If you have limited knowledge about cryptocurrency, don’t worry. Here’s the Guide To Know Everything About Bitcoin.
Who made Bitcoin?
No one knows for sure. The open-source code used to run it appeared under the name Satoshi Nakamoto, but so far, the identity behind the name was never revealed. Every couple of years, someone either claims to be Nakamoto or the media finds someone who could be him. This even included a completely random person who just happened to be named Nakamoto – great job there, intrepid journalists! Thanks to the odd shroud of mystery about its origins, there are many theories on how Bitcoin came about, including those that claim it was created by a group of people or even entire organizations. Also, conspiracy theories are numerous about this issue so if you think the CIA or the Illuminati made it, you’re not the only one. One thing is true – since it started working in 2009, the same network did not have a single day when it has not been working. In other words, whoever made it, did know what he, she, it, or they were doing.
The Basic Elements of Bitcoin
In its essence, Bitcoin is a peer-to-peer network that acts as a decentralized and distributed ledger that employs a mathematical system of rewarding its network members with digital tokens. Naturally, this sounds incredibly complicated for anyone who is not a cryptocurrency programmer. However, the same definition actually holds a simple explanation behind each element. Let us examine it one by one.
Peer-to-Peer Network
First, peer-to-peer means that users who run the source code of the network, which is completely free and open, make up the Bitcoin system. This code was created using the blockchain technology principles, which allows for any data to be split into infinitely small amounts that are then stored across a network. No central entity is used for data storing and all the nodes process all of the changes in data states. In any cryptocurrency, the data states are transactions – who has what and what is being sent where. At the same time, any bit of data is coded to be unique, so there is no chance of digital information being copied like a regular digital database (this is very important). Also, similar to Bitcoin’s take on certain points of data storage, it does not have a central point of data processing, like for example, a bank would have for its transactions. A special cryptographic process is used to secure the same elements so they cannot be manipulated or multiplied. This is the reason why Bitcoin is called a cryptocurrency and why each individual Bitcoin token is unique.
Distributed Ledger
Further on, understanding Bitcoin includes the part about the decentralized distributed ledger. This means that the network acts as a traditional banking ledger, which is used to note all of the transactions. For example, member X of the network gives member Y one token of BTC (the name of the traded Bitcoin token). This transaction is checked by all members of the networks and confirmed, in the sense that no one is cheating in any way, like if member X did not have that one token, but still pretended to give it out to Y. This ledger remembers and saves all transactions and all of its validations are completed by everyone in the network – this is the reason why it is fully distributed.
This also means that any node can exit the network and Bitcoin would keep on functioning without any loss of old data.
Reward Process of the Bitcoin Network
Finally, there is the reward part. For the network to function, it has to use so-called hashing power or simply put computers that use their processing power to run all those checks and transaction recordings. Of course, this computing process takes up energy. To give the people who run these computers an incentive to stay on board, the network was designed to run a mathematical process along with the basic transaction checking procedure. This process from time to time provides the owner of a computer in the network with a Bitcoin token (BTC) as a reward for the energy and effort they put into the maintenance of the system. Individuals and companies who run these computers are called miners and the production of new Bitcoin tokens is called mining.
Mining is a complex process as is the network’s mechanism of providing reward tokens – as time goes by and more and more BTC tokens are mined, the mining mathematical formula becomes more and more difficult. The reason for this is the so-called token cap, which limits the complete number of BTC that can be mined. This limit is at 21 million and as of May 2018, 81.26% of all BTC tokens have been mined. I know, all of this is complicated and hard to equate with other processes in the financial world. But the essentials are this – miners give their energy and computing power and in return, the network periodically rewards them to cover their costs and still provide a profit (at least in theory).
Value of Bitcoin
The tradable value of the network comes in the form of Bitcoin tokens, called BTC for short. They are offered on the cryptocurrency exchanges. Being that these tokens are unique and finite in their number, which is predefined in the core code, they have value to them. You cannot take a Bitcoin token and copy it like you would a Word file, for example. One of the miniature revolutions inside of the greater blockchain revolution is the easy creation of unique digital data. This way, it can act just like money, in the sense that one US dollar bill is worth something for everyone who accepts it as a valid currency. The bill is worth more than paper, unlike, for example, an ordinary sheet of paper – it represents stored value. A regular sheet of paper is worth nothing. A blank Word document that anyone can copy, multiply and send to other people is basically the same. However, if the same sheet has a dollar bill printed on it by the US Treasury, it is worth something.
But, if a blank sheet of paper has an autograph of a celebrity, it is suddenly worth a lot more than a single dollar. The same applies to the issue of the Bitcoin value – it is dictated by three factors. By having a limited number, uniqueness which stops people from counterfeiting them and some people who want to have them, Bitcoins can immediately be traded. However, the key point is that the long-term value of the network is reflected in the fact that miners are leveraging their energy, mining computers, and effort into the network. If you want to find a single element that is the underlying value of Bitcoin (unrelated to the day-to-day changes in BTC value) it would be that energy expenditure. This is the key fact why Bitcoin is not created out of thin air. As long as the energy is being spent by miners to keep the network running, Bitcoin will continue to exist and have – at least some – value.
Trading Bitcoin and its Price
The issue of trading BTC and its price is one of the essential dilemmas of the question of what is Bitcoin. Because Bitcoin is decentralized and under no external regulation, its tokens can be traded in a completely free market. This means its price is defined by the supply and demand factors – in many ways, it’s a libertarian’s dream, because only the market currents and movements impact its worth. When the network started to operate, the first mined Bitcoins were valued at mere cents. For example, on September 30th, 2010, you could buy a single Bitcoin for $0.06. Then, over time, they slowly rose in value to a couple of dollars – that was back when only a few people wanted them. Yet, those couple people were still a huge jump from what the Bitcoin investors had to pay to get them in late 2010.
On September 26th, 2011, one BTC was going for $4.93. Peanuts by today’s standards, but a galaxy away from $0.06. At that point, the phenomenon was gaining traction and the wider public, at least tech-oriented among them, started paying attention. As the network became more and more popular, the demand soared while the supply remained generally the same, or at least it did not grow at that rate. Naturally, the price shot up and in a couple of years, it reached the staggering level of $20,000 seen at the end of 2017. Yet, the same price can easily crash by more than 10 or more percent, as it did several times since 2009. What’s even worse is the fact that it can do this in a single afternoon thanks to the Bitcoin level of volatility.
The Stability of Bitcoin
Volatility is a factor that impacts all currencies, both digital and regular ones. Some might be more stable while others are not, but all change in value regularly. However, in the case of Bitcoin and any other cryptocurrency, volatility is a lot more significant, with frequent drops in value that would make regular markets crash immediately and send traders to their doom. By being completely unregulated, crypto markets are influenced only by the trading activity on them. This regularly leads to drops in value that seem catastrophic. Yet, in the case of Bitcoin, these crashes are a part of the normal way the network functions.
It is the reason why so many are inclined to prophecies that the network will disintegrate, but so far, it has survived many huge price crashes and continued to gain in value long-term. At the same time, saying that cryptocurrency is not volatile would be complete madness. When it comes to day-to-day trading, it is still one of the most unpredictable assets around. That is why the volatility factor should always be perceived as something that the investors have to work with, instead of counting on it or being shocked by it. The same goes for being too fascinated and enthralled with the volatility – in that case, you’re better suited to be a crypto trader than an investor. But, if you might be a person who is horrified by the same level of volatility, you should not be considering a crypto investment in any shape or form.
