So, you want to know what Bitcoin is. Is it a giant scam? Is Bitcoin here to stay? Is it safe for me? We will attempt to cover this here.
First, if we think of Bitcoin as a currency, we need to know the characteristics that make a currency.
Bitcoin holds up extremely well to these characteristics. Once a currency holds up to these traits, all that holds it back from having true value is adoption.
Bitcoin’s whitepaper was released in 2008 by an individual or group called Satoshi Nakamoto. To this day, we don’t know who the mysterious creator of Bitcoin is. Australian computer scientist Craig Wright claimed the title, saying he is part of the original team that helped create Bitcoin. However, much of the crypto-currency world does not believe him.
Bitcoin could change the world beyond finance, and it already has. The best way to start explaining bitcoin is to explain why it has value:
Gold and silver are backed by tangible assets: themselves. FIAT currencies such the EURO and USD are backed by their own respective governments and the agreement of all parties that use them. Bitcoin is backed by mathematics. A growing number of people see this as a much fairer way to value a currency, as the money supply is not controlled by a single central bank or person, but rather by the entire network.
In 2014, one Bitcoin was valued at about $300 USD. It is now at over $40,000 USD in 2021. That’s an over 14,000% return. So, knowing this kind of added value on this new trend, the question you might ask is… Why?
Bitcoin’s primary and arguably best trait is its design. A fixed protocol provides decentralization in the system from the ground up. Bitcoin makes up a cash system where those participating do not rely on intermediaries, like banks, to facilitate transactions. The Bitcoin system is evenly distributed, immutable, and composed of hundreds of thousands of miners worldwide.
The people who mine bitcoin process transactions and create blocks on the blockchain, and are awarded BTC. The way the system is designed allows for fund transfer without the use of centralized systems, while each block in the chain is verified by all other nodes (Computers) that work on the block. So instead of a top down system where the bank controls all movement of assets, Bitcoin allows a more direct exchange between parties and is verified by a nearly immutable set of characteristics.
The main reason for Bitcoin’s success is that it takes power away from a central authority. On the other hand, digital dollars now require a digital signature to prevent the duplication of dollars by individuals, or what is called “Double Spend.”
Bitcoin is a digital currency upon a decentralized network called a blockchain. Bitcoin represents digital rewards given to those who participate in updating the blockchain via mining. Bitcoin can be transferred between Wallets quickly and with no third party, like a bank. Bitcoins are mined with computers solving complex puzzles using algorithms. Once a puzzle is solved, a “block” or part of one is added to the chain, and the miner is awarded a certain amount of Bitcoin as an incentive.
This means that Bitcoins become rarer as time goes on, and the difficulty in creating new ones scales with technology.
On a base level, there’s no need to go through a third party to exchange Bitcoin funds. No bank is necessary.
The first thing we need to know to understand Bitcoin is a basic understanding of the history of our monetary system and how we have assigned value to the currency.
Now, Bitcoin can simply be bought. Using an Onramping service such as Mobilum is a fast and secure way to purchase Bitcoin with FIAT currency.
Satoshi Nakamoto wrote the 2008 White Paper titled Bitcoin: A Peer to Peer Electronic Cash System. This whitepaper explained how Bitcoin was going to function, what it would do, and why it was made. You should really read it if you wish to learn more about Bitcoin.
There is no consensus officially on the identity of Satoshi Nakamoto. It’s not even known whether they were a person or an organization. Australian computer scientist Craig Wright makes one claim, but the community believes certain evidence was backdated. Japanese engineer Dorian Nakamoto was “outed” as the creator due to his name and profession. He aggressively denied it. A third, and more likely potential creator is Nick Szabo, who is credited with pioneering the concept of smart contracts in 1996.
Still, there is no definitive proof! Does this mean you can’t trust Bitcoin? No, it does not. It simply means that the person or persons behind the world-changing blockchain-based and first cryptocurrency wish to remain anonymous.
The first form of FIAT currency originated in China around 1000 AD. The Song dynasty (960-1276) saw a boom in trade in Sichuan, resulting in a shortage of copper coins. For the past few hundred years, precious metals were becoming harder to come by so promissory or credit notes were already known to people. A monetary reserve was created and traders used credit notes based on it, making it the first-ever known form of legal tender, or FIAT money. The Yuan dynasty made paper money legal tender.
FIAT is a Latin term meaning By Decree. Our dollars have value as they are backed by trust in a government. Up until August 1971, the Gold Standard was used to measure the value of the US dollar. In that summer, Richard Nixon signed an executive order that made it so dollars could no longer represent divisions of physical gold, thus ending the gold standard.
The path away from the gold standard has led us into an uncertain future. The government itself is now liable for the value of the paper money. People continue to trade receipts that are backed by nothing but the government’s promise. It works because of trust. Even though there is no commodity backing the money, people trust the government.
That trust quickly erodes when a government prints so much money to cover expenses that it devalues the citizen’s currency. People may then resort to counting money by weight instead of denominations.
Now, the US dollar’s value is based on trust in the US government. With rising inflation, more people are turning to crypto as a possible alternative to store wealth.
A new monetary system is on the rise that is completely decentralized. It allows individuals to send funds to one another without the need for a third party to take a cut in order to facilitate the transaction. This new system started with Bitcoin.
In October of 2008, a white paper document appeared online from Satoshi Nakamoto called Bitcoin: A Peer-to-Peer Electronic Cash System. This was the first decentralized currency. To this day, no one really knows who Satoshi Nakamoto is. Australian computer scientist Craig Wright claims he is Satoshi Nakamoto, but many are hesitant to believe him.
Now, instead of a centralized authority or bank regulating finance, we have an option to implement an unchangeable consensus mechanism to regulate the way we conduct business.
That’s why the recent official adoption of Bitcoin as the national currency of El Salvador was such big news. Now a government is officially backing this still-new and speculative asset that is very far away from being anything close to the safe haven that gold is.
There are currently 18.4 million Bitcoins in circulation. There is a hard cap to how many bitcoins can exist, and it’s set at 21 million. This stop is what will regulate the value of Bitcoin long into the future.
A decentralized banking system allows users to transfer money between each other without middlemen. In the current system, the bank is the only one that has access to the ledger and can charge a fee. They can even cancel/disallow the transaction.
A decentralized system ledger works like this, in the Protocol: “Who wants to be a banker?” This means that transactions go directly between your wallet ID and the recipient if you wanted to make a transaction or send a bitcoin. There is no third-party bank that can be involved.
Anyone who wants to participate in updating the ledger, known as the blockchain, can update it.
In the simplest terms, this requires participants to “guess” numbers or algorithms. This is of course done with computers, and the more powerful your processing power, the more calculations or guesses you can make. This leads us to the next thing you’ve probably heard about, how Bitcoin is made, or “mined.”
No, there are no sheepherders turned miners in a dark cave somewhere underground finding Bitcoin under a mountain.
Making “guesses” correctly and being able to update the blockchain is called mining. Participants engage their mining computer, the mining software a miner uses will determine which group of transactions will be added to the block. Mining is the process by which computers use processing power to guess the answer to a mathematical puzzle that gets harder and harder. As more of this puzzle is solved, Bitcoin is awarded to the “nodes” (computers/groups of computers) performing the mining.
Once your mining computer comes up with the right guess, your mining software determines which of the current pending transactions will be grouped together in the next block of transactions. Mining software is a program you install on your mining computer that allows that computer to mine on the network.
Compiling this block is your moment of glory. The block you create and your solution are sent to the entire network, which updates the ledger for everyone.
Mining is a guessing game. Mining is the process of using computing power to process transactions, secure the bitcoin network and keep it synchronized. Mining computers use software to “listen” to the peer-to-peer network and perform tasks to process and confirm transactions on the network. Miners earn fees paid to them in Bitcoin for processing, and new bitcoins are issued into existence according to a formula.
After this stage, the system generates a fixed amount of Bitcoin as compensation. The block rewards the transaction fees for any transactions you put into the system. This is how “Miners” are rewarded. “MIning” when referring to bitcoin simply means updating the blockchain ledger.
The difficulty of mining is coded to be proportional to the number of bitcoin miners and how much power they have.
Mining started from CPU mining in 2008 and then after a few years as Bitcoin caught on, GPUs began being used as they have 30x the mining power of a CPU. Then, specific new mining chips were created called the FPGA mining chips. FPGA is hardware that runs calculations and can be 3 to 100x faster than a GPU. They are harder to configure, however. Then came ASIC mining in 2013. This new breed of miner Application-Specific Integrated Circuit is manufactured SOLELY for the purpose of mining bitcoin. They have mining hard-coded into the system and are the current standard for bitcoin mining. The frantic bitcoin mining gold rush is over, as in 2016 the “mining arms race” slowed down and evened out as we reached the limit of our reasonable calculation power.
So you may be wondering: Is bitcoin mining profitable now in 2021? Well, the answer is somewhat weighted, but generally, it’s a no. Unless you have a plan and enough start-up capital, it’s gone far past the days where you can earn a quick buck from mining.
Bitcoin is on the blockchain. A blockchain can be thought of as a database. Traditional databases work in a centralized manner, with individual files being stored in one location. Multiple users are able to access it via servers from that one central location.
The blockchain is essentially a record of all transactions and accounts, or addresses that hold bitcoin. Each block is verified by others within that block and from other blocks, so no central authority or database has control over the entire network. It is immutable, meaning that it cannot be tampered with to become centralized. Think of it like comparing a funnel to a net, the funnel being the centralized finance model and the net being blockchain.
Blockchain technology is not solely attributed to Bitcoin. It is the technology that has allowed for the creation of hundreds of other cryptocurrencies upon different blockchains. If Bitcoin is like gold, then Ethereum, or ETH, is like the silver of the crypto world.
Blockchain can affect the world in many ways beyond finance. Imagine a democratic voting system built on an immutable, self-verified blockchain network that can’t be controlled by a government or politician – this makes democracy sustainable and fair, especially in developing nations where this is a real issue.
There is a hard cap on the number of Bitcoins that can exist. It’s set to 21 million. There are approximately 18 million Bitcoins that have been mined. Some of them were on USB drives that got lost in a dump! Imagine owning the coin in 2010 when it was in the hundreds of dollars, and then selling it now!
Imagine if I had 1 digital dollar. What’s to stop me from just copying it over and over into infinity? The central record is stored by the bank, that’s what! This reliance on a third party is the reason for bitcoin’s success!
El Salvador is officially the first nation to adopt Bitcoin as a currency. Corporations and investment funds are buying large amounts of BTC and holding them. Tesla sold cars for Bitcoin until Elon Musk decided to stop this due to the rising environmental impact of Bitcoin.
How much electricity does Bitcoin consume? Recently, China banned all Bitcoin mining in the country. In China, coal is the primary producer of electricity. Bitcoin consumed more electricity than the entire country of Finland, or about 80 terawatt-hours of electricity annually. Imagine 23 coal-fired plants going full blast. This is one major downside of Bitcoin for now, but as technology and power efficiency improves, we could see this number fall over time.
Let’s talk about why Bitcoin solves the Double Spend problem. Instead of trust, we now have an uncompromisable, immutable (unchangeable), transparent ledger of transactions. The nature of blockchain technology makes Bitcoin impossible to hack or counterfeit!
However, that’s not to say fraud is not a huge problem in the crypto world.
The simplest way is to use a Bitcoin wallet. Many wallets are available, but it’s important to secure your wallet properly, have offline backup copies, and use multi-key security protocols and 2-factor authentication.
It’s also pretty easy to buy Bitcoin fast! A new sector in Crypto is blasting open and it’s called On Ramping which allows you to buy bitcoin nearly instantly. If you have a website and wish to receive payment in Crypto or allow your users to buy Crypto through your site, you can use Mobilum’s Onramping Widget to create a way for those users to do so.
Nothing in this article should be taken as financial advice, as it’s for informative/educational purposes only. Never risk more than you’re willing or are able to lose as you’ll be jeopardizing your own financial health.
Educating yourself in the crypto space is the first step and you should understand the technology before you put any hard-earned money in.
What Bitcoin did was cause a fundamental crack within an aging system that might not just topple the current economic system, but replace it entirely. It might not be Bitcoin itself doing it all. It could be another cryptocurrency or something different that combines aspects of crypto, blockchain, and something else that’s yet to come about! With cryptocurrency, it’s nearly impossible to predict what’s going to happen long-term.