Primer on Bitcoin
The recent surge in Bitcoin prices have caught the interest of many people. In this short summary, I hope to bring some clarity to what is happening now in the cryptocurrency space. And in a later paper, I hope to present some thoughts from the technical and financial industry on the still developing space.
Out of nowhere, the price of Bitcoin went from just under $1,000 dollars to well over $4,000. This four times increase in value in the span of nine months. This, however, is nothing new in the cryptocurrency space.
If we look at the raw percentage increase in value, back in 2013, the price went from $100 to $1,000. A ten times increase in value.
So what causes these price spikes?
Very simply, adoption.
The Network Effect
Just imagine Facebook in the early days, where it’s users counts numbered only in the thousands. In those days, logging into Facebook was not a very good value proposition. There were only limited amount of people you could interact with, and the chances are, those who you do want to interact with, are not on Facebook.
Fast-forward to today, where having an Facebook account is as common as having a cellphone number, the value of logging into Facebook increased exponentially. Now, you can probably send anyone a message you met provided you remembered their name and can find them on Facebook.
The same is true with the Bitcoin network; with more and more people on the blockchain network, the amount of people you can interact with increases exponentially.
Except for a very small difference.
The Value Net
Facebook’s network is designed to allow you to communicate with each other through messages, pictures, videos, or even games. Doing these things on the Facebook network costs you nothing, the cost of performing these tasks and keeping track of them falls on Facebook. Facebook is of course ok with absorbing these network costs because Facebook can analyze or sell these data to marketers, and in turn, make a profit on things you purchase. Facebook’s business model is what is called the Data Company model. Where maintaining the network is simply the cost of doing business, and the company makes money off the data generated on the network.
On Bitcoin it’s completely the other way around. Maintaining the network is how the money is made.
If we take this as our new starting position, we first have to rethink how we design the system. If maintaining the network is our priority, then we would want to limit how much data we put into the network. After-all, more data means more stress put on the network. So a limited data size is what we need. But what good is a network that has only limited amount of data? It’s good for keeping track of where everything went.
Imagine that you are a bank, with millions of customers.They each put in, take out, and send each other money. Your job as the bank is to make sure you can keep track of this millions of transactions everyday while not making a single error. Since customers are always adding to and subtracting from your money supply, you’re going to need a lot of computers to keep up, doing a lot of calculation every second, making sure things add up, that the total amount of money sent is equal to the total amount of money received.
But what if you have a fixed amount? That would make doing the math a lot easier.
And what if you can split that work up and outsource it? Even better, what if you make it so that everyone can see how the math is done? That means anyone can run the calculation, making sure that, if the adds and subtracts equals out, the same amount of money will remain in the end.
In the next post, some thoughts from the technical and financial industry.