Bitcoin is a cryptocurrency created by Satoshi Nakamoto, whose true identity remains unknown to this day. Satoshi released the Bitcoin white paper in 2008, and the 1st transaction took place on January 3, 2009.
On April 23, 2011, Satoshi disappeared with around 1,000,000 Bitcoin, leaving the future of the currency in the hands of its believers. No one has heard from Satoshi since her disappearance, and not a single 1 of her Bitcoin have ever been sold.
The events surrounding the inception of Bitcoin may forever remain a mystery, but that hasn’t deterred investors across the globe from pouring billions upon billions of dollars into the currency.
But does Bitcoin have any real value? And, why do so many people think it does?
Bitcoin: What’s the Point?
Satoshi Nakamoto wasn’t the only person upset with the banking industry after the collapse of the housing market in 2008. Many people realized the need for a currency that wasn’t regulated by any centralized organization, but Satoshi was the 1st to create a solution.
Bitcoin is the 1st system that figured out how to combine cryptography with a decentralized ledger (the blockchain) to replace the need for trust altogether.
The point of Bitcoin is to create a store of value that is also a practical medium of exchange, without relying on trust. The US Dollar has value not because it’s backed by gold, but because people have faith in the United States Government to stick around long enough for them to spend their dollars. Bitcoin has value because many people would prefer to rely on a distributed network (blockchain) to back their currency, rather than a centralized bank or government.
The value of Bitcoin is only worth what someone is willing to exchange for it – same as the US Dollar. It’s just a matter of placing your trust in a decentralized, or centralized system.
Centralized Trust Issues
According to the Bitcoin whitepaper written by Satoshi Nakamoto, the point of Bitcoin is to avoid the “inherent weakness” of the traditional trust-based banking system.
Banks make sure that money is spent fairly, which means mediating a lot of transactions. Mediation incurs a lot of operating expenses passed on to the users as fees.
Satoshi made Bitcoin’s transactions non-reversible. This eliminates situations where centralized mediation from banks or otherwise might be necessary. Fraudulent refunds are also prevented, meaning vendors no longer need to hedge their sales by knowing their customers personal information.
Aside from mediation, banks also prevent the double-spending problem, where someone quickly spends the same digital money twice before the network has time to update their account.
Satoshi solved the double-spending problem with cryptography: a combination of mathematical theory and computer science.
With these 2 trust issues solved, there is no more need for banks.
What is Cryptography?
Cryptography is secrecy through math. The concept of cryptography is fundamental to removing trust from payment, and should be understood at a high-level by anyone considering investing money into any cryptocurrency.
The basic idea of cryptography is to scramble a message into an unreadable jumble of numbers and letters called a hash.
Messages are scrambled by the Secure Hashing Algorithm (SHA) created by the NSA in the early 2000s. By scrambling messages, sensitive data can be sent safely across the internet – away from prying eyes.
Cryptography for Mining
Cryptography enables random people throughout the world to view the entire history of every Bitcoin ever transacted without revealing any private information. These people are called “miners”, and they are also in charge of preventing double-spending.
Miners compete to turn recent Bitcoin transaction data into a secret hash, and the 1st to do it shares their solution with the other miners who either agree or disagree.
If the network agrees, the data is securely added to the blockchain.
Curious to learn more about mining? Jump to What is Blockchain? to learn more.
Cryptography for Wallets
Crypto wallets use a slightly different form of cryptography than the miners. This cryptography is called public key cryptography. Public key cryptography uses the mathematical concepts behind prime numbers to secure data.
Cryptocurrency wallets have 2 “keys”: 1 public key and 1 private key:
- Your public key is needed to send money to your wallet. Your public key is used to encrypt (or lock) any data sent your way. Data must be encrypted before being sent over the network for privacy reasons.
- Your private key can be used to decrypt, or unlock, any data that was locked by your public key.
Bubble or the Future?
Bitcoin could be considered just a bubble or the future of currency. But it’s not quite that simple. Let’s take a look at both angles.
Bitcoin has been through 3 clear market cycles since its inception. Each of these market cycles have led to a bubble, and each of these bubbles have popped. This is not inherently a good or bad thing – it’s just the way it is.
Bitcoin is often criticized for it’s volatility by traditional investors. This shouldn’t come as a surprise – Bitcoin is not a traditional investment. Bitcoin investors are drawn to the currency for this exact reason; extreme volatility means a chance at extreme profits.
Bitcoin investors typically fall into 1 of 2 groups:
- The HODLer. Many investors believe Bitcoin will only go up given enough time. These investors have predetermined to hold on to their Bitcoin for years or decades, ignoring the current price entirely. In 2013, inebriated Bitcoin Forum user GameKyuubi posted a message entitled “I AM HODLING” amidst price turbulence. Unbeknownst to him, this legendary misspelling has come to define an entire category of crypto investor.
- The Trader. Other investors believe they can take advantage of Bitcoin’s somewhat-predictable market cycles and trade the currency frequently in order to make profits.
Bitcoin is (Probably) the Future
Users of the dark web (the portion of the internet dedicated to illegal activities and services) were the 1st to harness the potential of Bitcoin. A digital currency with anonymity, refund-protection and international freedom allowed the Silk Road (a popular dark web marketplace for illegal goods) to thrive. For better or worse, Bitcoin became associated with these illegal behaviors for many years.
In 2017, Bitcoin saw its 1st wave of mass adoption and became associated with it’s volatility just as much as it was associated with its dark web history.
In 2021, the total value of all Bitcoin in circulation briefly surpassed $1 trillion as Bitcoin took aim at replacing gold as the best possible store of value. When compared to the market cap of gold, $10 trillion, Bitcoin has a long way to go. Bitcoin’s market cap will reach that of gold’s today when the price of a single Bitcoin reaches $400,000.
Going a step further, many make the argument that Bitcoin is several times better than gold as a store of value. Does this mean the future market cap of Bitcoin is several times the market cap of gold today? Only time will tell for sure.
Without Satoshi Nakamoto in the captain’s chair, Bitcoin has struggled to upgrade its core technology. The codebase can still be updated and improved through democratic consensus, but that’s often hard to achieve. Debates within the development community have often led to “hard forks”.
A hard fork diverges a single blockchain in 2 – forever traveling forward independently. Miners are forced to pick a side and dedicate their computer power to authenticating 1 branch or the other.
Bitcoin has forked its fair share over the years. The most notable of the Bitcoin forks happened in August 2017, creating Bitcoin Cash.
Before disappearing, Satoshi Nakamoto secretly updated Bitcoin’s code to cap the block size at 1 megabyte. Some developers believe that the block size should be increased to allow for more transactions to be processed per second, so they decided to create Bitcoin Cash with a hard fork.
Bitcoin Cash is a completely separate cryptocurrency from Bitcoin. But it wasn’t always that way. When this fork occurred, all wallets holding Bitcoin before the split were issued newly minted Bitcoin Cash – 1 for each Bitcoin.
Increasing the block size comes at the cost of increasing the size of the blockchain in total, which leads to centralization as participation becomes more costly. If Bitcoin continues to grow in popularity, an unknowable number of updates would be required to keep up. Satoshi likely implemented the block size cap secretly to prevent this path from being taken down the road.
Decentralized Finance (DeFi)
For some people, decentralized currencies such as Bitcoin are a lifeboat from corruption. Take Venezuela, for example, a country affected by extreme hyperinflation. In Venezuela, Bitcoin is used by the average citizen to protect their value from the corrupt institution.
On the flipside, this presents an interesting opportunity for investors across the world. Loans with unregulated interest rates can now be made directly in emerging markets and regions dealing with economic crises.
A new industry is quickly forming around this concept called decentralized finance (DeFi). It provides novel opportunities for people across the world and the socioeconomic spectrum.
Check Out Bitcoin Today
Bitcoin seeks to replace the need for trust in financial transactions. It continues to grow, and it could be a great way to diversify your portfolio.
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