On the 31st of October, 2013, Bitcoin was introduced to the cryptography community via a mailing list. It has since become a world renowned form of digital or cryptocurrency. The inventor of the digital currency is Satoshi Nakamoto (his or her true identity is yet to be revealed). It is a marvelous invention based on blockchain technology.
To truly understand the ingenuity behind this cryptocurrency, we have to explore the blockchain briefly.
What Is The Blockchain?
The best analogy for the blockchain is a ledger your accountant uses to keep a record of your transactions. Let us imagine your finances as some sort of finite ecosystem, every penny you spend or receive is recorded. Once recorded, each transaction is given a non-reproducible identifier that you can refer to if you want to look back to see what you spent money on.
Extrapolating this analogy to the blockchain, what you get is a cryptographic system that emulates a ledger recording incoming and outgoing transactions. Each transaction on the blockchain is assigned a non-reproducible hash that records the transaction. The transaction once performed cannot be reversed and is tamper-proof.
What makes the blockchain tamper-proof is the identifier each transaction is given in the form of a hash function. Once each transaction has been processed and finalized, it is recorded as a non-reproducible block and is added to the remaining blocks that were previously processed. If this process goes on long enough, you get a chain of transaction blocks. The addition of transaction blocks to previous blocks led to this process being named “the blockchain”.
The blockchain has many practical uses because of its ability to ensure the honesty of any system it is applied to. Some of its applications include the generation of cryptocurrency, political elections, issuance of contracts, file storage, and identity management.
How Is The Blockchain Related To Bitcoin?
The blockchain from our understanding is the ledger that records the transaction every time a Bitcoin is sent or received by another user. What makes the blockchain so special is its ability to provide non-reproducible evidence that the currency has been sent or received over its network. Given the honesty and efficiency of the system there is no way to defraud it or duplicate each unique transaction between end users.
How Are Bitcoins Made?
Bitcoins are made by powerful computers known as miners that issue the currency each time a mathematical puzzle is solved. Each time the puzzle is solved, a Bitcoin is issued and whatever machine solved the puzzle first is given a reward in the form of the currency for their efforts.
The mathematical puzzles that have to be solved to release a Bitcoin were designed to become more difficult each time a puzzle is solved. Bitcoin Miners (people who use their computers to manufacture Bitcoins) in response to the increasing difficulty of each mathematical puzzle, decided to increase the processing power of their computers. The Miners increased processing power to increase the speed puzzles were solved and thus earn more Bitcoins for their efforts.
The amount of Bitcoins that can be mined are also designed to be finite. At the time of this writing, the amount of the cryptocurrency in circulation has surpassed half of its final amount. Bitcoin’s finite quantity and an increasing demand for the currency indicates a potential rise in the currency’s value lies ahead.
Is Bitcoin Production Centralized?
Decentralization is another key feature of Bitcoins. As mentioned earlier, there will ultimately be a finite amount of the currency in circulation. Unlike paper currency, which can be printed on the whims of any government, it is decentralized in how it is produced. Anyone with a powerful enough computer can get on the Bitcoin network and mine the currency. The decentralized nature of Bitcoins has made it very attractive to anti-establishment libertarians. These libertarians see it as a way to wrestle away the power governments have over currency and value production.
Is Bitcoin An Anonymous Currency?
Bitcoin has been described as an “anonymous currency” and this is, in fact, inaccurate. Every transaction involving the sending and receiving of Bitcoins is recorded on the blockchain. Anyone, like a law enforcement agency, with a strong enough incentive can trace the origin or destination of transactions on the blockchain.
Why Is Bitcoin Always Associated With Crime?
Bitcoin itself is not a criminal invention and it was never intended to be. However, nefarious parties over the internet decided to hijack the technology for illicit activities. Bitcoins were used as the currency of choice for purchasing illegal goods and services on the internet.
A high-profile case involving Ross William Ulbricht aka “Dread Pirate Roberts” who created the first online marketplace for illicit products, think of it as an Amazon or Ebay for illegal activities, used Bitcoins as his currency of choice for his online marketplace. The marketplace named The Silk Road was, however, shut down in October of 2013 and Ulbricht was arrested. He is currently serving a life sentence in a federal prison for his role in operating The Silk Road.
What Are Other Applications Of Bitcoin?
Bitcoin’s application continues to evolve, for now, some see it is as a safe haven asset. The currency has increased from its original value of less than a dollar in 2008 to over $1000 as at the time of this writing. However its value as a currency is very volatile. The currency can also be used to a varying degree as a means of purchasing products over the internet or to transfer value from one person to another by way of remittances.
Where Can I Buy Bitcoin?
There are several online exchanges where you can sign up for a digital wallet and purchase the currency. Some of the more popular exchanges include Coinbase, Coindesk, and Bitfinex. For a more detailed list of where you can purchase Bitcoins please stop by Bitcoin.org’s website.
Can My Bitcoins Be Stolen?
Unfortunately, the answer to this question is Yes! Depending on what exchange you choose to buy your Bitcoins from, you are given two cryptographic keys with which you can access your account. The same keys, which come in a public and private form, can be used to send and receive money.
Never under any circumstances should you share your “private key” with anyone. The private key, which MUST be kept private, is used to gain access to your account. If you do share your private key, your Bitcoins can be withdrawn and once withdrawn, there is no way to recover your stolen currency. The public key, which also comes in the form of a QR code, is what you share with people.
Will Bitcoin Ever Become A World Currency?
There is no way to tell if this is a possiblity. However, with the aid of the internet, Bitcoin’s transparency, its decentralized nature, and its low remittance cost, Bitcoin will continue to see an ever increasing adoption and a subsequent increase in its value.
In Sub-Saharan Africa, for instance, where there are so many people that are unbanked, Bitcoin could become their currency of choice. Africa has some of the highest remittance rates, with relatives in developed nations sending money to relatives back home. Bitcoin can play a role in making sending money home less costly and more efficient.
In Asia, India recently demonetized its larger bank notes in an effort to combat tax evasion, money laundering, and other financial crimes. This led to major outflows of capital into other assets, one of which was Bitcoin. In China, a major market for the currency, Bitcoin has become so popular that the government recently decided to enact legislation to combat capital outflows from the country into the currency.
Europe and North America have also seen wide ranging adoption of the currency. Bitcoins are issued at special ATM’s, used as currency with Bitcoin debit cards and also as safe haven assets. They have also found utility as a means of purchasing goods and services online.
Bitcoin as a currency has so much potential for future use and adoption. It also has its enemies and problems. The currency is fast becoming the “go-to” asset for people either dissatisfied with high remittance costs of money transfer services. Some people have turned to it to resist the iron grip governments hold over currency issuance. Ultimately, we will have to wait and see what time has in store for this magnificent product of the digital age.
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