“Let’s start at the very beginning,
A very good place to start,
When you read you begin with A-B-C,
When you sing you begin with do-re-mi”
Julie Andrews sang these famous lines by Rodgers and Hammerstein in “The Sound of Music.”
And, that’s exactly what I suggest we do here – start with the A-B-C of bitcoin, to understand how the, much written and talked about, cryptocurrency works and where it’s headed.
So, what is bitcoin?
Bitcoin is a digitally encrypted, universal online currency that saw the light of day in 2009.
The brainchild of the intriguingly mysterious Satoshi Nakamoto, a name without a face, bitcoin is an intangible decentralized currency – a virtual currency, if you like – that boasts lower transaction fees compared to conventional online payment systems, like PayPal, for instance.
Unlike government currencies, bitcoin is not a legal tender regulated by a central monetary authority, or, for that matter, any single administrator.
It is a decentralized payment mechanism, where transactions happen peer-to-peer through, apparently, secure encoded messages, with no intermediary government-appointed controlling authority hawk-eyeing the monetary exchanges between users.
Named after its creator, a “satoshi” is the smallest bitcoin unit representing 100 millionth of a bitcoin, or 0.00000001 bitcoin.
The “millibitcoin” is the next highest unit worth 100,000 satoshis – a thousandth of one bitcoin, or 0.001 bitcoin.
The bitcoin currency abbreviation/symbol is BTC, also sometimes called XTB.
How does bitcoin work?
Again, bitcoin, being every bit a virtual currency with no physical existence, is recorded in a cloud public ledger referred to as “blockchain.”
The balances and bitcoin transactions in the blockchain go through verification processes with the help of a hugely powerful computing network – the virtual governing body for bitcoin, owned by independent individuals and companies known as “miners.”
Obviously, there has to be some type of revenue model for the miners to be able to do what they do. So, they are rewarded by new bitcoin releases, and, as custodians of the controlling network, earn fees for all bitcoin transactions, paid in bitcoin.
Miners can be looked upon as the decentralized authority responsible for the credibility and veracity of the bitcoin network.
The release of newly created bitcoin to miners will continue at a fixed, but periodically declining rate, until the bitcoin cap, set at 21 million bitcoin, is reached.
However, once the cap is reached and the rewards stop, “miners” will continue earning fees for their role as transaction validators in the blockchain.
As mentioned earlier, the blockchain is a virtual public ledger where bitcoin transaction records are maintained with the help of high-performance computers. Just like a physical ledger is made up of pages, the blockchain comprises individual “blocks.”
A bitcoin block records all the recent bitcoin transactions, which have not already been recorded in a previous block. Once the data limit of a block is reached, a new block is added to the blockchain in order to record the latest transactions, while the completed “block” becomes part of a permanent block archive for all bitcoin transactions.
Now, in order to be eligible for bitcoin rewards, miners have to complete a current block. It, therefore, goes without saying that miners are always in competition with each other to be the first to complete a block.
The first entry or transaction recorded in a new block is invariably the reward given to the miner who completed the last block.
The record-keeping service provided by miners with the help of computer processing power is called “mining.”
It’s the responsibility of the miners to keep the blockchain updated and secure by consistently recording all new transactions into the current bitcoin block.
Each block in the blockchain is linked to the last completed block using a mathematical algorithm, thereby, completing the chain.
Each completed block is rewarded with 12.5 newly minted bitcoin (BTC), which decreases every four years. When bitcoin started back in 2009, the reward for each completed block was 50 BTC.
As more and more new bitcoin come into circulation and new blocks added to the blockchain, mining becomes increasingly difficult in terms of computing power required to keep everything up and running.
Initially, an ordinary desktop computer was good enough to handle the mining load. However, with the consistent increase in bitcoin and blocks and the consequent rise in the difficulty levels, newer and faster computers like Application-Specific Integrated Circuits (ASIC), more advanced processing units like Graphic Processing Units (GPUs), etc. are required by miners to tackle them.
It is the difficulty of the computing issues that determines the creation rate of new bitcoin; hence, the drop every four years as new blocks can’t become a part of the network without a solution to the computing problems.
On an average, it takes about 10 minutes to solve these mathematical issues and create a new block, which effectively means that 12.5 BTCs are minted every 10 minutes.
What is the monetary value of a Bitcoin?
According to the laws of supply and demand, which apply to bitcoin as well, the bitcoin price will keep going up with the increase in the number of people using the service.
Since the number of bitcoin users is still relatively small, the bitcoin value is subject to significant fluctuations on a daily basis but will keep increasing as more and more people start transacting in bitcoin.
The fact that bitcoin price was as low as less than a dollar in 2011 and now, as I write this, the bitcoin price in US currency is $14,176.40 having opened for the day at $15,378.28, testimony to its increasing value with more users coming into the world of bitcoin.
The bitcoin price is, also, directly proportional to the size of its mining network, which is consistently increasing with the increase in users and blocks.
To put it simply, as the network gets larger and more complex, it also becomes costlier to maintain, thereby increasing the cost of minting new bitcoin and, needless to say, as the cost of production increases, the price also increases.
A bitcoin wallet is necessary to transact in bitcoin. It, basically, “stores the digital credentials for your bitcoin holdings” and allows you to spend them using private keys.
While there are different types of wallets, what is important to know is that whoever controls the private keys controls the wallet.
There are some bitcoin wallets that function the way banks do, holding your private keys on your behalf. However, using such wallets is not recommended by bitcoin itself.
Here’s what the bitcoin website has to say about wallets:
“There are several different types of Bitcoin wallets, but the most important distinction is in relation to who is in control of the private keys required to spend the bitcoins. Some Bitcoin “wallets” actually act more like banks because they are holding the user’s private keys on behalf. If you choose to use one of these services, be aware that you are completely at their mercy regarding the security of your bitcoins.”
However, maximum number these wallets allow you to have control of your own keys, without the need of sharing with anybody, which effectively means you, and only you, can access your bitcoin holdings to spend them, as and when required.
There is a downside to this, though. If by chance, you forget your key/password, your bitcoin holdings are as good as lost, as the bitcoin network will not consider any other “evidence of ownership.”
A user lost 7,500 bitcoin in 2013, when he inadvertently discarded his hard drive containing his private key, without any back up to fall back on. The loss was worth $7.5 million according to the bitcoin price of the time.
The breaking news, however, is not good for bitcoin as its price took a steep plunge today on the South Korean exchanges, dropping from its Dec 27 trading price of $15,400 to $13,500 – an 11% decline in a single day, according to Coindesk.com. Bitcoin’s peak price this year had reached $20,000.
The drop is the result of South Korea’s announcement to curb irrational “cryptocurrency speculation” in the country even if it meant shutting down exchanges. South Korea, it must be mentioned, is a global hub for bitcoin trading.
“Cryptocurrency speculation has been irrationally overheated in Korea. We cannot leave the abnormal situation of speculation any longer,” the government statement said.
“The government had warned several times that virtual coins cannot play a role as actual currency and could result in high losses due to excessive volatility,” the statement further read.
— RT (@RT_com) December 28, 2017
— englishinvancouver (@engvancouver) December 28, 2017
Here’s what experts have to say about the South Korean impact on the future of bitcoin.
Naeem Aslam of Think Markets, who is optimistic about the future of bitcoin says:
“After forming a high of $16,416 this week, the cryptocurrency came under a selling pressure as traders showed their reaction to South Korea’s news. The country is determined to curb the speculative market and it would take measures to stop and review various crypto-exchanges.
The reality is that the market is way too overheated and no one wants the cryptocurrency popping on their door steps. However, this is surely not the first time that we have witnessed this kind of reaction in the Bitcoin price.
Throughout this years, we have heard many similar messages (followed by actions) from China and yet Bitcoin made a high of $19,338 [earlier this month].”
Craig Erlam of Oanda, on the other hand, has his doubts about a quick revival.
“Bitcoin is coming under selling pressure once again, with efforts by South Korean authorities to rein in speculation being blamed…
While this is likely a contributing factor, I wonder if given the pre-holiday drop, whether speculators have become more sensitive to negative news.
We saw plenty of this in reverse on the way up, with positive news triggering significant rises and negative news being brushed aside. It wouldn’t surprise me if we see prices heading back below $10,000 before they find their feet again.”