The Rise & Fall of Bitcoin
At the moment, 1 Bitcoin is trading at $5,255.21 CAD. Seems expensive? Not if you bought 1 BTC exactly a year ago when it was trading at 19,772.59CAD. Not a typo…. no exaggeration… it fell $14,517.38 in just one year. Clearly, there seems to be a problem, somewhere.
Every informed person needs to know about Bitcoin because it might be one of the world’s most important developments
What is Bitcoin?
Bitcoin is an open-source cryptocurrency powered by a new concept known as “Blockchain”. Some people call it the start of “digital currency”, others may call it “cryptocurrency”. Either way, it’s the form of a new decentralized currency on peer-to-peer technology, used to facilitate instant payments.
Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part, bitcoin.org
This is a new innovative replacement to centralized banking networks. It was developed in 2009 by an anonymous creator known by the alias of “Satoshi Nakamoto”. As part of Bitcoin’s implementation, Satoshi is also credited for creating the first ever blockchain database, where data is stored in Transactions. Transactions are appended to Blocks, which are further attached to a Blockchain
What is Blockchain?
Bitcoin is just one example of something that uses a blockchain. Cryptocurrencies are just one example of decentralized technologies.
A Blockchain is a chain of blocks; or more technical: a digital ledger of all the transactions which have been made by the users. A copy of this digital ledger is maintained on the entire network of computers (nodes). There are about 5 million computers across the globe for Bitcoin. Whenever a new block is added to the blockchain, it is verified through Proof of Work.
Proof of Work is a concept in which people spend computer power (GPU) to solve complex calculations, and as a result, they receive awards (BTC in this case). This is also referred to as “mining”. The purposes of requiring to mine a block is to verify the legitimacy of a transaction, avoiding double-spending, and generating new currency along the way.
A hash is a function which takes an input and returns an encrypted output of a fixed length. Each block part of a blockchain contains a hash of the transactions of the block + the hash of the predecessor block. This means if someone changes a transaction on an older block, they would have to recalculate and change all of the hashes on the newer blocks.
Therefore, it is impossible to delete a block, and extremely difficult to modify an existing block. It would require a malicious network with more power than the combined power of all of the other users.
When Things Go Wrong…
The consensus mechanism is the essence of blockchain. The block is added once 51% of the mining nodes verify and record it.
The 51% Attack: A hypothetical attack known as the 51% Attack is — if a group of miners manages to control more than 50% of the computing power (hash-rate). They will be able to prevent any new blocks from gaining confirmation, and they could also reverse any transaction; allowing them to double spend currency. Although this is unlikely for Bitcoin which already has a huge pool of miners, smaller cryptocurrencies (and blockchain databases) are more vulnerable to such attacks.
In August 2016, Krypton and Shift, two currencies based on Ethereum, suffered the 51% attack. Similarly, Bitcoin Gold was attacked with the 51% attack in May of 2018. It is estimated that the hackers were able to double spend for several days, eventually stealing more than $18 million worth of Bitcoin Gold.
Criminal Activities: With no overlying central authority overseeing the movement of money, cryptocurrencies are invaluable for criminal activities. America’s DEA law enforcement agency estimates that 90% of Bitcoin’s usage is from illegal services.
PayPal is a safe and secure way of transferring centralized currency between people (i.e. USD), however, they do charge a transaction fee of 2.9%. Bitcoin enthusiasts may claim that such fees is ridiculous; I would argue otherwise. With the fees comes to a buyer and seller protection agreement, bringing peace of mind during the trade. Eliminating transaction fees with Bitcoin may increase profits, but it will also increase the risk associated. Businesses are never keen on increasing risk.
Fraud is common when it comes to currency. Banks such as Bank of America and Canada Trust may have centralized management, but they monitor and prevent accounts from fraud 24/7. Lost password: reset; stolen card: block card; hacked account: block account. When it comes to decentralized currency management, none of the above services are provided. Losing the 32-byte private key translates into losing permanent access to the account along with it’s balance, no exceptions.
The concept of Bitcoin and Blockchain overall may be interesting. However, there seems to be a huge disconnect between the everyday markets and cryptocurrencies. Will Bitcoin shrink those gaps? Maybe. Will it be enough to gain consumer trust? I don’t think so. Perhaps the cons just outweigh the pros, at least for me. I’m quite skeptical about the future of decentralized currencies.