What’s a Bitcoin?
Published on: 11 Apr 10:07
If you’ve heard of anything related to cryptocurrency, it’s the word Bitcoin, which has become synonymous with cryptocurrency since bitcoin was the first cryptocurrency to come into existence. However, since then there has been more digital currencies come into existence, such as Litecoin, Ethereum, and Zcash. cDuel offers the best cryptocurrency trading simulator online. Learn cryptocurrency trading in a safe, fun environment, risk-free. Sign up today! Below, we’ll go into detail about the history of the Bitcoin.
HISTORY OF BITCOIN
Bitcoin is a cryptocurrency with inauspicious beginnings. A cryptocurrency in its simplest definition is a digital currency with no overarching authority and uses cryptography as security). Bitcoin was the first blockchain (decentralized, distributed ledger that consists of cryptocurrency transactions) in the world. It was invented by an anonymous group of people, using the name Satoshi Nakamoto. Essentially, it was a blog post — a white paper that was published on the internet in 2008.
Only nine pages long, Bitcoin was described as a peer-to-peer electronic cash system. It’s a borderless currency and does not require any central monetary authority, which is what most other currencies operate under. Banks, or government mint actual physical money units, and the system only works because of that authority. If that authority were to shut down or cease to operate, the whole financial system would collapse. The advantage of Bitcoin and having no centralized authority is it will always exist as long as there are traders.
The first question that arose was how would this digital currency be secured without an overarching authority. This problem was solved by the invention of the blockchain. A blockchain is the system to record and validate ledgers that record the transactions. It is maintained and validated by everyone in the network. The database of transactions is in the public domain, available for viewing by anyone. This not only ensures no transactions are lost, but it also allows you yourself can verify transactions.
A block stores a sequence of transactions and a sequence of blocks is called a blockchain. Each block is identified by its hash, and a cryptographic algorithm secures the data and prevents double spending, which is when you spend money you don’t have.
Mining is when new blocks are generated. This is done through solving hashes, which takes a specialized mining rig (thin computer set up basically) of computing power. A hash is basically taking a large amount of data and shrinking it into a fixed length. Bitcoin uses the SHA-256 hash algorithm to generate its numbers.
Miners are those who generate the new blocks are rewarded Bitcoins for creating the blocks. This is the only way new bitcoins can be created. Anyone can be a miner and a new block is generated about every 10 minutes.
However, to have a block you have to have a first block. Enter the Genesis block, the founding Bitcoin blockchain coded by the inventors in 2009. A Genesis block is hardcoded and is needed to start every blockchain.
It took 10 months for the Bitcoin to be rated against the US dollar, which at time $1 equalled 2300 BTC (Bitcoins). Then, the first physical transaction occurred when a programmer offered BTC for pizzas. The offer was accepted and has thus become a reference point at to what exactly Bitcoin will be able to do in the future.
Like all physical currencies, Bitcoin has had its ups and downs in value. It’s been valued on par with the US dollar and with an ounce of gold at over $1000, and it’s had a range between those ever since its inception.
Microsoft began accepting Bitcoin payments in 2014, helping to garner its acceptance as a legitimate currency. The famous Economist magazine even featured Bitcoin on its cover in 2015.
Bitcoin cash came about in 2017 and Bitcoin has seen a bullish market, passing the $10,000 mark at the end of 2017.
There’s been somewhat of a push-back on Bitcoin with China banning ICOs and cryptocurrency exchanges as well as Facebook. However, the SEC (Securities and Exchange Commission) looks positively on Bitcoin and promised to help protect investors from the volatility and risks of ICO funding, which helps to legitimize Bitcoin even further. Twitter and Google banned cryptocurrency advertising, and 2018 saw the SEC reject nine Bitcoin ETF proposals due to concerns of “inadequate resistance to price manipulation.” An ETF is an exchange traded fund, which are investment vehicles that allow potential investors to test a given market without the risk of actually buying into it. They are classified as securities and track movements of the investment without having to buy the investment directly.
HOW DO YOU TRADE BITCOINS?
- You have to have an account to trade bitcoins. You can generate an account by having cryptographic key pair, which is a public key and a private key. A hash of the public key is your account address and the private key proves you own that account. Private keys should never be shared as whoever has the key has access to your wallet and all the cryptocurrency in that wallet.
- Next you’ll have to procure Bitcoin. This can be obtained by a friend you know or from someone else whom you trust in the system.
- To send a Bitcoin, you would broadcast the transaction to the Bitcoin network that included the amount and the destination account. You use your private key to sign the transaction (much like a signature of withdrawal in a real bank) to prove you are an authorized user of the account.
- Miners will verify your transaction is correctly formatted. Your transaction will be shared in the database by the nodes. Your transaction is unconfirmed until a miner includes your transaction in a new block. This finalizes and confirms your transaction. The more blocks that are mined after your transaction, the more secure your transaction is considered. This is because a certain amount of computation power is required to create blocks. A proof of work algorithm is required, which takes about 10 minutes to solve.
PROBLEMS BITCOIN NEEDS TO OVERCOME IN ORDER TO GROW
- Current transaction processing time is 7 transactions per second. Visa processes thousands of transactions in a second.
- Block sizes are limited to 1 MB, which limits the number of transactions that can be included in a block, which delays processing time and drives up transaction fees.
- A miner’s computation power is a limited factor as well, due to the processing power needed. Sharding is where nodes only have partial copies of a blockchain, which helps to increase consensus speeds and network performance.
- Barriers to entry. Setting up an account on a cryptocurrency exchange can be difficult, with the need to set up a wallet and keep it secure. A Bitcoin-based ETF could give investors a good exposure to Bitcoin in a regulated environment. The challenge to setting this up is the SEC, which has regulatory authority over ETFs since they are classified as a security — ironic since the whole point of cryptocurrency is to be unregulated.
Efforts are underway to increase the size of the block; however, the majority of miners on the Bitcoin network have to agree to the changes ahead of time. As you can imagine, this can be a difficult process.
LEGACY OF BITCOIN
Once Bitcoin was created, other cryptocurrencies came about using the open source coins, such as Namecoin and Litecoin. Currently, these number in the thousands and has spawned many more blockchain projects as well. These new models wanted to know if they could create a digital platform that represented something else, such as property, instead of currency. Their problem was creating their own blockchains since Bitcoin was not set up to do so.
Bitcoin has challenged the way society thinks about finance and banking and while it’s had its ups and downs, Bitcoin still remains highly valued with enormous potential.
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