In recent years there has been a lot of talk about a virtual cryptocurrency called Bitcoin. But what is Bitcoin? How does it work? Let’s go to answer these questions.
Bitcoin is a cryptocurrency – a virtual currency that works through cryptography – created in 2008 by an anonymous inventor called Satoshi Nakamoto. The technology behind Bitcoin makes it possible fast, anonymous, and secure money transfers.
We’ll see in this article: – What is bitcoin. – How it works. – Its history. – Its future prospects.
What is Bitcoin?
Bitcoin is a system that allows money transfer from one user to another extremely fast and, at the same time, freely and independently from the control of banks and governments. This is thanks to Blockchain technology, introduced in 2008 by the anonymous inventor Satoshi Nakamoto. In this way, Bitcoin makes possible a greater freedom for people, who can freely transfer money without being subject to any restrictions. It is the first of many other similar “cryptocurrencies“
How does Bitcoin work?
Transactions executed through Bitcoin are stored on a virtual register called “Blockchain”, which is composed of many “blocks”. Each block collects a certain amount of transactions between users and is then added to the other blocks, thus creating a “chain of blocks”. The authenticity of the transactions is validated by some individuals called “miners”, who use their own computing power to “extract” (through encryption) the blocks in which to insert the transactions. In return for their work, miners are rewarded with a small number of Bitcoins generated at each block. The new Bitcoins generated for miners represent the total number of existing Bitcoins. Every 4 years, the number of new bitcoins generated per block is halved until, in the future, it will reach a maximum of 21 million bitcoins (17 million today). It is the so called “halving”. That’s a big point: Bitcoin is a “limited” good available in limited quantities like gold. If it were to be used by many people, its price would inevitably rise, making it an interesting investment. A block is usually generated every 10 minutes, so, to see your transaction added to the blockchain (and then confirmed) you usually have to wait around 10 minutes. There is always some variability depending on the number of active miners – it can be 8 or 12 minutes.
What is the history of Bitcoin and its evolution?
The story of Bitcoin begins on October 31, 2008, when the introductory white paper “Bitcoin: a peer-to-peer electronic cash system“, was published. This document describes how it works and its purpose: to make possible a system of secure online transactions free from any form of control.
A few weeks later, on January 3, 2009, the first Bitcoin block was mined. In the following days, the first version of the program is released for those who wanted to execute transactions and/or contribute to the maintenance of the network. In the following years, the Bitcoin price increased exponentially. Initially, Bitcoins were exchanged privately between users, but in 2010 the first Bitcoin exchange was born. They are legit platforms where you can sell or buy Bitcoins. Since then, the price grew exponentially, despite some temporary collapse, reaching an all-time high of $20,000 per Bitcoin on December 17, 2017. In the following months, Bitcoin market price decreased, remaining anyway above 50 billion of capitalization. Meanwhile, in recent years, the use of Bitcoin to execute transactions has increased: to date, about 280 thousand transactions per day are made using Bitcoin for payments or transfers of value. Following Bitcoin, other cryptocurrencies and many business realities of all kinds were born, creating a new market in continuous expansion. The total capitalization of all crypto market exceeded 800 billion dollars at the beginning of January 2018, although market price decreased in the following months. These huge spikes were also boosted by low liquidity (see HERE for mor technical expanation). We have also seen a greater adoption of BTC in finance, for example with the proposal to create Bitcoin Futures (approved) and Bitcoin ETF, that would be incredibly importantfor this market.
What are the future perspectives for Bitcoin evolution and price?
The purpose of Bitcoin is to become a currency used by everyone, replacing the so-called “fiat” currencies (dollars, euros, pounds, etc.). Even if ten years after its creation Bitcoin is used to execute 200-300 thousand transactions per day, there are still some problems to solve in order to achieve global adoption:
1) Bitcoin price today is highly volatile. Its value may vary by more than 10% in 24 hours: too much for everyday business. Bitcoin today is very interesting for speculation, but it’s too unstable for everyday use. Some people think that if Bitcoin was used by a large number of people, its price would be more stable. But until it stabilizes, it won’t be used by millions of people: an extremely difficult puzzle to solve.
2) It requires a lot of storage to handle all transactions! Bitcoin transactions are collected in “blocks”. Today each block can contain up to 3000 transactions. Assuming that 6 blocks per hour are mined (one every 10 minutes), this means 18000 transactions per hour, i.e. 18000 x 24 = 432000 transactions per day. It would take at least 1000 times more to cover the needs of all the people in the world. The problem of how to “scale” the bitcoin blockchain to meet this need has led to internal conflicts and endless debates; several solutions have been activated, but for the moment they are not yet ready. This is the so-called “scaling problem”.
3) In the future, fewer and fewer Bitcoins will be generated, providing lower incentives for miners to keep the network safe. In case of price increase, there would be no problem. The same goes for increasing transactions: in this case, a very small fee on each transaction would be enough as compensation for miners. However, although it doesn’t cause much concern now, this will become a rather critical issue in the coming years.
Besides, there are several organizations (so-called “pools”) that collect miners. In the future, miners could decide to join forces and create a monopoly, even if this scenario is unlikely: in this scenario, the trust in bitcoin would collapse and so the price, damaging them and making all their investments in computational power useless. Graphic cards used for Bitcoin mining, ASICs, are useless if not used to mine cryptocurrency.
4) It is potentially vulnerable to attacks to exchanges. Today the Bitcoin market relies on exchanges. These platforms are legal and often supervised by governments; moreover, they are connected to the banking system to manage clients’ money. If there was no cooperation from banks or governments, the exchanges would be forced to close, destroying the market. Without exchanges to connect all users, bitcoin price would be much more uncertain and it would be really difficult to use it for transactions.
Also, consider that there are other cryptocurrencies, the so-called “altcoins”, which use their own blockchain and compete with bitcoin, taking away users and market share. Bitcoin is today the most adopted cryptocurrency, it is the first for market share and developers, but in the future, the situation could change.
How can I buy and invest in Bitcoin?
The most common way to buy cryptocurrencies is to deposit money on an Exchange that accepts bank transfer or credit card. An Exchange is an online platform dedicated to the trade of cryptocurrencies, including fiat currency (e.g. Euros, Dollars, etc.). Below there’s a list of the main exchanges used to purchase cryptocurrency. These exchanges require identity verification:
– COINBASE allows deposits via Visa or Mastercard, SEPA Bank Transfer or International Bank Transfer; – BINANCE JERSEY allows deposits via SEPA Bank Transfer or International Bank Transfer; – BITSTAMP allows deposits via Visa or Mastercard, SEPA Bank Transfer or International Bank Transfer; – KRAKEN allows deposits via SEPA Bank Transfer or International Bank Transfer;
Warning: 1) When registering on an Exchange, remember to activate the 2-Factor Authentication (2FA), keeping the relevant data such as QR Code with the utmost care, in addition to the access password. 2) You have to pay attention to websites and platforms like IQoption and Plus500. They look like exchanges but they aren’t. They don’t sell cryptocurrencies, but financial instruments called CFDs that replicate the trend of cryptocurrencies. Buying CFDs exposes you to higher purchase costs for lower guarantees. Besides, many brokers close during the weekend while the above-mentioned exchanges are always open.
How can I store Bitcoins?
The technology behind Bitcoin is designed to be free from any external control. Your funds in Bitcoin or other cryptocurrencies are all yours and, if properly secured, no one can ever confiscate them! Now let’s explain how security works in the Bitcoin world. Each coin you own is connected to a certain “address” on the network. A virtual wallet, where you can store your bitcoins, is linked to any of these addresses.
The wallet functionality is based on encryption, that consists of two security keys: – a private key, to be carefully kept secret; – a public key, related to the private key, which is visible to everyone in the form of an alphanumeric address and is used for transfers (for example, John sends from his wallet 1 Bitcoin to Frank’s wallet, through knowing John’s public key).
There’s a wide variety of wallets, both online and on desktops or other devices. For simplicity, we divide wallets into two groups: Exchange Wallets and Personal Wallets.
Which wallet to choose?
The answer is: it depends. If security is your first goal, you should opt for a personal wallet, of which only you know the private key. There are many solutions to create your own personal Wallet, especially to store Bitcoin or Ethereum and other cryptocurrencies.
Below we list the most reliable wallets currently available: – ELECTRUM for Bitcoin only; on Windows and Android devices – COINOMI for Bitcoin and all other cryptocurrencies; on all kind of computers and smartphones – EXODUS for Bitcoin and many other cryptocurrencies; on all kind of computers and smartphones.
For the hardware wallets you can refer to this shortlist: – LEDGER – TREZOR
Important SAFETY precautions for all personal wallets: When creating a new wallet it’s of crucial importance to annotate the series of 12 words (Seed) released by the application. This list of words corresponds to a long code (private key) that will allow you to reclaim the funds stored in that wallet. Keep the 12-word Seed with the utmost care!!