A History of Bitcoin
Bitcoin was originally introduced to the world in January 2009, when the software for the exchange of the BTC token (Bitcoin) was released. The software to run the Bitcoin code is completely open source.
An online personage going by the username Satoshi Nakamoto initially created the first reference article for the system in a paper called “Bitcoin: A Peer-to-Peer Electronic Cash System.”
There is little doubt from comments made by Satoshi Nakamoto that the purpose of the Bitcoin infrastructure was to create an alternative to the financial system, and it is safe to say that this is becoming a reality day by day as people are flocking to cryptocurrencies of all kinds.
Nakamoto left control of the project to core developers in 2010 and nobody has heard from this person since. The price of Bitcoin skyrocketed to $1,242 in November 2014, its first burst upwards that really got people interested in the technology. In December 2017, it reached an all-time high of $19,783 but by January 2018, the price had gone below the $8,000 mark.
What is Bitcoin?
Bitcoin is a form of digital cash whose integrity lies in the solving of cryptographical puzzles. It is a new medium of exchange that relies on math to control its supply and demand as opposed to the personal views of policy makers and politicians who print fiat money in response to economic conditions.
Fiat money is money that is not tied to anything and is controlled by the government. Cryptocurrencies take the middlemen out of the equation and there is no need to trust any third parties. It relies on algorithms and cryptography, and there is no gaming or manipulating the system from the point of view of transacting the tokens.
Bitcoin is inseparable from something called the “blockchain.” Blockchain is the infrastructure on which the Bitcoin currency (BTC) runs on. When you send BTC from one wallet to another a Bitcoin “miner” has to verify the validity of the transaction.
Miners do this by solving a mathematical puzzle. When this puzzle is solved, the solution is broadcast to all other miners who verify that the solution is correct. The solved puzzle is then added on as another block on the blockchain.
Each block builds on the last block, so a solution can’t be wrong. This is known as a proof of work (POW) blockchain. The miners prove their work to the other miners who verify it.
An alternative to this is called proof of stake (POS), where blocks are forged and not mined by people who have a large amount of cryptocurrency for a long time period. This means they have a stake in the cryptocurrency and are less likely to misbehave. Both POS and POW have their advantages and disadvantages.
Each cryptocurrency has its own blockchain. But essentially the blockchain is always going to be a ledger or records and the records need to be validated with a POS or POW system.
There are a number of hybrid systems which are probably the most robust. There are a number of possible alternatives such as Proof of Activity and Proof of Storage, but these are not in widespread operation as of yet and are more specific in their application.
Bitcoins are stored in wallets. Wallets are software programs designed to house your coins. Each wallet will have a receive address which enables users to send their cryptocurrency once they have the receive address of another wallet.
There are online wallets, local wallets and hardware wallets. Online wallets are the least safe, followed by local wallets, followed by hardware wallets. When you set up your wallet, you get a seed phrase usually of 13 words.
It is important that you store this seed phrase in a safe location because if anything happens, you will lose access to your cryptocurrency. Forever. There is no way to get them back.
The most popular and secure online wallet for Bitcoin is blockchain info, and the chances of this being hacked or robbed are very, very slim. But for other cryptocurrencies, it is important to get a local or hardware wallet, as nobody has external access to these types of wallet, and it is easier to crack online databases.
Good local Bitcoin wallets include Electrum and Exodus (a multi-cryptocurrency wallet). Hardware wallets are even better again and include the Trezor and the ledger wallet.
For most, hardware wallets are a little overkill though they are definitely the safest. Your wallet is an actual piece of hardware that you connect to computers with.
Bitcoin as a Currency
For all intents and purposes, Bitcoin is money. Money is something that is a store of value, a medium of exchange and a unit of account. Bitcoin meets all of these criteria.
A currency is something used by a country, so Bitcoin is not technically classified as a currency. But that is the whole point of Bitcoin – that it is not linked to a certain country but is usable by all people all over the world.
The initial purpose of Bitcoin was essentially to replace fiat money (the everyday money we use for purchases) and get away from the banking system. So, a good question to ask is what differentiates it from conventional money.
Both fiat money (USD, EUR, CAD etc.) and BTC are digital. Though fiat money is sometimes used as cash withdrawn from ATM’s, this is a tiny proportion compared to the amount stored as digits in bank accounts, as debt, interest or items purchased using credit or debit cards. And this trend is set to increase as cash is on the way out, the financial world becoming 100% digital.
Neither fiat money nor Bitcoin are backed by anything. They are not tied to a specific commodity. The USD was unpegged from the price of gold in 1971 and it then became fiat money, which could be printed at will.
However, there is an argument that Bitcoin is backed by something even purer than gold. The cost of mining a Bitcoin is dependent on the price of electricity and the advancement of hardware technology such as fans to keep the computers cool and the power of the mining rig.
In 2017, Bitcoin mining consumed more electricity than the Republic of Ireland as well as 19 other EU countries. This is cited as a serious economic and environmental concern and one that is unsustainable, and Proof of Stake cryptocurrencies do not rely on mining and thus do not have this problem.
If the price electricity were to double tomorrow, it could well put many miners out of business. It is unknown what effect this would actually have.
It could drive up the price initially as demand exceeds supply, but over the long-term people would move to different cryptocurrencies and the price would drop as the ecosystem could collapse. This speculation implies that Bitcoin is inversely correlated to the price of electricity in the long term.
The main component that separates Bitcoin from other currencies is that Bitcoin is decentralized. In centralized systems there is a tendency for corruption. The money is linked to a country which gives away its authority to an even more centralized authority which again centralizes.
Think the EU and the ECB, the USA and the Federal Reserve, and potential Transatlantic trade agreements between the two continents. The power becomes more and more centralized over time until technology can break apart such power structures.
Decentralization removes this from the equation. With fiat money, policy makers can control the money supply. Many Bitcoin proponents suggest that printing money (Quantitative Easing) dilutes the value of savings and drives up the price of goods and services, and that it is terrible for everybody except the wealthy and large institutions.
With decentralized currencies, the algorithm has been set and does not change. People know how many coins are being released (a fixed amount every 2 weeks) and the price is determined by free market variables.
In the case of Bitcoin, this is a mix of supply, demand, electricity and hardware components. In a nutshell, this decentralization feature is what sets Bitcoin apart from fiat money – it eliminates market manipulation.
At least in theory. The truth is that pure decentralization is hard to achieve. Because Bitcoin relies on miners to verify transactions, if a group of miners got together they could theoretically start rewriting the blockchain.
While this process is unlikely, the possibility remains. It is very difficult to get decentralized at every level.
While Bitcoin started out decentralized, a few mining pools now own nearly half the hash rate. And it seems to be getting more centralized. This does not mean that the miners are planning some conspiracy like a Bitcoin takeover.
The mining pools are made up of independent individuals across the world using their own mining rigs. It is just a note that centralization seems to be occurring… which does tend to lead to power grabs. Replacing central banks with central miners was not what Satoshi Nakamoto envisaged.
This is an issue, but from a speculative perspective it should not unduly worry anybody who intends to profit off of the cryptocurrency currency. The vast majority are unaware of this issue outside of the cryptocurrency arena and Bitcoin is still the symbol of the cryptocurrency world.
Institutional investors are going to pour billions of dollars into it in 2018. And centralized mining has not come to pass, and if it does it is probably years away
Aside from the ongoing decentralization debate with regard to all cryptocurrencies, and not just BTC, there are other features which distinguish Bitcoin from fiat money. There is a set supply of Bitcoins, a total of 21 million.
This figure cannot be changed and BTC are being released at a steady rate until the year 2140. The Bitcoin network adjusts the difficulty of mining so that a certain amount of Bitcoin is released every two weeks and so that it takes 10 minutes to verify a transaction on average.
With Bitcoin you are not tied to a nation, regulatory authority, or banking system. Your money is yours, not to be looked at by prying eyes. You have more control over your own finances.
Your transactions are anonymous. You do not have to pay huge fees (at present the Bitcoin fee is high, but this is a temporary measure) and the transfer is sent quickly, to anyone, anywhere in the world. No need to open an account with a bank. In a lot of ways, it is vastly superior to fiat money.
In sum, Bitcoin is money, except it is faster and with less fees. The only issue at present is that it is not widely accepted, but its use is becoming more widespread day by day.
It satisfies all the criteria of money and it is decentralized, though this is something of a hot topic at present. It represents the perfect alternative to a broken and hugely centralized financial system. It puts power back in the hands of individuals, but it is up to them to manage their own affairs.
If somebody misplaces their wallet seed words, then the cryptocurrencies are gone, and exchanges are known to run off with user funds. This is the price for monetary freedom, which is increased personal vigilance.
How to be a Bitcoin Miner
Before starting Bitcoin mining an understanding of how the Bitcoin mining process works is essential, as well as a wider understanding of the wide Bitcoin ecosystem. Mining is essentially the verification of Bitcoin transactions.
A number of unverified transactions are gathered together into a block, and this block forms a computational puzzle to be solved by the miners. Each block has a number on the chain, such as block 12345.
For verifying a transaction, the miner gets a reward of 12.5 Bitcoins. This reward is given out every 10 minutes (adjusted algorithmically) to ensure a steady and consistent flow of Bitcoins.
Bitcoin mining can actually be completed by a complete novice. It requires basic software and specialized hardware. A lot relies on luck when Bitcoin mining, as the software is essentially guessing the answer to the puzzle as quickly as it can. The software is open source, but the hardware and electricity costs can be very prohibitive.
Miners need a wallet and open-source software such as GUI Miner. When launched, the program mines on its own. The program keeps running and the faster and more powerful a miner’s PC is, the faster the PC will start generating Bitcoins.
Now comes the hardware part. When mining initially, regular computers were enough to get the job done. But those days are long gone, and Bitcoin mining is now in the hands of specialists. This was the way that Bitcoin was set up, easy to mine in the beginning and getting more difficult as time goes by.
As the value of Bitcoin went up, it makes sense to make them harder to mine to control the supply. Now people are buying hardware that is designed specifically for mining, using application specific integrated circuits (ASICS). The price tag for a standard mining rig now runs in the region of $15,000.
Miners join mining pools to increase their chances of success. When Bitcoins are discovered/mined (by validation of transactions) every miner in a pool gets a reward for the work completed.
The work completed is analyzed by the hash rate of each mining machine in the pool. Every 4 years the reward is halved. It started out at 50 Bitcoins and is currently 12.5. It will be 6.25 in 2020.
The more miners that join, the harder it is to actually mine Bitcoins as the Bitcoin network is designed to produce a constant number of Bitcoins every 10 minutes. There is a fee to join a mining pool.
There is no real answer to the commonly asked question “Is Bitcoin mining profitable?” because there is no way of knowing the BTC/USD exchange rate in the future or the number of miners who will join the network, as well as increases in the electricity price. There are calculators online which take in all variables and can give you a current estimate of profitability.
Bitcoin is the easiest cryptocurrency to acquire. It has been around the longest and has the largest support and community.
In order to purchase cryptocurrencies, the most common way to do so is to first acquire Bitcoin and then trade Bitcoin for other cryptocurrencies. There is no shortage of online platforms through which to buy Bitcoin.
The method you choose to buy your Bitcoin will depend largely on your personal preferences. One of the most popular ways to get your Bitcoins is to go through Coinbase.
You need to sign up for an account, connect your bank account and provide identity verification. PayPal and credit cards can also be used to make these purchases.
Coinbase is the largest US platform for buying and selling Bitcoin and has over 10 million active users. But because of these numbers, it is also under scrutiny from US regulatory authorities.
Litecoin, Ethereum and Bitcoin Cash are also supported. Other popular places to purchase Bitcoins include Binance, Local Bitcoins, CEX.io, Litebit.eu, BitPanda, Changelly, Kraken, Blockchain info, Poloniex, Bitfinex and more.
All of the above give a variety of different payment options. Credit card is the fastest and most expensive, followed by PayPal, followed by bank transfer.
There are a number of ways to buy Bitcoins anonymously for those looking to go down this route. With local Bitcoins, you can simply meet up with somebody in your area looking to sell a Bitcoin. When paying in cash it is untraceable as there is no documentation for the transaction.
Of course, there is risk involved in meeting up with a total stranger and transferring the cash and the Bitcoin, but this risk is mitigated by the fact that it is a review-based system, and scammers will obviously get negative reviews unless you are their first client.
Another option is to go to the nearest Bitcoin ATM and exchange cash for your Bitcoin When asked to enter your Bitcoin address at the ATM just specify that you don’t have one – in most cases this will just generate a new paper address for you and you’re good to go.
You can later import the private key from the paper wallet and transfer the Bitcoins where you wish. Other methods such as Wall of Coins and BitQuick do not require identification but are not anonymous.
If you are looking for an exchange with a huge variety of buying and selling options, then Kraken is probably the best option, and this requires signup and verification.
The Future of Bitcoin
Bitcoin has already replaced money in a lot of significant ways. Many in the cryptocurrency space have already availed of Bitcoin-backed debit cards.
Fiat money is now backed by Bitcoin with services such as Wirex and Revolut. You can still pay for everyday purchases but the currencies that you are paying in are backed with Bitcoins.
Expect this trend to continue as Bitcoin adoption increases. There may come a point where so many people are using Bitcoin, exchanging it to fiat and then buying goods that the middle man, in this case fiat, could become redundant.
What might be more realistic is that fiat money and cryptocurrencies would go hand in hand, and there would be choices and options available. People could simply choose their currency to suit their preferences without coercion.
But as many advantages as Bitcoin has over fiat money, it is soon going to have more competitors. It is obvious that cryptocurrencies are superior to fiat money from a technical standpoint.
Governments are going to develop their own version of cryptocurrencies in a cryptographic world. The future of money and record keeping lies in cryptographic functions.
How large a slice Bitcoin is going to have of the financial cake remains to be seen in a competitive, innovative and lightning fast cryptography market.