Understanding Bitcoin as a Cryptocurrency

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As technology gets more and more advanced more and more things start to change. Computers run the world and there is no doubt about it. But what if you were told, that our everyday currencies could be all just nostalgic dream in a few years from now? How would the world’s economy change knowing there is a kind of “currency” that is intangible?

What is a Cryptocurrency?

A cryptocurrency is a digital or virtual currency. The prefix “crypto refers to the study of “cryptography” which involves the solving and writing out codes that are used to verify and secure every transaction made. In relation to everyday money, the issue of “double spending” doesn’t occur with the cryptography security features such as blockchain. Double spending like in its name refers to spending the same money twice. What makes cryptocurrencies very different from everyday fiat currencies is there is no “middle man” in order for a transaction to take place. Crypto in its nature strictly a “Peer to Peer” network. Another main difference is the currency also is unable to be mended by the government, a reason why many countries do not support cryptocurrencies (“Cryptocurrency,” 2018).

What is its Origin?

Cryptocurrency is yet another phenomena, of what is known as a happy accident with the creator of Bitcoin, under the pseudonymous name Satoshi Nakamoto. Nakamoto was sick of having financial and governmental institutions being control in how money is obtained, used and exchanged. In today’s world almost, everyone has some association with a bank whether it’s Citi, Chase or Wells Fargo. We rely on banks to have our transactions verified and approved through their single entity because banks are centralized meaning that they are concentrated in one place unlike Bitcoin and other cryptocurrencies.

If someone wanted to send someone from France 3,0000 Euros to their friend in Sweden, they would need to go through multiple banks till it officially reaches their friend in Sweden. The person sending the money from France would come across various obstacles such as working around the bank’s business hours, the bank would have to make sure the transfer isn’t fraud, conversion rates, and some additional fees for their service. This process could take up a lot of time and you lose some money on the way. You might as well fly over the Sweden and hand your friend the 3,000 Euros. Nakamoto wanted to have his “Peer to Peer” Network fantasy come into reality thus, the born of Bitcoin in 2009. The software is now made public and transactions are recorded and verified into a blockchain.

Many people has the idea of “Bitcoin” before him but many have failed due to their inabilities to push away from centralization. Nakamoto watched how early creators failed and decided to create his currency, Bitcoin, the first digital cash system that was decentralized meaning there was no one institution that controls Bitcoin and its network. When Bitcoin was created it started off basically with no value, with a worth less than a cent. As years passed and people starting seeing Nakamoto’s vision and wanted to incorporate it to their own lives, thus there was an increase and a single Bitcoin was worth $27. In 2010, someone tried selling their Bitcoin for the first time, and since there is no set or monetary value for Bitcoin he gave 10,000 for an exchange of 2 pizzas.

Little did he know that if he held on to that 10,000 it would be worth more than $100 million. A year later, here comes some competition as decentralization gains popularity more people want to create their own cryptocurrencies. Some examples are Litecoin and Namecoin. Currently there are over 1,000 cryptocurrencies in circulation. Each year the value started creeping up more and more as more people joined the bandwagon. In 2017, a single Bitcoin was worth over $7,500. Fiat currencies are so easily counterfeited, just look at the Dark Web for instance there are people selling “real $600” for $450. In this type of digital currency system, every user/party has to agree on every account’s balance and their transactions (“The History of Cryptocurrency,”

What Kind of Cryptocurrencies are there?

Besides Bitcoin, there are other types of crypto. You have something called “altcoins” that are a type of cryptocurrency that can be either similar to Bitcoin or drastically different. A type of altcoin is different than Bitcoin is called “Factom” that doesn’t use miners and instead use stakers using a system called PoS (Point of Stake).

In Bitcoin, new coins are created through a process called PoW (Proof of Work) which basically means a miner is guessing/solving a complex code by guessing a hash that has to be equal or less than the value of the target hash to complete the block. When the block is solved it is added to the blockchain and then the miner is rewarded for their hard work. In relation to Factom, stakers are just like mines who verify transactions, but what differenciate them from Bitcoin is instead of having thousands of people “racing” to see who verifies the block first, they take turns. PoS is a more environmentally and economically friendly because you’re saving on electricity (“Understanding the Different Types of Cryptocurrencies,” 2018).

What is Blockchain Technology

Blockchain technology is now called the “backbone” of the new wave of technology. Blockchain is a decentralized database that is a digital edger that records everyone’s transactions, verifies one’s ownership and cannot be altered in anyway. Copies of the blockchain are accessible to anyone that on the network. Miners are the ones that check the accuracy and are sure that all transactions are valid in a specific block.

Transactions that are made by using cryptocurrencies are not final until they are added to the blockchain and for the most part are non-refundable and are there to stay (Martucci, n.d.). A blockchain transaction a occurs when someone wants to send a piece of data to someone else. To verify each transaction each node (basically anything with an IP address, for instance a computer) has the ability of the Bitcoin network to verify that that person/party sending Bitcoin actually have the Bitcoin they claim they have.

Once everyone agrees that transaction is then added the to the block that contains other transactions as well. The software being use has its own unique “fingerprint” to have its own unique hash of data that is specifically for that particular transaction. There are special nodes called “miners” that compete with each other to add a new block to the blockchain. A miner’s computer calculates lots of possible hash-based calculations using trial and error. There is no trick in finding the hash value, therefore it takes a lot of computer power. Whoever arrives to the answer close enough is rewarded with new Bitcoin (Pavlus, 2018).

Who created Bitcoin

Bitcoin was created by a software developer under the fake name “Satoshi Nakamoto” in 2008. Bitcoin was introduced not only as a new form of payment aside from the typical PayPal or the use of bank cards. Through Bitcoin people to have more privacy and control of their own finances and are encouraged to shy away from government manipulation and centralized financial institution control. The basic principle is that it was a way to exchange money without a middle man in a secure and verifiable way through the use of blockchain (Acheson, 2018).

How is Bitcoin Obtained?

Mining is the way new cryptocurrency is being released into circulation. In relation to Bitcoin Nakamoto capped the limit to 21 million Bitcoin and now there is currently 17 Million already mined and in circulation. Bitcoin is mined in blocks (a group of transactions).Miners get paid appoint and authorize transactions within the Bitcoin network, mainly they are there to prevent anyone trying to “double spend” the amount they own.

In order to earn Bitcoin you need to meet two standards (besides just luck) is you need to have a least 1 MB worth of transactions and you have to be the first person to solve the 64-digit hexadecimal number (otherwise known as a hash) that is equal or less than the target hash (lots of trial and error). In order to mine you will need to invest in the proper equipment (a graphics processing unit or an application integrated circuit – they can start off in low 100s and go up to cost over $10,000) and to have access to cheap electricity because a lot of energy/computing power is used to mine and a lot of the time it’s just wasted energy that you pay a lot for.

If you don’t have that type of money to invest join a “mining pool” where w group of miner that work together to solve a block. In a mining pool the payout id divided by how many miners are in that particular pool. When a block is mined, miners will receive a reward. Every four years the reward halves in value. In 2009, one block was worth 50 BTC and then in 2012 it was worth 25 BTC (Hong, 2018).

In What Ways is it Different from Traditional currencies?

Bitcoin is similar to a regular currency because they are both able to be exchanged digitally. However, there are a few key differences: decentralization (no one controls the network. It is run by miners and is a network that is available all around the world. This make crypto ideal to people who are uncomfortable about having financial or government institution handling their money. Second, there is a limit (unlike regular currencies they are unlimited and the government controls when new currency should be printed out. In relation to Bitcoin however, it is capped at 21 million).

Third is the aspect of pseudonyity (in traditional currencies when you use your bank card you are always identified. In Bitcoin, you are semi-anonymous because of the decentralized feature, there is no need to be identified when sending Bitcoin. When a request is put in to send, the sender is checked to see if they have enough funds to send People in the network are only known for their wallet address. Lastly, transactions cannot be refunded (“How is Bitcoin Different from Traditional Currencies, 2018.)

How does Bitcoin Affect Economic Stability

The way Bitcoin growth is measured is based on how many transactions are completed and verified by miners and are put on the blockchain. It is also measured by their volatility which is the fluctuating prices that are shown over a span of a week. Bitcoin can be very unpredictable when it comes to determining whether to not one will lose or make money. Bitcoin is also still controversial in many countries to whether it should be legal, have some restrictions or completely ban it.

Cite this paper

Understanding Bitcoin as a Cryptocurrency. (2021, Sep 21). Retrieved from https://samploon.com/understanding-bitcoin-as-a-cryptocurrency/

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