While global markets crashed after Brexit, the value of the bitcoin astonishingly shot up rapidly. The value of the bitcoin has fluctuated wildly since 2009 but hovered between $400 and $450 a month ago. Today, one bitcoin equals $646.22. The time has come for us to take the virtual currency seriously.
What is the bitcoin?
Bitcoin is a form of digital currency, created and held electronically, which means that there are no physical paper notes, or coins. Transactions are made peer-to-peer without the need for a middle man, e.g. banks. There are no transaction fees and you don’t need to reveal your identity, making it cheap and completely untraceable (which is why the bitcoin has become the currency of choice for drug cartels and criminals).
Increasingly, merchants and businesses are beginning to accept bitcoins – amongst it’s legal uses, you can buy web hosting services, a subway or even a pint at the Pembury Tavern in London using bitcoins. Here is the full list of companies that accept bitcoin today.
The bitcoin is the most famous example of a growing category of money known as cryptocurrency, which refers to currencies that are traded digitally through using encryption.
Who invented the bitcoin?
The paper introducing the bitcoin protocol was authored by a software developer named Satoshi Nakamoto. This is a pseudoname and it is a mystery who this man actually is (some believe it might be Craig Wright). “Satoshi” is Japanese means “clear thinking, clever, wise”. “Naka” can mean “medium, inside, or relationship”. “Moto” can mean “origin”, or “foundation”.
Those things would all apply to the person who founded a “medium” by designing a clever or wise algorithm. We have no idea if he is Japanese, or if he is even a “he”.
How is the bitcoin different from traditional currencies?
Perhaps bitcoin’s most important characteristic which differentiates it from traditional money, is the fact that it is decentralised. No single institution controls the bitcoin network. There are no nasty banks involved and no central authority regulating it.
In addition, international payments are easy and cheap because bitcoins are not tied to any country in particular, like all the currencies we have today. As a result, it is not tied to the economic or political fortune of any country, which is probably why people swapped their pounds for bitcoin when Brexit shook the UK.
How do transactions work?
Transactions are performed from one “digital wallet” to another, using mobile apps or computers, in a manner similar to online bank transfers. Such transactions are digitally signed for security.
To send bitcoins, each sender needs two things: a bitcoin address and a private key.
A bitcoin address is generated randomly, and is simply a sequence of letters and numbers. The private key is another sequence of letters and numbers, but unlike the bitcoin address, which is available publicly, this is kept secret.
The Block Chain – What about transparency?
How do we prevent people from simply cheating during a transaction? Everyone on the network knows about a transaction (though not the names involved, simply the addresses). This is done by storing every single transaction that ever happened in the network in a huge version of a general ledger, called the blockchain. The blockchain tells all, and a copy of the blockchain exists with everyone who owns bitcoins.
Blockchain is the real enabler behind bitcoin. Cryptocurrencies have come and failed but the underlying technology is blockchain and this revolutionary concept will be at the heart of any cryptocurrency that goes mainstream, whether it be bitcoin or something else.
Bitcoin Mining – How are bitcoins created?
Bitcoins are not physically printed in the shadows by a central bank, unaccountable to the population. Banks can mass produce notes in order to cover national debt (quantitative easing), thus devaluing the currency. This cannot happen with the bitcoin. You also can’t lose bitcoin on a night out or accidentally leave it in your pocket before putting it in the wash.
Instead, bitcoin is created digitally, by a community of people that anyone can join. Bitcoins are ‘mined’, using computing power in a distributed network. Here is where the real magic behind the bitcoin lies, and where it gets a little complicated and difficult to understand, so brace yourself.
Since we have no bank, somebody needs to check the ledger (blockchain), make sure that every transaction has occurred smoothly and then add it to the blockchain. This is done by the miners. In effect, the miners act like bankers for the cryptocurrency in checking the ledger. However, anybody can become a miner. Miners use special software to do this.
The bitcoin network compensates bitcoin miners for their work in checking the ledger, by releasing bitcoin to those who contribute the needed computational power. The more computing power you contribute, the greater your share of the reward. This provides a smart way to issue the currency and also creates an incentive for more people to mine.
In a way, the bitcoin mining community is the equivalent of a bank for bitcoin.
Bitcoin mining has been purposefully made to be slightly difficult. It requires time and computing power. It is so called because it resembles the mining of other commodities: it requires exertion (here in the form of computing power not physical effort), and it slowly provides new currency at a rate that resembles the rate at which commodities like gold are mined from the ground.
So can the number of bitcoins just keep growing?
No, there is a limit to the total number of bitcoins that can be ‘printed’. The Bitcoin protocol (the set of rules that make bitcoin work) states that only 21 million bitcoins can ever be ‘mined’. However, these coins can be divided into smaller parts (the smallest divisible amount is one hundred millionth of a bitcoin and is called a ‘Satoshi’, after the founder of bitcoin). Since 1 bitcoin is worth $634.25, these divisions are important to be able to buy a $10 subway.
Okay, but what is the future of the bitcoin?
The bitcoin has been proclaimed dead 3,000 times. It has been labelled a Ponzi scheme and a failed experiment. It is seven years old and it is experiencing many of the problems that early technologies experience.
One big bitcoin scandal was the demise of Mt. Gox, a bitcoin exchange that at one point saw 80% of bitcoin transactions. Some suspicious manipulation of trade volumes resulted in individuals losing hundreds of millions of dollars collectively and Mt Gox CEO getting arrested.
Silk Road, “The eBay of Drugs” used bitcoin as an untraceable way to make illegal transactions. The website was shut down in 2013 but had already done serious damage to bitcoin’s reputation, perpetuating the idea that it was a currency for crime. Further, governments are concerned about their inability to tax bitcoin transactions, resulting in a huge black market, and their lack of control over the currency.
Yet, much like the recent UK Leave Campaign, it kept bouncing back stronger and stronger. The popularity of the bitcoin is growing and people are beginning to see it as more than a way to buy a joint online. The next stage of exchanges, such as Coinbase, take both security and regulation seriously. Investors have thrown incredible amounts of money at the bitcoin exchange space and some believe that it will eventually replace all physical currency.
The major challenge that remains if the bitcoin community hopes that its currency is adopted by the wider public is to improve the user experience. At the moment, the user interface is clunky and unintuitive. Below is a screenshot from BTC, the biggest bitcoin exchange. It is a maze and the kind of software that you need a tutorial before using.
We believe the future of bitcoin may be bright and promising. Let’s not forget that it is decentralised, secure, fast, and has almost no transaction charge. It is still very young, only in the seventh year in the development of this network. It takes years to build out a protocol, which is what bitcoin is. As Joel Spolsky says, “Good software takes 10 years. Get used to it.”
2. bitcoincharts.com offers a comprehensive look at the digital currency network, and is useful for pricing information.
3. Blockchain.info has basic information on the what the blockchain is and how it works.
4. CoinDesk – This London-based resource and news operation aims to be the “Reuters of Bitcoin” according to its founder Shakil Khan.
5. Bitcoin Education Project – The full name of this community-built resource is “Bitcoin or How I Learned to Stop Worrying and Love Crypto: The definitive guide to understand what the bitcoin is and why we should care about them.”
6. Let’s Talk Bitcoin –Tired of reading and want to listen instead? This podcast is brand new on the scene and produced by Adam Levine.