Contributor, Benzinga

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 between Satoshi and Hal Finney 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 their disappearance, and not a single 1 of their 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. Perhaps it’s a good, even necessary, thing that the world never finds out the true identity of Satoshi Nakamoto.

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.

Satoshi distributed control of Bitcoin to the masses via blockchain technology. Blockchain can be thought of as a global computer, not controlled by anyone, but by a network of individuals who stand to benefit from using it. Instead of bank employees monitoring and recording transactions, Bitcoin miners run computer algorithms in exchange for newly minted Bitcoin. This method removes the need for centralized trust and creates predictable inflation at the same time.

The point of Bitcoin is to create a store of value that is also a practical medium of exchange. The US Dollar has value because people all over the world 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 pay for it – same as the US Dollar. It’s just a matter of placing your trust in the blockchain, or the government.

Bitcoin Mining

In order to verify transactions without a centralized 3rd party, Bitcoin’s distributed ledger must come to consensus to validate transactions. In blockchain technology, consensus is where nodes across the network agree on which transactions are legitimate, and which are fraudulent. Once 51% of the network agrees that a transaction is legit, consensus is reached and the transaction is submitted to the blockchain.

This is done through a process called mining. Miners on Bitcoin’s network use computer hardware to secure its blockchain, and these miners are rewarded with what’re called block rewards. Every 4 years, these mining rewards half in what’s known as the Bitcoin halving. This slows the issuance of new Bitcoin, and Bitcoin block rewards will continue to halve until all 21 million coins are mined; the last Bitcoin is predicted to be mined around the year 2140.

Inflation

Thanks to COVID-19, the U.S. has been issuing money, and summoning inflation, at an alarming rate. With Bitcoin, this is impossible.

Bitcoin’s max supply is 21,000,000 coins. New coins are issued to miners at a rate that halves every 4ish years. Both of these inflation strategies are hard coded into the Bitcoin core and cannot be changed. As the USD depreciates rapidly, more traditional investors are beginning to realize the inflation-hedging utility of Bitcoin.

Over the next decade as the purchasing power of a single U.S. Dollar halves, Bitcoin’s predictable inflation combined with diminishing volatility will appear only more attractive to those looking to protect their value.

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 exist to 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. 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 issues solved, Bitcoin became a trustless global currency. 

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. Two types of cryptography are used in Bitcoin: hashing and encryption.

Cryptography for Mining: Hashing

Miners compete to jumble a 10 minute block of recent Bitcoin transaction data into a secret hash. The 1st miner to compute the hash shares their solution with the other miners who either agree or disagree. Once a majority of the network agrees, the block of data is securely attached to the chain. 

Hashing is similar to encryption, however it is intentionally irreversible. It is not meant to be decrypted by a recipient – it is meant to be a unique representation of the data. Any small change in the block’s data will result in an entirely different 256-bit hash. The hash of each block is stored as a parameter in the following block, this way, changing one block from long ago in the chain will have a ripple effect invalidating the rest of the chain.

Curious to learn more about mining? Jump to What is Cryptocurrency Mining to learn more.

Cryptography for Bitcoin Wallets: Encryption

Cryptocurrency wallets can be thought of as mailboxes on the blockchain.

Cryptocurrency wallets have 2 “keys”: 1 public key and 1 private key: 

  • Your public key is needed to send money to your wallet. Think of this as the GPS coordinates of a mailbox on the blockchain.
  • Your private key can be used to send money. Think of this as the key needed to open the bottom of the mailbox to access the contents.

Your public and private key are actually just prime numbers. Cryptography exploits the difficulty of factoring large primes. Your private key must be protected at all costs. Crypto wallets truly only store your private key, not your coins. The private key stored on the wallet can be used to open your wallet address and access the currencies associated with that address on the blockchain’s ledger.

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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 Bubbles

Bitcoin has been through 3 clear market cycles since its inception, and is in the early/middle stages of a 4th . Each of these bubble cycles have lasted around 4 years, and come back down to earth after. 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’s Value

Unlike stocks or other traditional assets, Bitcoin is much more difficult to value. As stated before, Bitcoin is worth just as much as what someone else is willing to pay for it. There’s no revenue from Bitcoin and the network doesn’t own assets, so the value of Bitcoin comes from its scarcity and global acceptance. Due to this, Bitcoin is extremely volatile. People don’t really know what a bitcoin should be worth, causing major price swings in the currency.

Bitcoin can be seen as an improvement to gold. Both gold and bitcoin are scarce assets people value, but Bitcoin is finitely scarce, more easily divisible, and more accessible to the masses. If Bitcoin were to reach the same market capitalization as gold in the future, each coin would be worth over $400,000.

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.

Bitcoin Forks

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. 

segwith chain
Source

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, but others were worried an increased block size would lead to more centralization. Due to this disagreement, Bitcoin underwent what’s known as 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 large number of updates would be required to keep the digital asset decentralized. Satoshi likely implemented the block size cap secretly to prevent this path from being taken down the road. 

Bitcoin Cash
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Decentralized Finance (DeFi)

For some people, decentralized currencies 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. While the vast majority of the DeFi ecosystem is built on Ethereum, you can use bitcoin on Ethereum’s network by using a tokenized representation of Bitcoin, Wrapped Bitcoin (WBTC).

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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