What Is Bitcoin? How It Works?
July 4, 2021 | Watsala Shakya
Bitcoin is the pioneer in the field of digital currency. Not only has it pioneered a path for over 5,000 cryptocurrencies, but it is the best known among all cryptocurrencies. Bitcoin has been catching the headlines since it was valued at over a gain of 3200% in 2011 when its price jumped from $1 to $32 in just three months. The cryptocurrency market’s high volatility has always piqued investors’ interests as somedays profits soar, other days it does not. Although it has been a subject of many controversies it has become an acceptable means of payment in some countries. For instance, since October of 2020, PayPal, the online payment platform, has allowed its customers to buy and sell Bitcoins.
What Exactly is Bitcoin?
Bitcoin is one of a kind. It has been a challenging tradition since its existence. It is a decentralized form of currency without regulators or administrators. All currencies of the world are regulated by central banks, with the exception of cryptocurrencies that have existed for a milli-fraction of a second if the whole of human history were to be compressed to twenty-four hours. The cryptocurrency came into existence early in 2009 when its creator created this cash system under the pseudo name of Satoshi Nakamoto. Speculations have been made on why the identity of the creator is kept a secret. Some speculate it is to maintain privacy as the creator would have garnered attention from media and governments. Another reason could be safety reasons, as the creator could be threatened by governments in response to threatening existing payment and banking systems. Also as someone who possesses great amounts of bitcoins, the creator could be under threat of theft and various other harms. Exposure could prove to be fatal for the creator.
Nakamoto created bitcoin in an attempt to move further away from traditional banking systems when the whole infrastructure of banking collapsed in 2008 in the aftermath of the financial crisis of 2007-2008. While bitcoins are not the usual means of currency used for daily transactions to date, as it was intended to, it has gained momentum and has made way for other cryptocurrencies to enter the market. Currently, it’s seen as a store of value and a hedge against inflation. Its valuation could be one of the obstacles for it to be a mainstream cash system. This aspect is both the saving grace and drawback of cryptocurrencies.
The symbol “₿” denotes bitcoin, not to be confused with “฿”, which symbolizes the Thai baht. Bitcoin or ₿ were created as rewards for a process better known as “mining”. Bitcoin mining is the processing in which digital currency is circulated into the economy. It is done through advanced computers, although the process is highly costly and tedious, it appeals to a large crowd of investors. Investors are mostly attracted to it as through mining, investors can earn cryptocurrency without ever having to deposit money.
A Peek into the Past
The journey of Bitcoin started on August 18, 2008, when the domain name “bitcoin.org” was registered. Satoshi Nakamoto made the cryptocurrency public on October 31, 2008, by announcing it to the Cryptography Mailing List at Metzdowd.com. This announcement can be found on bitcoin.org under the title “Bitcoin: A Peer-to-Peer Electronic Cash System”. Peer-to-Peer technology was for the first time used by bitcoin, the technology is a network created with two or more computers connected which share resources without going through a separate server computer. This allows bitcoin miners to participate in the network in the processing of transactions on the blockchain, this provides enough motivation through rewards.
January 3rd, 2009 marked the first time the first bitcoin block was mined which is known as the genesis block or block 0. As for the proof that the block was actually mined, it has released a text.
On January 8th, 2009 bitcoin announced its first version of bitcoin software through the same Cryptography Mailing List. On January 9th of the same year, bitcoin mining commenced with Block 1 mined.
Bitcoin Bubbles
Bitcoin’s price has experienced multiple bubbles in its short history. As cryptocurrencies tend to have highly volatile markets uncertainty covers the market and to add to the uncertainties, since the cryptocurrency market is not regulated in a legal sense, problems such as scams and frauds are in circulation. This also tends to drive the valuation of bitcoin.
1. The first bitcoin bubble ever recorded was in 2011 when the bitcoin was valued at $32 from $1. By November of the same year, the price of bitcoin had reached $2. This shows the magnitude of the volatility of bitcoin. However the price of bitcoin had improved by May of the following year as prices rose to $4.8 and by august, it the price rose to $13.2.
2. The second bubble occurred in 2013 when the trading of bitcoins occurred at $13.4. During the second bubble, the price of bitcoin skyrocketed to $220 at the beginning of April of the year, and by mid of April, the price had plummeted to $70. The same year two separate bitcoin bubbles took place.
3. The third bubble occurred in October of the same year. The digital currency was trading at $123.2 but by December, the price skyrocketed to $1156.1. The hiked price was short-lived, 3 days later the price plummeted to $760. After this, the price of bitcoin faced many downturns up to the beginning of 2013 when bitcoin was valued at $315.
4. The next bubble took place between the periods of the beginning of 2017 to the end of that year. At the beginning of the year, the price of bitcoin was fluctuating at around $1000. But then, the downturn began after just two months. But things turned around for good by March 25th, 2017 the price rose to $975.7, then further rose to $20,089 by December 17th. Since December of 2017, bitcoin came into the limelight. It gained the attention of governments and economists. This also marked the beginning of the digital currency market getting competitive as others started to create cryptocurrencies to compete with bitcoin.
5. For the next two years, the price of bitcoin rose and surpassed $10,000 by June 2019. Fluctuation did take place and the price rose and fell, however, the market for bitcoin remained and flourished. But with the onset of the Covid-19 pandemic, the global economy came to a halt. With this, the price of Bitcoin rose from $7,200 at the beginning of 2020 to $18,353 by November 23. The cause of the rise in price has been due to stimulus made by government policies. By the end of 2020, the value of bitcoin was $24,000.
6. On January 8th, 2021, the bitcoin price reached a new peak. Bitcoin was valued at $41,528. However, this price did not last long, three days, the price stood at $30,525.39.
7. Bitcoin reached its new peak in April 2021 where it traded above $63,000. After that, the price has fallen substantially and is currently trading at around $35,000.
By analyzing the price bubbles of bitcoin, we get a picture of the cycle structure. Since bitcoin is relatively new, these previous trends or cycles can help to predict and make investments.
How Bitcoin Works?
Bitcoin was created to serve the purpose of a wallet. In essence, it is supposed to be a computer file that stores digital currency. It is quite similar to digital wallets or phone apps we use such as Khalti, Fonepay, eSewa, and various bank mobile apps. But with bitcoin, we use cryptocurrency to purchase and sell daily necessities instead of our traditional currencies that are regulated by the monetary authorities of each existing economy. When using traditional currencies these authorities monitor the spending but, bitcoin uses blockchain to trace transactions.
Bitcoin transactions are confirmed by a network of computers and are recorded in a kind of ledger called a blockchain. Blockchain is a revolutionary system that is said to be the next big thing after the internet. To explain the blockchain, it links a body of data that is made up of units that contain information about each and every transaction including date and time, buyer and seller, and an identification code, which is called blocks. The entries of each of the transactions are put together in chronological order.
Today, bitcoin mining has been made available. It is essentially the process used to add new transactions to the bitcoin blockchain. But, it is a choice. Those who choose to mine bitcoin using a process that organizes computers to solve mathematical problems that verify transactions in a process called “proof of work”. Those who choose to mine, or miner, are rewarded new bitcoins. Mining requires powerful computers to solve puzzles that get even more challenging with time and requires more resources as time progresses.
With these processes, individuals can gain access to more bitcoins. This may seem intimidating to those without much coding knowledge. However, bitcoins are also alternate forms of investing. Individuals can gain access to bitcoins through investments. Bitcoins are viewed as stocks and bonds that diversify portfolios. They are a store of value for now and in the near future, it may be a new form of cash transaction. Since bitcoins lack regulations, tax implications on bitcoin investments are something to be aware of, as Nepal currently bans bitcoin and other cryptocurrencies legally, legal implications must also be taken into consideration.
From The Author: Cryptocurrency: A Vision Into The Future Of Finance
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