What Is Bitcoin?
Interest in Bitcoin peaked late last year when it reached an all time high price of $20,000 and made headlines across the internet. However, while it has been around for nearly a decade, very few people know anything about it at all. Now that the cryptocurrency market is officially recognized by companies and governments around the world though, it is perhaps time to uncover the shroud of mystery surrounding it.
Bitcoin is best described as a digital currency that can be used to pay for goods and services. It is not backed by any government, organization or company and is instead, completely reliant on the people using the network. Bitcoin transactions are meant to be peer-to-peer and do not involve the role of a middleman such as a bank or other financial entity.
An individual can store Bitcoin in a digital wallet application on their computer or smartphone. The same application can also be used to initiate transactions, ether inbound or outbound, with another user.
Records of transactions on the Bitcoin network are stored on a publicly accessible ledger, also commonly referred to as a ‘blockchain’. New transactions initiated on the network are recorded in a block every ten minutes and then linked to the previous such block. As a result, the blockchain is a permanent record of all transactions that has ever taken place on the record since its release.
The blockchain essentially uses a cryptographic algorithm to prevent malicious actors from tampering with it. It also makes it impossible to control another user’s wallet or initiate unauthorized transfers on behalf of someone else. The network is also protected by miners who ensure that new transactions are legitimate.
The birth of Bitcoin
The original proof of concept for the Bitcoin network was laid down by an individual named Satoshi Nakamoto in a white paper published online. Not much is known about Nakamoto, especially since he mysteriously disappeared without warning in 2010, leaving the future of the currency in the hands of its dedicated community. Even though most of the cryptocurrency community has been obsessed with finding out who Satoshi Nakamoto is, his true identity continues to remain a secret.
Nevertheless, Bitcoin, like most other open-source software projects, was not developed solely by a single entity or individual. Several enthusiasts in the fields of computer science and cryptography collaborated with Satoshi Nakamoto to iterate upon his original vision and concept. Nine years later, individuals from all over the world are still actively contributing to the development of the Bitcoin network. Any technically proficient individual can also contribute to the project, contingent to a review process by other developers.
That said, it is important to note that the entirety of Bitcoin was not conceptualized within a short span of time. The origins of its underlying technology, blockchain, can be traced back as early as a few decades ago. A research paper published in 1991 first explored the possibility of using a chain of blocks to permanently record timestamps of digital documents. By 1992, this concept was iterated upon in another paper, which allowed multiple documents to be included in one block. Bitcoin was essentially the first practical application of that system.
The economics of Bitcoin
Fiat currencies typically do not have a hard cap on the amount of money in circulation. Bitcoin, on the other hand, will only ever have 21 million coins in circulation. The idea is that as time progresses and more people begin using the currency, transactions will take place in small sub-unit denominations. Bitcoin can currently be divided up to 8 decimal places, with the smallest unit (0.00000001 BTC) named 1 Satoshi.
The price of Bitcoin is driven entirely by the economics of market demand. Given that there are only a finite number of bitcoin in circulation, supply and demand plays a rather influential role in determining its daily trading price. As with any other currency, Bitcoin has value because it can be used as a means of payment and people accept its role as a cash substitute in digital form.
In the early days of Bitcoin, it was relatively unheard of outside of a few technology-centric communities that discussed its potential. As such, finding merchants willing to accept it was almost impossible and the only transactions were between individual parties. The first documented purchase of an item with the help of Bitcoin was actually a pizza for 10,000 BTC in 2010. Notably, the proof of concept transaction was worth a mere $41 at the time of the exchange but would today be valued at several millions of dollars.
However, all of that began to change when Bitcoin’s price skyrocketed and began attracting public attention. The first few major organizations to adopt Bitcoin were non-profit websites looking for an inexpensive and safe way to accept user donations. The most prominent example of this was Wikileaks in 2011. With the development of better infrastructure though, other commercial projects also began accepting the cryptocurrency. Steam, Microsoft and Reddit were some of the first to offer customers the ability to pay with Bitcoin.
Unlike traditional money, however, Bitcoin is entirely digital. This means that all transactions have to be made electronically with the help of some sort sort of computing device. While this does take away some of the convenience that cash offers, it is worth remembering that even traditional fiat currency relies quite heavily on electronic records. Many also believe that the aspects of decentralization and security are more valuable than the ability to physically trade currency.
Understanding the legality of Bitcoin
Financial regulators believe that since cryptocurrencies are designed to be a payment method similar to cash, Bitcoin may be used to aid money laundering and illegal activities if left unchecked. This has resulted in a long-standing debate over whether the cryptocurrency market should be regulated or not. Nevertheless, since Bitcoin is decentralized and global, no regulatory body can completely stop its free trade and use.
Furthermore, given the disruptive nature of Bitcoin, it should come across as no surprise that governments across the word are conflicted over its legality within their respective borders. As a result, regulation specific to Bitcoin and other cryptocurrencies has been somewhat uncertain and region-dependant.
While some countries have shown open hostility to the market, others have gone the exact opposite route to allow its free trade and usage. As of the time of writing this article, China and Vietnam are the only two countries that have effectively banned cryptocurrency trading. Japan, on the other hand, not only has a solid legal framework for companies offering services related to Bitcoin, but also recognizes it as a payment method.
Bitcoin and anonymity
A Bitcoin wallet can be created and operated by anyone and does not require the user to divulge any personally identifying information. This is unlike the traditional banking system, where each account is associated with an individual’s identity. Given that Bitcoin is fundamentally decentralized and global, it would go against the network’s principles to introduce background checks.
However, even though the Bitcoin network does not directly record any identifying information, it cannot be considered as a completely anonymous payment method. This is, in fact, a common misconception among those new to cryptocurrencies.
The Bitcoin blockchain is, by design, a publicly viewable ledger that carries transaction data such as wallet addresses, amounts transferred and the timestamp. While it is not a trivial task to trace someone’s identity with this data alone, careful analysis over hundreds of transactions may reveal a discernable pattern. In fact, such blockchain analysis has proved to be a legitimate business strategy of late, as is evident by the rise of companies like Chainalysis.
As a result of these factors, Bitcoin can only be categorized as a semi-anonymous payment system. It is also commonly referred to as being pseudonymous, which is a portmanteau of the words ‘pseudo’ and ‘anonymous’.
Since Bitcoin does necessarily guarantee anonymity, cryptocurrency enthusiasts began working on their own alternatives that focused on the privacy aspect from the ground up. These so-called ‘privacy coins’ have since become popular among those looking to transfer funds without fear of discovery by a third party. Examples of these digital currencies include Monero and Zcash.
While Bitcoin is not completely invulnerable to attacks, it has certainly proved to be one of the most secure and foolproof methods of moving wealth. Even if it does not become the world’s global reserve currency anytime soon, it is worth recognizing that it spawned an asset class that almost reached a valuation of one trillion US dollars last year. Furthermore, Satoshi Nakamoto’s documentation and implementation of the world’s first blockchain has also gone on to inspire the evolution of several other industries.
Today, even governments that are hesitant to embrace cryptocurrencies have voiced public desire to develop blockchain systems to improve transparency and efficiency. Today, Bitcoin is not only only a flagship digital currency, but also a revolutionary technology product that can potentially change the world of computing.