Are Your Children Safe With Their Toys?
December 26, 2015
Stop Companies from Charging You More Online Because of Your Online Habits
January 4, 2016
Show all

Bitcoin – The First Cryptocurrency

In layman terms, Bitcoin is known as cash for the internet. Bitcoin is a completely digital form of money and a consensus network that enables a new way for payment systems. It is powered by its users with no central authority or middlemen, thus making it the first decentralized peer-to-peer payment network.

Bitcoins-wsj

Source: Wall Street Journal

Bitcoin’s official website enlightens on the history of Bitcoin’s beginnings:

In 2009, Bitcoin specifications and proof of concept was first published in a cryptography mailing list by Satoshi Nakamoto. However, Satoshi left the project in late 2010. Although the concept of “cryptocurrency” was first illustrated by Wei Dai as early as 1998, in which Wei Dai suggested the idea of a new form of money that uses cryptography to control its creation and transactions, the Bitcoin protocol and software has since been published openly and any developer around the world can review the code or make their own modified version of the Bitcoin software. Because of this, the community has since grown exponentially with many developers working on Bitcoin, and nobody controls its network. Thus, it is self-sustaining and is controlled by all Bitcoin users around the world.

 

The mechanics of Bitcoin

How Bitcoin works is through its network which is sharing a public ledger called the “block chain”. In this ledger contains every transaction ever processed, allowing a user’s computer to verify the validity of each transaction. Through this block chain ledger, it allows a user’s computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses, allowing all users to have full control of sending Bitcoins from their own Bitcoin addresses. Moreover, anyone can process transactions using the computing power of specialized hardware and earn a reward in terms of Bitcoins for this service, which is often better known with its colloquial term “mining”.

According to Wired, Bitcoins are made at pre-set intervals whereby an algorithm releases new Bitcoins into the network: 50 every 10 minutes, with the pace halving in increments until around 2140. The automated pace is meant to warrant consistent growth of the monetary supply without interference by third parties, like a central bank, which can lead to hyperinflation.

 

Mining

bitcoin-spectrum

Source: Bitcointalk (Open image in a new tab to see a larger infographic)

Bitcoin mining is the method of spending computing power to process transaction, secure the network and keep everyone in the system corresponding together. It has been designed to be fully decentralized with miners operating in all countries and no individual having control over the network which can be perceived as a Bitcoin data centre. The term “mining” is used as an analogy to gold mining because it is also a momentary mechanism used to issue new Bitcoins. However, Bitcoin mining offers a reward in replacement for useful services required to operate a secure payment network.

Anyone can be a Bitcoin miner by means of running software with specialized hardware. Transactions broadcasted through the peer-to-peer network can be listened over the mining software and perform applicable tasks to process and confirm these transactions. Transaction fees which is paid by users for faster transaction processing is one of the reason Bitcoin miners perform this work.

In order for a new transaction to be confirmed, the transaction needs to be included in a block along with a mathematical proof of work. Such proofs are actually trying billions of calculation per second, which requires miners to perform these calculations (by cracking cryptographic puzzles) before their blocks are acknowledged by the network and before they are rewarded (the first to solve each puzzle receives 50 new bitcoins).  Bitcoins can be stored in a variety of places, from a ‘wallet’ on a desktop computer to a centralized service in the cloud. With more users starting to mine, finding a valid block will be more difficult as the network to ensure that the average time to find a block remains at 10 minutes. As such, mining is a very competitive business where no individual miner can control what is included in the block chain.

The proof of work is also intended to hinge on the previous block to force a chronological order in the block chain, which makes it increasingly problematic to reverse previous transactions, as this requires the recalculation of the proof of work of all the following blocks. Indirectly it allows mining to secure and conserve a global consensus based on processing power. Thus, Bitcoin miners will not be able to cheat by increasing their own rewards nor process fraudulent transactions that could corrupt the Bitcoin network because all Bitcoin nodes would discard any block that includes invalid data as per the rules of the Bitcoin protocol.

 

Advantages of Bitcoin

Bitcoin is transparent and neutral as the Bitcoin money supply itself is instantly available on the block chain for anyone to verify and use in real-time. As mentioned, there is no individual or organization who can control or manipulate the Bitcoin protocol because it is cryptographically secure and therefore completely neutral and transparent.

Since Bitcoin is basically a digital form of money, it is possible to send and receive Bitcoins anywhere in the world at any time thus allowing its users to be in full control. Compared to other payment methods whereby merchants would be able to force unwanted or unnoticed charges, Bitcoin users are in full control of their transactions which makes it impossible for merchants to do so. Lower fees, larger markets, and fewer administrative costs.

Besides that, payment with Bitcoins can be made without using any personal information making it a strong protection against identity theft. To add another layer of protection for Bitcoin users, they can also protect their Bitcoins with backup and encryption, enhancing its security and control benefits.

 

Disadvantages of Bitcoin

The degree of acceptance for Bitcoin is still relative low as many people are still ignorant to it, although its network has shown slow, steady growth over the last two years. Bitcoin is still considered volatile to many as the circulations and the numbers of businesses using Bitcoin are still relatively small, thus causing significant effect on the price. Investors seem to view Bitcoins more like a commodity rather than a currency. As with any commodity, what can be learned from the basic law of supply and demand is that when the demand for Bitcoin changes, so will its price. When there is a significant rush of people to acquire Bitcoin, the price increases due to the rise in demand. On the contrary, when people who already own bitcoins start to dispose of the currency at a higher rate than people are willing to acquire it, then its supply in the market increases and its price drops.

Bitcoin software is still an ongoing development and in beta stage with many unfinished features in active development. Most Bitcoin businesses are relatively new and still offer no insurance, which may discourage customers from using the currency.

 

The Bitcoin economy

The number of new Bitcoins produced each year will be routinely halved over time until Bitcoin issuance stops completely with a total of 21 million bitcoins in existence. Currently, Bitcoin miners will probably be supported entirely by numerous small transaction fees. Bitcoin mining is a very competitive business as the Bitcoin protocol is designed in such a way that new Bitcoins are produced at a fixed rate. It becomes progressively tougher to make a profit when more miners join the network and miners must seek efficiency to cut their operating cost.

Bitcoins carry value because they possess the same functions as money, and it has similar characteristics of money for instance durability, portability, scarcity, divisibility, and recognisability. Bitcoin is measured by the growing base of its users, merchants and start-ups. Value comes only and directly from people who are willing to accept Bitcoin as payment equal to other currency.

bitcoin price over time

Bitcoin price over time. (Source: Bitcoin)

 

Future

In the future, Bitcoin can completely fail or succeed, but it depends on the degree of acceptance of this cryptocurrency. Once people get over the fear of Bitcoin and come to terms with it, then people will open up to the idea of implanting the technology of Bitcoin.

Side-note:

BolehVPN was one of the first VPN providers to accept payments using Bitcoin and Dogecoin. On top of other privacy-centric digital currencies that we now accept are Dash and XEM.

 

Sources

[1] Bitcoin

[2] Wired

[3] The Economist

[4] Global News Youtube

[5] Graham Jones

Leave a Reply

Your email address will not be published. Required fields are marked *