Chapter 1.3 Bitcoin
We’ve talked about cryptocurrencies and we’ve talked about blockchain. It’s impossible to talk about both technologies without referencing bitcoin. In this chapter, however, we’re specifically focusing on bitcoin.
Bitcoin’s network was launched in January 2009 by Satoshi Nakamoto. Satoshi is a programmer or a group of programmers who chose to use an anonymous pseudonym.
Bitcoin was the world’s first blockchain-based cryptocurrency. We could argue that previous efforts – like Nick Szabos and his BitGold project – were the world’s first theorized cryptocurrency. BitGold, however, never launched. Bitcoin was the world’s first cryptocurrency to not only launch – but become the world’s largest cryptocurrency.
Today, bitcoin’s market cap is larger than the entire GDPs of certain countries. It hasn’t always been that way, however. Keep reading to discover where bitcoin came from, why it’s a big deal, and what the future may hold for bitcoin.
Bitcoins are digital assets located on the bitcoin blockchain. These digital assets have no inherent value: they’re not connected to gold reserves or any other physical assets. Instead, the entire value of each bitcoin comes from its underlying technology. The blockchain can facilitate transactions between two trustless parties anywhere in the world. You can transfer $0.01 or $10 million without the need for a centralized intermediary. That’s where the value of bitcoin is derived.
How Are Bitcoins Created? Where Do Bitcoins Come From?
There’s a maximum number of 21 million bitcoins in circulation. As of May 2018, we’ve mined just over 17 million bitcoins. As we get closer to the maximum total supply of bitcoin, the mining rewards will gradually decrease.
Miners – also known as nodes – receive rewards for securing the bitcoin network. These miners process transactions on the blockchain, then receive a reward – in the form of bitcoin – when they successfully process a transaction. These bitcoins are locked into the bitcoin network and only released through mining.
In the early days of bitcoin, mining rewards were set at 50 bitcoins apiece. That means the bitcoin network released 50 bitcoins to a miner every 10 minutes. Over time, the mining reward decreased. Today, the reward is set at 12.5 bitcoins. That reward gets cut in half approximately every 4 years.
Ultimately, this means that as we get closer to 21 million bitcoins, it will become progressively harder to mine bitcoins. When bitcoin was first released, the difficulty was rated at 1.0. “Difficulty” refers to how much power it takes to solve a hash encrypted by the SHA256 algorithm. In the last few years, difficulty has risen as high as 4.4 billion. That’s why hobbyist miners struggle to compete with larger mining bitcoin conglomerates. Today, individual miners need to join a mining pool to have any chance of sharing the reward of 12.5 BTC.
The Pros and Cons of Bitcoin
Ultimately, we could write a book about how bitcoin works. Let’s boil it all down into a series of pros and cons.
Fast Payments and Low Fees: The bitcoin network lets you transfer money easily and cheaply around the world. You can transfer $0.01 as easily as you can transfer $10 million. You don’t need to pay costly exchange rate fees or transaction fees.
Easy to Use: Download a bitcoin wallet to your phone and you can start using bitcoin. You can transfer bitcoin to someone over your phone. You can easily send money overseas, act as your own bank, and perform other advanced functions even with limited technical knowledge.
Secure: Bitcoin is the ultimate secure currency. As long as you remain in control of your private keys, nobody can access your bitcoin holdings. Bitcoins cannot be counterfeited, and all transactions can be immediately verified by checking the blockchain.
You’re in Charge of Security: One of bitcoin’s biggest advantages is also one of its biggest cons. You act as your own bitcoin bank. You’re in charge of your own bitcoin funds. If something goes wrong – say, if you send bitcoin to an incorrect address or lose access to your private keys – then your bitcoin may be lost forever. There’s no bank helpline you can call when you mess up. Approximately 2 to 4 million bitcoins of the 21 million total supply have been lost through various issues.
Government Regulations: Bitcoin is decentralized and can operate without the jurisdiction of a bank or government. However, you’re a human being who lives within a country. As a citizen of that country, you need to abide by the rules of that country. Governments don’t have control of the bitcoin network but they do have control in other ways. If you earned $1 million through bitcoin, for example, then you’re required to pay taxes when you sell that bitcoin for a profit.
It Facilitates Illegal Activities: Bitcoin can be used for illegal activities, money laundering, and other nefarious acts. Bitcoin has been used to finance terrorism, for example, and to prop up dictatorships like North Korea. Bitcoin has been used to pay for assassinations, child prostitution, and other illegal activities. This is one of the downsides of having a decentralized, pseudonymous currency outside of centralized control.
Bitcoin Versus Bitcoin Cash: The Scaling Debate Continues
Bitcoin launched in 2009. For nearly a decade, the community worked on bitcoin with no major disputes. There were always disagreements between developers in the open source community, but those disagreements would work themselves out, and the entire project steadily grew and moved forward.
Things all changed in 2017, which was the largest year in bitcoin’s history. More people were using bitcoin. More people were buying bitcoin. More people had heard about bitcoin and wanted to get a part of it. This was great for the price of bitcoin, which skyrocketed from $1,000 to $20,000 by the end of 2017. However, it also led to a huge problem: the bitcoin network couldn’t scale with demand.
The problem with bitcoin came down to its blocksize limit. Basically, each bitcoin block was limited to a size of 1MB. This was the original size proposed by Satoshi Nakamoto. With a block size of 1MB, the bitcoin network can process about 2,000 transactions every 10 minutes. Each “block” can hold approximately 2,020 transactions.
A blocksize of 1MB simply wasn’t enough to handle the number of transactions. In mid-2017, bitcoin fees were skyrocketing. Transactions were taking days or even weeks to be completed.
A group of developers proposed a simple change: increase the blocksize limit to 2MB, 4MB, 8MB, or higher. Allow for more transactions to be contained within a single block. Network congestion will clear up.
Unfortunately, that group’s proposed changes were rejected by the bitcoin community. That group of developers announced a hard fork: on August 1, 2017, their version of bitcoin would “fork” away from the main bitcoin blockchain.
The end result was that on August 1, 2017, we had two versions of bitcoin for the first time in history, including bitcoin (BTC) and Bitcoin Cash (BCH). Both versions of bitcoin share the same history. Both versions of bitcoin date all the way back to 2009. Bitcoin Cash is supported by some major, influential figures within the community – including Craig Wright (a man some believe to be Satoshi Nakamoto). Bitcoin, or BTC, continues to have the majority of community support.
The scaling debate rages on within the bitcoin community. It’s unclear what the solution will be.
The Future of Bitcoin
Bitcoin is digital gold. Nobody knows what the future holds for bitcoin. Another cryptocurrency could topple bitcoin in months. There are cryptocurrencies that are faster and more secure than bitcoin. There are cryptocurrencies with better scaling than bitcoin or cheaper fees. Nobody, however, can claim the title of the world’s first cryptocurrency like bitcoin – and that’s one of many reasons why bitcoin is valuable.