This month you may have noticed a lot of buzz surrounding Bitcoin. As of last week, a single Bitcoin has surpassed $10,000 USD in value. This is the highest Bitcoin has ever been valued, and it’s market cap has even passed value of The Bank of America at over $300 Billion! So what is this magical Bitcoin and how do we get some? I think most people have at least a very basic understanding of Bitcoin, that it is a form of digital currency that people over the internet use, and that it’s become very popular. But there is so much more behind the scenes of this cryptocurrency revolution. To understand what’s happening, we’ll need to have an understanding of 2 things: Bitcoins (Cryptocurrency) and Blockchains (Transactions).
Bitcoin is essentially digital currency. It was created to allow vendors and merchants to exchange currency without the use of a centralized bank. Because Bitcoin is digital, you can buy whole Bitcoins, or you can trade in smaller fractions. One Hundred Millionth (0.00000001) of a Bitcoin is called a satoshi, which is interestingly enough the name of the mysterious creator.
Bitcoin was created by a mysterious person using the name Satoshi Nakamoto, although the true identify of it’s creator still remains a mystery. Nakamoto theorized that a system could be put in place that allowed 2 parties to exchange currency without the need of a 3rd party for verification. The downfall to this system in the past has always been the problem of double spending (making sure payments are actually sent and ensuring they are not revoked fraudulently). Currently, our banking system acts as the 3rd party, solving the problem of double spending by recording all transactions into an electronic ledger. The problem with our current method is that the bank controls all the details of the ledger, and there is no accountability or transparency into that ledger. If a bank decided to withdraw funds from your account, you would have no way of proving they had done so, as they control the list of all transactions. This system is problematic and is the cause of much fraud and corruption in the upper echelons of banking institutions. Nakamoto suggested a system in which a ledger is kept by everyone who has an account, and that if there was ever any dispute over the validity of a transaction, the copies of the ledger can be used to course correct. The management of transactions and the storing of information in this fashion is whats known as a Blockchain.
Blockchain is the name of a new technology of distributed information. It’s name is quite literal, as the core concept of a Blockchain revolves around the idea of blocks of information which are chained together. Blockchains have many proposed uses, but for the purposes of this blog post, I’ll explain how Blockchain stores Bitcoin transactions. When a transaction occurs, let’s say you pay your sister .0005 Bitcoin, that transaction and others occurring around the same time chronologically are grouped into a block of information. That block is then added onto the existing chain of blocks in chronological order. Each block in the chain points to the block before it, and the block after. If you visualized this, it would be much like a long rope knotted rope, with each knot representing a block. Since the Blockchain is stored chronologically, you would be able to follow the chain all the way to the very first transaction. To make sure that Block data is secured and cannot be compromised, each block is verified with a complication mathematical computation. These computations are performed by computers known as “Bitcoin Miners”. Anybody with a powerful computer can become a miner. Because solving these computations becomes more and more complicated, thus taking more time and energy, the reward for completing a computation is a Bitcoin. Now that Bitcoin has become so popular, millions and millions of computers are competing to solve the computations, and it is very very difficult to mine any Bitcoins without a very expensive and powerful mining rig. While popularized in the use of cryptocurrency, Blockchain technology actually extends much further. Blockchains are being developed for many other interesting purposes like medical records, cloud computing, and eCommerce for example.
Bitcoin is the most well known and valuable type of cryptocurrency, but it is definitely not the only. While Bitcoin is currently very valuable, it does have it’s own pitfalls. For instance, Bitcoin uses a very complicated computation system that results in a finite amount of possible coins. It is estimated that by 2020-2021, the last Bitcoin will be mined capping the currency off at approximately 21 million Bitcoins. Other criticisms have come in the form of security concerns, fees, and transaction speed. This has led to the creation of hundreds of other coins, each with their own advantages, disadvantages and values. All of these coins can now be publicly traded on various marketplaces, creating the opportunity for very volatile, but potentially very lucrative investment opportunities. Bitcoin for instance, was valued at approximately $742 USD/coin a year ago today, and has now grown to roughly $9,788 UDS/coin (that’s an increase of over 1200%!). While these results have been amazing, its just as likely that Bitcoin could have been worth pennies today. If you’re going to enter the cryptocurrency market, please do a lot of research and understand that the market is extremely volatile. In a matter of days a coin can triple its value or completely disappear. I hope that you know have a better understanding of the Bitcoin phenomenon, and if you have any further questions or concerns, please comment or drop me a message.