• Market Cap: $251b

  • May 19, 2019

Chapter 1.3

What is Bitcoin?

Created in the year 2009 by a programmer (or a group of programmers) who goes under the pseudonym of Satoshi Nakamoto, Bitcoin has become quite the internet darling

What is Bitcoin?

Before we begin with what a Bitcoin is, it must first be known what Cryptocurrencies are and how they function:

  • Cryptocurrencies are basically digital assets which carry a monetary value

  • Cryptocurrencies make use of cryptography to secure the transactions

  • Cryptocurrencies are also known as virtual currencies or alternative currencies

Imagine an economy that functions without banks or a centralized authority. That is the world of Bitcoin miners and traders. Bitcoins exist on the blockchain - which is basically a ledger that keeps the record of all Bitcoin transactions ever made. 

Read in Detail: What is the Blockchain

What is Bitcoin?

Bitcoins, technically speaking are a digital asset which have been assigned as a currency upon creation. It is a global cryptocurrency which carries the same value across the world. It allows peer to peer transactions between users without the need for a centralized authority. Bitcoins are created after a block is mined, and they are rewarded to miners as a block reward. Bitcoins can be exchanged for other alternative currencies (altcoins) and can be exchanged for goods and services if merchants are willing to accept them. To sum it up in one line, Bitcoin is a virtual currency

How do Bitcoins function as a currency?

What makes Bitcoins really special as a currency is that they have been designed in a manner that they cannot be devalued. Regular currency is devalued if there’s a lot of money in circulation. When the government starts printing more currency notes, the value of the existing currency falls. However, if the amount of currency in circulation was limited and it would never increase, the currency could never be devalued. The general rules of inflation and deflation do not apply to a Bitcoin led economy. 

The maximum number of Bitcoins that can ever go in circulation are 21 Million. As of this writing about 16 Million bitcoins have been released from the blockchain and bitcoin miners are working hard to mine the remaining 6 million. 

Wondering how you can mine for Bitcoins? Read: How to Mine Bitcoins

How are Bitcoins Created?

Bitcoins are created every time a user discovers a new block. A block consists of certain amount of bitcoins. Every four years, the amount of bitcoins that a user gets upon finding a block are reduced. A new block is found after a user solves a hash encrypted by the SHA256 algorithm. This can be understood as a complex puzzle in the simplest of terms. This puzzle is basically a string of characters that need to be decoded using high computing power. Every time a user adds a block to the blockchain, they get rewarded with bitcoins. 

If you were to add a block to the Blockchain in 2009 you would get 50 Bitcoins. Today you get only 12.5. This number is revised every four years. As more and more blocks are discovered and bitcoins are released, the difficulty of solving this ‘puzzle’ too increases. This ensures that as we reach closer to 21 Million bitcoins, it becomes harder and harder to mine them. 

The difficulty, when Bitcoins first came out, was rated 1.0. At the end of 2009, the difficulty was measured at 1.18. However, eight years down the line, in April 2017, the difficulty was judged at 4.24 billion! This clearly indicates that it has become significantly harder to mine for bitcoins now than it was when it all began. 

Back in the early days of Bitcoin, a desktop computer could be enough to mine a coin. However, as more and more miners began entering the rat race, it became quite complex to mine for bitcoins. Not only do users now need systems with advanced configurations, the process takes longer and consumes more electricity. 

If ‘hashes’ ‘cryptograpy’ and the like confuse you, don’t worry. Bitcoin mining is for the everyday man and not just limited to the tech geeks! Read more to find out how to mine bitcoins.

Bitcoins: Pros and Cons

Pros:

Quicker payments, Lesser Fees: In case of a traditional banking system it would take a longer time, especially for larger values of money to reach from one person to another. Bitcoin makes it significantly faster as there is no third party banking system involved. Even the fees that one pays in bitcoin transactions is considerably lesser compared to bank charges at times. 

Ease in transfer: For two parties which are trading between different countries, sometimes banking options might not be easily available. Instead of going through all the hassle of figuring out a way to transfer money, bitcoins make it much easier. 

Protection against Payment Fraud: Unlike bank transfers or physical currencies, Bitcoins are more secure as it is certain that they cannot be counterfeit. Once Bitcoins have been transferred they cannot even be reversed. 

Cons:

Risk of Loss: One of the first rules of investing into bitcoins is to invest as much as you are willing to risk. It shouldn’t hurt you to part with the money that you have invested. There are time when web exchanges go out of business and all that you have invested might be taken away from you. Market fluctuations too, might be dangerous as what is worth $5000 today might be worth $4000 an hour later!

Government Regulations: The legal side of bitcoin is still rather ambiguous. It has not been accepted as a legal tender in most nations, and is illegal in some. Bitcoins have attracted many a users who have invested using black money too. If governments globally decide to regulate bitcoin value, it might become unstable and collapse - again a major risk. 

Illegal Activities: One of the biggest arguments against Bitcoins is the fact that the money that Bitcoins bring are often used to fund illegal and immoral activities such as online drug trades and weapons. Hacking services were also being provided in exchange for bitcoins. 

Final Verdict

The simplest way to understand bitcoins is like it is Digital Gold. Gold is a finite resource, and has to be mined. Same is the case with Bitcoins. Bitcoins are like gold, but better - because they are digital and you know how much supply there is, as opposed to gold - which we know to be finite, but we do not know how much more can be mined before all gold mines get depleted. 

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