Bitcoin is again in the news, making waves as it just created a new all-time high of approximately $25,000 US this month. Everyone seems to be talking about it. The digital token has shook the traditional banking system with major financial institutions acknowledging its potential. But for many people around the world, Bitcoin is still a mystery.
Let’s look at what it actually is and what makes it so popular.
All Hail Satoshi
In the last days of October 2008, a paper, entitled, Bitcoin: A Peer-to-Peer Electronic Cash System was published online. The paper listed the author’s name as Satoshi Nakamoto a pseudonym. The paper described Bitcoin as a digital coin that would be created mining, a process of solving complex calculations, a process similar to spending effort to extract precious metals from ground. Satoshi mined the first Bitcoin, the genesis block, next year, on 3rd January, 2009.
During its first year of existence, Bitcoin was mined and exchanged by a core group of people, with no practical applications. In 2010, Nakamoto handed over the Bitcoin control to Gavin Andersen who became the lead developer of the Bitcoin Foundation. Satoshi has since then never made an appearance online and no one knows who he or she is- or even if the developer was not a single person, but a group.
When Satoshi mined the genesis block, he wrote a very specific news line, The Times 03/Jan/2009 Chancellor on brink of second bailout for banks. This and his reasoning in the whitepaper reflects the deep resentment he had for the current financial system. Using a technology he developed (Blockchain), each transactions is validated by miners and written into a block, or a file. After roughly every 10 minutes, a new block is mined, which is connected to the previous block through cryptography. This forms a chain of blocks, or blockchain.
The way blockchain is designed, there is no singular authority that controls Bitcoin. The blockchain and its transactions are validated by the miners who have the complete copy of the record. The miners are incentivised through rewarding them with new Bitcoins for every block they successfully mine, and through paying them a network fee for every transaction they validate. Through this, the need for a central authority is eliminated. There’s no middleman like a bank that will take the money, store it or be the one that sends it to a recipient. This decentralization is at the core of the Bitcoin concept.
Another thing that differentiates Bitcoin (and most of subsequent cryptocurrencies) is its deflationary nature. Unlike traditional money, which central banks can print and create as much as they want, Bitcoin has a hard coded limit of 21 million coins only. This means there can never be any more coins created.
Secondly, as more and more miners join the network, the mathematical complexity and competition increases, making it harder to successfully mine a block. This increasing mining difficulty creates an intrinsic value as more energy is spent by miners. Another activity, called halving essentially cutes down on the amount of Bitcoin reward per block by half roughly every four years.
The most basic economic theory of supply demands holds true here. The limited supply, increased efforts required for mining and the decreasing mining quantity means there is an increasing demand, but a dwindling supply. Instead of an inflation, where more currency notes are injected in the economy, the lowering supply leads to deflation and an increased value.
Today, there are more than 18.5 million Bitcoin mined, leaving less than 2.5 million coins to be mined. As of 2020 only 6.25 Bitcoin are rewarded for every block. The remaining Bitcoin may not seem a lot, but the decreasing supply means that the last Bitcoin will be mined somewhere around 2140.
Real Life Applications
Today, thousands of businesses all over the world accept Bitcoin as a means of payment. From small enterprises to large businesses such as Microsoft, Wikipedia and even AT&T. A survey by HSB shows that almost 36% of small and medium level enterprises in the US accept Bitcoin. If you are interest in finding out where you can spend Bitcoin in the UK, check out this updated list.
The most used application for Bitcoin is as a store of value. There are online crypto exchanges that allow people to buy and sell Bitcoin just like a securities or Forex exchange. Traders use the price volatility to buy low and sell high to make profits.
Over the years of its existence, many financial experts and economists have spoken in favour and against Bitcoin. The fact is that it has made its mark and is here to stay.