Digital Gold — Bitcoin

Bitcoin (Image from bitcoinist)

Before 2017, only a few people have heard about Bitcoin or cryptocurrency. But now, Bitcoin is a household name known by most, whether they hold some cryptocurrencies or not. Until now, a lot of people are still confused about what Bitcoin is and how it works. Questions on Bitcoin and its value usually come from the misunderstanding or the ignorance of the mechanism of the Bitcoin blockchain network. It is time to lift the veil of Bitcoin and let more people know about the reality of Bitcoin.

A New Form of Digital Currency and P2P Network

Due to its monetary attribute and supremacy in the crypto world, Bitcoin is well known as the digital gold. This new form of digital currency was designed on cryptographic technology to revolutionize peer-to-peer transactions. In a Bitcoin transaction, it doesn’t require a 3rd party and centralized trusted authority (like a bank or credit card network), the exchange of personal information, or transaction fees payable to the 3rd party.

The core concept of Bitcoin is to free people from the control of those centralized entities by giving them back two things that they had never had with money: a form of currency that was truly under people’s own control and a completely secure method of instant, worldwide transactions that is both completely encrypted and totally transparent.

Bitcoin is a computer program like none we’ve ever seen before. It is established on the basis of decentralization. The underlying technology which supports the Bitcoin and other cryptocurrencies is blockchain, a decentralized ledger that runs on a peer-to-peer network which contains a secure history of data exchanges. From block to block, each and every Bitcoin transaction ever made on the network is recorded on this publicly distributed ledger. Each block contains information of a certain number of transactions and gets linked to the previous block by an unbreakable chain (unique encrypted data), which works as a connective seal to make blocks permanent store of records.

Bitcoin Network (Image from Vecteezy)

Proof of Work (PoW) is the most popular consensus for now, which was first applied in the Bitcoin network. A consensus ensures that the network’s rules will be followed and that there is only one truth in the whole blockchain environment. A block containing transactions is also a batch of freshly minted Bitcoin that are created when one or more computers, also known as miners, run a complex mathematical problem involving cryptography, to determine who is able to mine the next block. This process is called “mining”. And those Bitcoin in the block will be received by those computers as mining reward. The blockchain is a public ledger that has recorded the entire chain of blocks mined since that first “Genesis Block” that started it all. The total amount of Bitcoin is designed as 21 million, which means that no more than 21 million Bitcoin will be in circulation. The mining reward will be cut in half every four years, to make Bitcoin mining continuous for many years. However, the mining competition consumes an unbelievable amount of power, which is not very environment-friendly.

Bitcoin Mining Facility (Image from Freedomnode)

Because the database is stored on a network of computers-nodes (P2P Network), rather than on a single server, hacking or stealing Bitcoin data is virtually impossible for cyber-criminals. A hacker would have to break into the majority of nodes simultaneously, a virtually impossible task.

Brief History of Bitcoin

After paragraphs of boring technology and concepts, let’s talk about the brief yet interesting history of Bitcoin.

1998–2008 — The Pre-Bitcoin Years

Before Bitcoin, there were several attempts at creating online currencies with ledgers secured by encryption which were not fully developed. The most two famous examples are B-Money and Bit Gold. In late 1998, Wei Dai released an essay detailing his idea for “b-money,” a cryptocurrency whose exchange reads similarly to what the blockchain in Bitcoin would eventually become. The theory of proof-of-work system was raised as well. In the same year, Nick Szabo put out a similar proposal for “Bit Gold.” Szabo’s reasoning for an alternative currency was to create something that did not require a third party, like a central bank, to create or manage it.

2008 — The Mysterious Mr. Nakamoto

In August of 2018, was registered. Two months later, a whitepaper was published: “Bitcoin: A Peer-to-Peer Electronic Cash System.” Satoshi Nakamoto, an unknown person or group of people whose real identity remains a mystery to this day, wrote the Bitcoin whitepaper.

2009 — Bitcoin Begins

It was a historic moment that the first-ever block of Bitcoins, known as the Genesis Block, was mined, which means that the process through which new Bitcoins are created and transactions are recorded and verified on the blockchain. On Jan.9th, the first iteration of Bitcoin software was released, and on Jan.12th, the first-ever Bitcoin transaction occurred as Nakamoto sent 10 Bitcoin (BTC) to noted computer programmer and developer Hal Finney.

2010 — Bitcoin is Valued in Real World for the First Time

May 22nd is celebrated in the Bitcoin community as Bitcoin Pizza Day, because on that day in 2010, a Florida programmer named Laszlo Hanyecz swapped 10,000 Bitcoin in exchange for 2 pizzas. If the buyer still held those Bitcoin until the peak in the end of 2017, the prices they would be worth about $200 million. These are the most expensive pizzas for sure.

2011 — Unstable Bitcoin Price and Cryptocurrency Rivals

1 Bitcoin was worth $1 for the first time in February 2011, which was a major milestone. By June, Bitcoin was worth over $30. Soon after, it crashed back down to about $10. The price of Bitcoin was very unstable and can be extremely sensible for public opinions and media releases. Litecoin was debuted in 2011, which became the largest rival of Bitcoin in several years. It was well-known as digital silver, which is the eighth-largest cryptocurrency by market capitalization.

2013–2016 — Bitcoin Price Crashes

Shortly after the price of one Bitcoin reaches $1,000 for the first time at the end of 2013, the price quickly began to decline. It took more than 3 years to get back to $1000 at the beginning of 2017. A few things of note happened in this period of time, like Crypto exchange Mt. Gox, the world’s biggest cryptocurrency exchange, going bankrupt and shutting down. But during this period, we mostly saw Bitcoin’s rising and falling somewhat while failing to reach its high.

2017 –Bitcoin Enthusiasm

2017 was the biggest and busiest year for Bitcoin. After spending 2016 desperately trying to claw its way back up, 2017 was when it finally reached and passed the $1,000 mark. It kept ascending. It ended November at nearly $10,000, and by the end of December, Bitcoin hit a peak of $19,783. CME and CBOE, two reputable, regulated and liquid exchanges in the United States, began Bitcoin futures trading in December 2017. An increasing number of people and companies began chasing the trend as the price just kept rising. Unsurprisingly, it wouldn’t continue that heady growth for a long time.

A lot of people thought that the appearance of Bitcoin Cash (BCH) was the trigger of this incredible rise. It might be. BCH was created via a fork in the Bitcoin network. Because of the rising number of Bitcoin miners, which means higher fees and more time spent processing transactions, an increase in block size was desired by some of the miners. Bitcoin Cash was the fifth-largest cryptocurrency by market cap before it got forked again in 2018.

Capital Enthusiasm is Pushing Innovation

The incredible rise of Bitcoin at the end of 2017 has already become a legend in the financial industry. However, the ‘epic’ drop from nearly $20,000 to about $3,000 in 2018 indicated the collapse of the Bitcoin myth. There is no doubt that 2018 witnessed the burst of the Bitcoin bubble. A lot of people are comparing Bitcoin bubble with Dot-Com bubble since they have a very similar capital retreat and value depreciation. It is obvious that they have almost the same downtrends shape on the graphs. However, there are still differences. First of all, the Bitcoin bubble grew much faster than Dot-Com bubble. There was a continuous growth of the Dot-Com bubble in about 4 years before it burst. However, for Bitcoin, it grew rapidly in several months before bursting the bubble. Secondly, the capital size of the Dot-Com bubble was much larger than the Bitcoin bubble. The peak of Dot-Com stock was valued around 4,700 Billion US Dollars, comparing to about 320 Billion US Dollars for Bitcoin, and around 800 Billion US Dollars for all cryptocurrencies. Finally, the huge drop happened in the Bitcoin bubble was more rapid than it happened in Dot-Com bubble, about 4 months comparing with 2 and half years. Although these two bubbles have so many differences, there is one thing in common, that after the retreat of capital, the golden time of innovation and production would come. This nature circle has been proved several times for emerging technologies.

Dot-com Bubble in 2000 (Image from Forbes Media)
Bitcoin Bubble in 2018 (Image from Coinmarketcap)

Capital enthusiasm brings in massive attention, funds, and talents. Technically, it is pushing the innovation and development of cryptocurrency and blockchain industry. It is good to see that Bitcoin is acceptable in more scenarios and more traditional financial institutions are planning to enter this market. Those big names such as Microsoft, KFC Canada, Subway, Expedia, Playboy, Reddit, Overstock and Virgin Galactic accepted payment by Bitcoin when using their services. Traditional institutional investors led by Goldman Sachs is getting ready for cryptocurrency related investment. According to Bloomberg, Nasdaq is moving ahead with a plan to list Bitcoin futures in the first quarter of 2019. Many people believe that along with the sustainable development of the industry, capital will certainly return to the cryptocurrency market. Based on the rapid correction process of the market compared with the internet, it may not take a long time.

Written by VirgoCX.