Bitcoin is the world’s most recognized cryptocurrency. For those who don’t know, a cryptocurrency is a digital currency that uses encrypted transactions. Bitcoin was developed by Satoshi Nakamoto, and its initial public release was in 2009. Since then, Bitcoin has been the pioneering digital currency of this industry and remains the most traded cryptocurrency in circulation. If you consider trading this electronic cash or simply want to buy Bitcoin, we have gathered 5 main things that you need to know about Bitcoin:
1. Bitcoin uses a decentralized p2p network
Traditional currency is controlled by a central authority, such as a government or financial institutions. Bitcoin is entirely decentralized and, therefore, has no centralized control. Bitcoin uses a p2p network to facilitate transactions. When a transaction is made, users connect with each other and not through a central network. The different users within the Bitcoin network are known as nodes, and this distributed system of nodes allows for the underlying Blockchain technology to operate. This decentralized nature helps to prevent “double spending” and also allows for smaller transaction fees.
2. The monetary value of Bitcoin can fluctuate vastly
Unlike traditional currency, the value of Bitcoin has fluctuated wildly since its initial release. Traditional currencies, such as USD, GBP and EUR, may fluctuate over time by a small percentage. This change in value is usually attributed to economic changes or government involvement within a particular country. As Bitcoin is decentralized, it is not affected in the same way.
To that end, since its initial release, the price of Bitcoin has risen astronomically. For example, in 2010, the value of a single Bitcoin was just $0.06 in comparison to today’s value of $7,641.45. As previously mentioned, Bitcoin has been known to fluctuate – in December 2017 Bitcoin rose to an unprecedented value of $20,089, and then dropped to $9,486 in April 2018.
But why does the price of Bitcoin fluctuate so wildly? There are many contributing factors. Firstly, Bitcoin receives bad press coverage, and many influential people have a negative attitude to this cryptocurrency. This can negatively affect the value of Bitcoin as investor confidence will inevitably plummet. Additionally, there are few options available to holders of large sums of Bitcoins. Those with $10m or more invested in Bitcoin will not have a clear escape route should they want to liquidate their Bitcoin into fiat currency. This factor can further deter large investors and inhibit the growth and price of Bitcoin.
3. There is a finite number of Bitcoin that can ever exist
Most people don’t know that only 21 million Bitcoins will ever exist in circulation. This number is finite and will never be exceeded. 21 million has been chosen as Bitcoin is often compared to gold. The figure could have easily been 16 million or another random number, but this is what Satoshi Nakamoto settled on when developing Bitcoin.
In practical terms, this total number has been chosen to help provide a consistent and manageable circulation. New Bitcoins enter into circulation in an orderly way, and the market cannot suddenly be flooded with Bitcoin causing a crash. Furthermore, it adds some form of structure to the otherwise decentralized currency.
4. Bitcoin transactions are immutable
Due to the way Bitcoin works, all Bitcoin transactions are immutable, i.e. they cannot be refuted or reversed. A record of each Bitcoin transaction exists on the public Bitcoin ledger and can be viewed by anyone. As there is no centralized control, there is no person or body who can say “right, that transaction is invalid and needs to be reversed!” – Once a Bitcoin transaction is processed, that is it.
The underlying technology behind Bitcoin is Blockchain technology – this is the main reason why Bitcoin transactions are immutable. Blockchain technology involves adding blocks of information (i.e. Bitcoin transaction details) into an existing chain. When this information is transferred, it is encrypted using a private and public key pair – this essentially means that your data is unreadable unless someone has the public key. That same data is then validated using the problem-solving process involved in Bitcoin mining. It is this combination of encryption, problem solving, and the decentralized Bitcoin network that makes the transactions immutable.
5. Bitcoin is generated through a mining process
Traditional currency is circulated via a government organization such as the US Mint. Money is printed and circulated in a controlled manner depending on the current economic climate. This method provides control and can prevent occurrences such as hyperinflation, where a currency effectively becomes worthless.
Bitcoin, on the other hand, is mined. This mining process involves solving complex math problems using high-powered computer rigs. The miners receive rewards in the form of new Bitcoins. This mining process is also used to validate Bitcoin transactions, therefore, is vital to the currency existence and continuation.
Rewards for mining are reduced on a pre-determined basis, and the difficulty of the math problems is also increasing periodically. This ensures that Bitcoins enter into circulation in a consistent manner and that the miners continue to have a purpose to mine (i.e. the monetary Bitcoin reward). If there was no such increase in difficulty or reduction in reward, all 21 million Bitcoins would have already been issued, and miners would have little incentive to continue mining – this could, in turn, destabilize the whole Bitcoin network and ledger.
One final point to mention about mining is that there are concerns over the power usage required to complete the process. As mentioned above, Bitcoin mining requires specialized computer rigs – these rigs run 24/7 and consume a large amount of electricity. If you consider investing in a mining setup, you could outsource it to a third party or engage in cloud mining to avoid the hefty electricity bill.
Hopefully, you have a clearer understanding of the intricacies of Bitcoin and can now make an informed decision about investing or trading.