations are the original Bitcoin (BTC) and Bitcoin Cash (BCN)

In 2017, over 3 million users own a Bitcoin wallet and over 200,000 merchants accept Bitcoin payment and these numbers are steadily increasing. However, alternative coins to Bitcoin, popularly called Altcoins like Ethereum, Monero or Dash have gained a large market share as well.

In August 2010, a vulnerability in the Bitcoin mechanism was discovered which allowed users to include unverified transactions on the blockchain which ultimately led to the creation of unlimited Bitcoin. Before it was fixed, hackers tried to steal 184 billion Bitcoin using the same exploit. However, the amount was easily spotted and removed from the ledgers.

 

How Bitcoin Works

To understand how Bitcoin or any other cryptocurrency works, we need to understand two very important concepts, mining and blockchains.

Blockchains:

Think of a data file:

  • Which has been validated by multiple parties
  • Each party has only viewing rights
  • Each party has one copy of it.

It will be impossible to change the content of that file because:

  • Those trusted parties will not validate it
  • None can edit the contents of that file.
  • None can bring in a new file and claim it to be the original file

Now, think what if your financial transaction data is saved on such a file, it will be incredibly safe, right? Welcome to blockchain technology where every transaction data goes to the blockchain which is nothing but an assembly of the file in our example. In other words, a blockchain holds the records of all the transactions which are going on in the network, just like our example. Nobody can edit a past block and thus, its immutable.

bitcoin transaction

Mining:

What are these parties who can validate a transaction data file? They are called miners in the Bitcoin network which actually do two things. These miners (actually computers with special access to the network) work as a public ledger keeper of the network almost like an accountant. Each miner of the network has one copy of the ledger which carries the complete transaction data of the network. For any transaction, a miner checks whether

1. The sender has enough funds to perform the transaction.

2. Is the receiving address a valid address.

Depending on the answers, the computer can actually approve or disapprove a transaction. For these services, miners takes a certain fee, called a transaction fee. This can vary depending on the coin you are mining but some can have more costly transaction fees.

Miners are also responsible for mining coins in which they receive for the work they have done. Usually a cryptocurrency has all the coins locked in and you will need your computational powers to mine the coins. This requires an algorithm in a software where with the right hardware, you can join along with a pool of other miners. As more miners join the network, the block creation rate increases which lowers your average mining ability. This means it will take longer to reach the same level as you were mining before which results in an increase of mining difficulty. To combat this, you would need a higher hashing power which just means more powerful components. Every 210,000 block, Bitcoin goes through a halvening which means the block reward is decreased by half. Bitcoins next halvening is in 2020 and it will drop the block reward down to 6.25 Bitcoins which is currently at 12.5. Bitcoin has an average inflation rate is 4.03%. There are an average of 1,800 bitcoins being mined per day (144 blocks per day) with a total of 4.3 million more to be mined, which is about 21% of what’s left. Pre mined coins are coins that were placed into a wallet without even needing to mine them yourself. Some altcoins can be premined but this kills the idea of decentralization.

How the Blockchain Works?

Alright, now that we understand two of these concepts, it is time to understand how the actual transaction happens on the blockchain, which the Bitcoin network is on.

The sender needs to issue a send command which contains two sets of data, the amount to be sent and the wallet address of the receiver. As mentioned above, this information is included into a blockchain and they become immutable. The blockchains carry the information to the miners who verify and approve the transaction. Once it is approved, the amount is deducted from the sender’s wallet and added to the receiver’s wallet.

 

Bitcoins Advantages

The advantages of Bitcoin completely changed the idea of wealth generation, fund transfer, asset ownership and of course, the asset itself. There are so many new options which Bitcoin opened up, as the pioneering cryptocurrency.  To sum up, the major advantages of using Bitcoin are as follows:

Peer to Peer Transfer: As you can see from the Bitcoin network, the transfer from one user to another user is direct with only miners coming in between to validate the transaction. This is so much unlike traditional banking where everything goes via the bank.

Decentralised Network: The Bitcoin network is not located at one place nor does the system have a central server. Like Torrents, the file sharing network, Bitcoin network works decentralized. This also means the hackers will have increased difficulty because it’s much different from taking down a single server.

Low Transaction charges (for large amounts): Although this was designed to be a universal advantage of using Bitcoin, due to several factors (including the resource needed to mine Bitcoin) the transaction charges have gone up slightly. While this is noticeable for smaller transactions, its is still a very economical way of transferring large funds between users.

Fast Transactions: While it is still much faster than banks, the increased complexity in mining has made the process slow. Bitcoin was made to be a very fast transaction between two users,. A P2P model, with a limited blocksize and slower block generation time but higher mining resource requirement has taken the transaction time to 1 hour or so.

Resistant to hackers: We spoke about the blockchain and how it is immutable. Similarly, every miner in the network has a copy of the public ledger of the network. As it is impossible to hack every miner at the same time on a network, both ledgers and the blockchains are very safe and thus, blockchain network is generally resistant to hackers.

High Security: In the same vein, Bitcoin transactions are highly secure. Bitcoin uses SHA-256 encryption for its transaction verification and Proof-of-Work (PoW) system. This is one of the strongest encryptions right now and it is highly difficult to break it.

Wallet Flexibility: There are multiple wallets where one can store Bitcoins and some of these wallets are super secure as well as mobile. As long as the user has an internet connection and a modern device with him, he can access his wallet. There are some offline wallets available and paper wallets (just like good ol’ money) are there as well. Always remember it is better to keep your private keys yourself rather than have an exchange handle all your coins. They ultimately control and own what you think you own on an exchange.

 

The Bitcoin Disadvantages

However, nothing in this world is free from disadvantages. Bitcoin has several disadvantages as well. In fact, some of the proposed advantages of Bitcoin became its major disadvantages, due to lack of foresight and unpredicted growth. Unfortunately a lot of big corporations are trying to profit off it too causing the original vision of Bitcoin to be forgotten.

Lack of Privacy: Bitcoin transactions and the user’s wallet address are visible. It’s not hard to track down the user behind an address. For example, many Bitcoin wallet operators ask for KYC (Know-Your-Customer). Thus, they have a record of BTC address, mapped against the real details of the user. Even doing a fiat to BTC transfer to a paper wallet can still trace your address history. Every transaction on the blockchain gets recorded and stored forever.

Unsuitable for small payments: Ever thought of paying for your morning coffee with Bitcoin? Give up the dream because Bitcoin transaction charges have gone through the roof, despite one of the major founding proposition was negligible transaction charges. This is due to the traffic in the network which leads to very high infrastructure cost and costly mining operations. That is the exact reason why Litecoin was invented, so it can act as the silver to gold. Smaller transactions should be used with Litecoin and bigger purchased with Bitcoin.

Irreversible payments: As the banks warn you “check the details twice before you deposit”, it’s the same with Bitcoin. Once the payment is done and you want to undo it, there is simply no way. You have to wait for the unintended receiver to be the “good Samaritan” and return it to you or else you just need to learn from it and move ahead.

Not widely accepted: This is the issue which bugged the crypto enthusiasts from the beginning. most of the world’s population still don’t understand Bitcoin (or other cryptocurrencies). While merchants are still opening up to the ideas, the number is not that great. The user base is growing but it is still a long way from mass adoption.

Problems with the Governments: Bitcoin has not been accepted as a legal alternate currency by governments around the world. While it is almost impossible to stop Bitcoin transactions, it can be made illegal if the government wants. Many countries are cracking down against cryptocurrencies. Reserve Bank of Estonia actually announced Bitcoin to be a Ponzi scheme and asked citizens to stay away. Indian Reserve Bank also issued warned citizens to be wary of Bitcoin and other cryptocurrencies. There are some major countries that are accepting it like Japan, South Korea, Australia and it seems that China and Russia are even opening up to it. Many other big countries still remain in question that are major powers.

 

So in a nutshell…

Bitcoin is the king of cryptocurrencies, there is no doubt with that. However, the network is suffering from multiple internal issues (high transaction charges, very long transaction confirmation, too expensive mining operations) and external issues (no mass awareness, reluctant and skeptic governments). However, the tech-savvy younger generation is opening up to this new method of transaction. Merchants are also putting up the “Bitcoins accepted here” signs, albeit with hesitation. In due time, Bitcoin will be just another currency accepted in major retailers and vendors.

For transactional purposes, some companies like TenX from Singapore are trying to build BTC powered debit cards for daily transactions. The community is expecting some major updates in the forthcoming release of Bitcoin as well. If the issues are addressed to properly, there is nothing stopping Bitcoin from becoming a globally accepted currency.

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