Bitcoin Explained
What is Bitcoin?
Bitcoin, often referred to as a cryptocurrency, a digital currency, a virtual currency, or an electronic currency, is a type of decentralized virtual money existing on the internet without physical form. By “decentralized” we mean it does not exist in only one (or even a few) central location/s. There is no one person or organization that controls it. It runs across and is verified by a network of computers that exist all around the world. A change on one computer would have to be verified and updated across all the computers on the network for it to be valid.
Bitcoin is created, dispensed, exchanged, verified, and stored on this decentralized public ledger system, called a blockchain. The blockchain records all bitcoin transactions and copies of the transactions are held on servers, called nodes, situated around the world.
Bitcoin is the equivalent to an online version of cash. As such transactions, such as buying and selling, are conducted on a peer-to-peer basis without intermediaries being necessary.
The blockchain stores bitcoin, and the code determines the scarcity of bitcoin. New bitcoins are produced by “mining.” Mining involves solving complicated math problems which confirms transactions and trigger the creation of new bitcoins.
In terms of market capitalization bitcoin is the largest cryptocurrency and has been so throughout its history.
Units and Divisibility of Bitcoin
The unit of account in the bitcoin system is a single bitcoin and it is denoted by the currency codes BTC and XBT and the Unicode character B. A single bitcoin is divisible by up to eight decimal places or 100 million parts or units. Each unit is called a satoshi. There are 100 million satoshi or satoshis (also known as sats) in 1 bitcoin. The satoshi was named after the creator or creators of Bitcoin, who went by the name (or pseudonym) of Satoshi Nakamoto.
History
The domain name bitcoin was first registered on August 18 2008 and in October 2008 Satoshi Nakamoto posted a paper on a cryptography mailing list titled, Bitcoin a peer-to-peer Electronic Cash System.
The initial bitcoin paper established the theory and design for a digital currency that was transacted from peer-to-peer, thereby abolishing the control of any third party such as a central bank, an exchange, or a government.
The bitcoin paper detailed how to create “a system for electronic transactions without relying on trust.” In 2009 Satoshi Nakamoto mined the Genesis block of bitcoin (block number 0) and launched the first bitcoin network.
The first bitcoin transaction was conducted by Hal Finney on January 12 2009 when he downloaded the bitcoin software on its day of release, and in return received 10 bitcoins from Nakamoto.
Satoshi Nakamoto is estimated to have mined 1 million bitcoins before stopping all involvement with the cryptocurrency and handing over control to Gavin Andersen who went on to become the public face of bitcoin and lead developer at the Bitcoin Foundation.
The Growth Of Bitcoin – Timeline
2010
The first retail transaction involving bitcoin occurred in May 22, 2010, when an individual mined 10,000 BTC to pay for two delivered pizzas.
2011
In 2011 other cryptocurrencies began to appear based on the open-source code of bitcoin.
In January 2011, a non-profit organization named Electronic Frontier Foundation started accepting bitcoin and then in June 2011, WikiLeaks started to accept bitcoin as a donation.
2012
In 2012 bitcoin began to become more commonly known as it was mentioned in several movies and TV series. In September 2012 the Bitcoin Foundation was launched with the stated aim of accelerating “the global growth of bitcoin through standardization, protection and promotion of the open-source protocol.”
In October 2012 the first indicator of bitcoin’s growth appeared as BitPay, a payment processing service, reported over 1000 accounts accepting bitcoin as a form of payment.
2013
In February 2013 Coinbase a bitcoin-based payment processor sold US$1 million in the period of one month and the Internet Archive started a program where employees could receive their salary in bitcoin.
In April 2013 OkCupid and Foodler started accepting bitcoin as a form of payment and in July bitcoin was accepted as a form of mobile payment in Kenya.
In October the worlds’ first bitcoin ATM was launched in Vancouver Canada and in November 2013, the University of Nicosia announced that it would accept bitcoin as payment for tuition fees.
2014
In January 2014 tested bitcoin as a means for purchasing in-game assets, and two Las Vegas hotels announced they would accept bitcoin as a means of payment.
In July 2014 Newegg and Dell commenced accepting bitcoin and in September the US. Commodity Futures Trading Commission (CFTC) approved a bitcoin financial product.
In December 2014 Microsoft announced it would accept bitcoin as a form of payment for its Xbox and Windows software.
In 2014 the film called “The rise and rise of Bitcoin” was released.
2015
In January, 2015 the bitcoin-based company Coinbase raised US$75 million as part of a Series C funding round, and the Museum of Applied Arts Vienna purchased art using bitcoin.
2016
In March 2016, the largest South African online marketplace accepted bitcoin as a payment method for both buyers and sellers.
2017
Japan passes a law accepting bitcoin as a legal payment method.
2020
October 2020 PayPal allows the buying and selling of bitcoin on the PayPal platform.
2021
Bitcoin along with the US Dollar becomes legal tender in El Salvador.
Advantages Of Bitcoin
There are three specific advantages to using bitcoin as a means of payment.
No Banking Fees
The first advantage of bitcoin as a payment method, is that there are no banking fees. Using bitcoin, buyers can purchase and sell items without incurring any banking fees. For example, using bitcoin you can purchase a gift card on Coingate without incurring any bank fees.
For example, there are no balance fees, maintenance fees, returned deposit fees or overdraft charges.
Low International Transaction Fees
Bitcoin has very low transaction fees for international payments. Typically, foreign purchases and wire transfers will involve transfer fees. However, bitcoin transfers do not involve government or any third-party intermediaries which means transfers made using bitcoin incur considerably lower transaction fees.
Transferring bitcoin funds is not only cheaper but also faster. Using bitcoin to transfer funds means avoiding waiting periods, and authorization requirements.
Secure Mobile Transactions
Another advantage of bitcoin transfers is that they can be conducted securely while mobile. Bitcoin users may purchase and trade coins wherever they have access to the internet which means they are not required to visit a bank or a retail outlet in order to buy a product.
Using bitcoin also offers users a much higher level of convenience and anonymity. For example, when using bitcoin to make a purchase there is no need to supply personal information, unlike when using bank accounts or credit cards.
Bitcoin offers a higher level of security than traditional fiat money because it is near impossible to steal cryptocurrency without the private keys for the crypto wallet where the cryptocurrency is held. And because bitcoin isn’t a physical currency, it is impossible for thieves to pass themselves off as the legal holder.
Peer-to-Peer & Pseudonymous Transactions
Bitcoin transactions are pseudonymous meaning they are not completely anonymous, and that they are identifiable by a blockchain address only. Any one individual can have multiple addresses and passwords for a single account.
Bitcoin payments are based on a peer-to-peer network which means that bitcoin users are able to send and receive payments worldwide, to and from anyone on the network.
No Third-Party Seizure
No third party can seize bitcoins because there are multiple redundant copies of the transaction database.
Governments cannot freeze an individuals’ bitcoin wealth which means bitcoin users have complete freedom to spend their bitcoin any way they want.
No Taxes
Bitcoin transactions cannot be intercepted by any third party which means there is no way to implement a tax on bitcoin.
No tracking
Bitcoin assets are held in a secure digital wallet which means all bitcoin transactions made from that wallet are private and untraceable. Only a wallets owner will know how many bitcoins a particular wallet contains, and this means no third party can track the expenditure coming from the wallet.
Short of a digital wallets’ owner publicizing their digital wallets address, none of the bitcoin transactions coming from that wallet can be tracked. In traditional financial mechanisms any transactions can be tracked but with bitcoin transactions cannot be tracked, which gives bitcoin users a much greater level of privacy.
No Charge-Backs.
Once a bitcoin transaction is complete the ownership address is transferred and impossible to revert. Put another way, once conducted a bitcoin transaction cannot be reversed. The new owner of the coin is the only person who can change ownership and this means there is no risk involved when sending or receiving bitcoin.
Cryptocurrency Is Becoming Mainstream
Crypto currency is now becoming mainstream. Retailers the world over are accepting bitcoin including in countries as diverse as America, Japan, England, Australia and New Zealand. For example, in April 2017 Japan allowed retailers to accept bitcoin as payment for goods and Australia did the same in July 2017.
Lastly, numerous businesses and financial institutions throughout the global financial system, are now accepting bitcoin payments.
Investing In Bitcoin
Financial advisors like Ric Edelman, The Founder of the “Digital Assets Council of Financial Professionals,” has predicted more than one third of Americans will own cryptocurrency such as bitcoin by the end of 2022.
Edelman states crypto is a new asset class that assists in diversification, improves returns and lowers risk and should therefore be included in peoples’ financial portfolio. He recommends a slow approach starting with investors composing 1 or 2% of their investment portfolio with crypto.
Financial experts claim that there is a large diversity of investment opportunities with bitcoin. They have identified bitcoin investment opportunities in publicly traded stocks like Riot Blockchain and Marathon Digital and have recommended investment in stocks like Coinbase a publicly traded crypto exchange, and proxy stocks like MicroStrategy which accounts for $7 billion worth of bitcoin.
When investing in cryptocurrency such as bitcoin, financial experts recommend investment in Exchange Traded Funds (ETF’s). There are funds such as Grayscale, OSPRay and Bitwise that trade over the counter and invest directly in Bitcoin and then there is indirect investment where people invest in Exchange Traded Funds (ETF’s.)
Financial advisors maintain that because cryptocurrency is still a comparatively new, volatile and unregulated, it is best to keep crypto investment as a small part of your total investment portfolio.
Ric Edelman when commenting on the regulatory practices as they relate to crypto investment points out that the SEC, the IRS, FINRA, CFTC, FinCEN, Treasury, Congress, everybody everywhere in the regulatory and legislative environments are all embracing crypto rather than fighting against it.
Edelman draws a comparison between societies attitude towards alcohol and cigarettes and cryptocurrency like bitcoin. He emphasizes that the regulators recognize that crypto is here to stay so it’s not a matter of shall we allow it or ban it, but rather, how can we regulate it much the same as cigarettes and alcohol.
Edelman and other view cryptocurrency as the emerging financial environment and points-out that there are even members of congress and city mayors buying bitcoin. He reasons that, regulations will not stop cryptocurrency but rather just protect people who invest in it.
Lastly, some financial experts are stating that it is the fiduciary obligation of financial advisors to advise their clients about possible investment opportunities in cryptocurrency such as bitcoin.
The Future Of Bitcoin
There are some very contrary opinions when it comes to the future of bitcoin and its effect on the global economy now and into the future. Some see bitcoin and cryptocurrency in general as a threat to the global economy, whereas others see it as an innovative game changer.
Bitcoin when viewed negatively, is seen as a potentially disruptive force, and when viewed positively it is seen as having the potential to transform human lives.
As an example, some people argue that with its lack of restrictions and intermediaries (such as governments and banks) together with its high volatility levels, bitcoin will change the global economy and have a negative effect on developing economies.
The naysayers argue that the lack of restrictions and intermediaries mean bitcoin will damage the economies of developing nations, however, proponents argue that bitcoin promotes the financial inclusion of developing economies.
There are also some negative signs such as the highly volatile nature of cryptocurrency which has seen devaluation in response to world events and various governments (such as the Chinese government in Hong Kong) trying to impose regulations.
The proponents of virtual currencies such as bitcoin point out that because virtual currency utilizes a decentralized ledger, increases transparency, lowers transaction costs and hedges against inflation. This means that in the future, bitcoin and other cryptocurrency’s is likely to see substantial growth.
The proponents of bitcoin and other cryptocurrencies site crypto as being a driver of innovation. They argue that it will drive innovation in the formation of new company development and in “scaling business outcomes.”
Many investment advisors are cautiously positive about the future of bitcoin and other cryptocurrencies and have predicted a 14 to 15% increase in people recommending investment and actually investing their own funds in cryptocurrency like bitcoin.
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