The world is buzzing with bitcoin these days, and many people are wondering what it is, why it is so popular right now, and what it all means for the future of eCommerce. The following post will hopefully assist in demystifying this extremely popular cryptocurrency.
What exactly is bitcoin?
Bitcoin is a type of digital currency as well as a global payment system. Bitcoin, unlike traditional currencies such as minted coins or printed bills, is created and stored online. Moreover, unlike traditional currency, which is managed by a central bank, no single entity controls bitcoin, and thus no single authority has the ability to manipulate the value or destabilize the network. Users transact Bitcoin electronically using encrypted addresses. These transactions are facilitated by third-party sites known as exchanges.
What is the origin of bitcoin?
Mining is the process by which bitcoins are created. Individual miners or organizations working together solve a complex mathematical problem using powerful computer processors, which not only uncovers fresh bitcoin but also serves to preserve the security and integrity of all bitcoin transactions that take place on the network.
Specifically, transaction details resulting from bitcoin transfers around the world are compiled into a list known as a block. It is up to miners to confirm such transactions and record them in a general database known as the blockchain, which is effectively a long list of blocks. Anyone with access to the blockchain can investigate every transaction performed between any bitcoin addresses at any point on the network.
When a block of transactions is formed, miners put it through a sophisticated procedure including a hash algorithm and a nonce, which is described in greater detail in this Coindesk blog for those who are interested. Miners earn bitcoins for successfully completing each sophisticated cryptographic hash in exchange for all of their hard work in maintaining the blockchain. The mining process employs a number of checks and balances to maintain the security of the system’s data, as tampering with data essentially inhibits the creation of new bitcoins.
There are a finite number of bitcoins to be discovered — 21 million to be exact — and the mining process itself grows in difficulty overtime to limit the number of bitcoins discovered each day. All 21 million bitcoins are expected to be mined by 2140.
Who made bitcoin?
It stands to reason that the origins of a cryptocurrency should be cloaked in obscurity. Since the first digital paper on bitcoin appeared in 2008, the name Satoshi Nakamoto has been connected with its invention. Even now, nearly a decade later, we are no closer to determining who Satoshi Nakamoto is or whether bitcoin was the result of a group of people working together.
So far, potential contenders have included Hal Finney, Dorian S. Nakamoto, Craig Wright, and Nick Szabo, among others. A satoshi is the lowest divisible value within one bitcoin, signifying 0.00000001 bitcoin or one hundred millionth of a bitcoin, as a tribute to bitcoin’s claimed founder.
What are the main characteristics of bitcoin?
Given that bitcoin was designed in large part to serve as an alternative to fractional-reserve banking, it’s not surprising that it differs from traditional currency and payment systems in a number of ways. Here are a few important distinctions:
1. It is distributed
Individual users have complete control over their bitcoin. The bitcoin network cannot be manipulated or taken over by a centralized authority.
2. Personal information cannot be linked to transactions.
This is both good and negative because it protects users from identity theft, but it also led to bitcoin becoming a popular payment mechanism for unlawful black markets like the Silk Road, an online marketplace for illegal weapons and drugs.
3. Low transaction fees
Bitcoin payments are now associated with relatively low fees. Bitcoin exchanges may provide a number of services, with costs varying based on the type of transaction, although in general, these fees are cheaper than those charged by credit cards or PayPal.
4. Lower risk for merchants
Because bitcoin transactions cannot be reversed, do not contain any personal information, and are safe, merchants are better protected from damages caused by fraudulent credit card use.
5. It is a genuinely global currency.
Bitcoin has the same value everywhere and may be spent in any country. No single country can inflate or depreciate the value, for example, by producing more.
Should you put money into bitcoin?
Bitcoin has experienced its ups and downs since its birth, but nothing quite like what is happening right now. At the time of writing, one bitcoin was worth $25,000 CAD. But, before you join on the bitcoin bandwagon, consider the following benefits and downsides of bitcoin investing:
Pros
- Bitcoin is no longer limited to computer enthusiasts and libertarians. A rising number of mainstream investors and entrepreneurs regard bitcoin as a legitimate asset class, comparable to stocks, bonds, and commodities.
- Bitcoin’s limited quantity may continue to influence its value. It is estimated that almost 80% of all bitcoins have already been discovered, and as previously stated, no new ones will be available after 2140. Furthermore, some believe that demand will rise, particularly if central banks begin purchasing them as foreign currency reserves.
Cons
- The adoption of Bitcoin as a mainstream payment system has been sluggish (except among criminal entities). To date, there is little evidence that bitcoin will ever replace cash or credit cards. Transactions are delayed (10 minutes in certain situations), and costs are steadily rising.
- The bitcoin boom may pop. Bitcoin has been volatile over the last decade, with several very severe falls, most notably in 2013 and 2015. Furthermore, analysts believe that the present exponential price surge is unsustainable and that if prices fall, many purchasers would leave the market.
While it is unknown what the future holds for bitcoin, it has unquestionably been the driving factor behind raising cryptocurrencies to the collective conscience. Whether you decide to stay on the sidelines and observe the bitcoin activity or get right in, it will be intriguing to see how this journey unfolds.