Bitcoin – cryptocurrency review
Bitcoin (BTC) is the first known cryptocurrency. According to the definition of Wikipedia, Bitcoin is a peer-to-peer payment system that uses the unit of the same name to account for transactions.
The functioning and protection of the cryptocurrency system is provided using cryptographic methods. At the same time, information about system transactions is stored in the clear. The smallest division value (or the smallest possible number of transferred Bitcoins) is 10-8 Bitcoins, and is called ‘Satoshi’ in honor of its creator with the pseudonym Satoshi Nakamoto.
It is known that the concept of cryptocurrency was announced in 2008. And in 2009, the development of the protocol was completed, and Satoshi Nakamoto published the client program code – the Bitcoin network was launched.
However, the first steps to create electronic money were made in the last century, and they formed the basis for the creation of the first cryptocurrency. So back in 1983, the first “electronic cash” protocols were proposed by scientists David Chaum and Stefan Brandson.
Later in May 1997, Adam Buck proposed Hashcash, based on a proof of work system, to counter spam and DoS attacks.
In 1998, the first ideas of cryptocurrencies were described. Their authors were Wei Dai with the idea of ’b-money’ and Nick Szabo – ‘bit-gold’. Later, Hal Finney (who became the second member of the Bitcoin network) implemented hash block chain communications for the Hashcash system based on the IBM encryption chip within the TPM specification.
It is these developments that formed the basis of what we know today as Bitcoin …
The first generated blocks and the first Bitcoin transactions
The first block and the first 50 Bitcoins were generated on January 3, 2009. And on January 12, Satoshi Nakamoto sent the first 10 Bitcoins to Hel Finney, which was the first deal. Later, with the help of PayPal, 5050 Bitcoins were exchanged for $ 5.02. To assess the cost of Bitcoins, it was proposed to use the cost of electricity, which was spent on its generation.
For the first time, they bought 2 pizzas for Bitcoins in 2010, which cost 10,000 BTC at that time, which is a fabulous sum by today’s standards, considering that the price of one BTC at the time of writing is about $ 10,000.
So what is bitcoin today? Why has its price skyrocketed so high, and what features of its technology distinguish it from other cryptocurrencies?
The main idea of Bitcoin was to create a decentralized currency that would not need financial or other support and would not succumb to such phenomena as inflation.
Today, Bitcoin is often compared with currencies such as the dollar or the euro. However, it is still probably more appropriate to compare it with some precious metal, for example gold. The whole point is that the issue of fiat money is unlimited, while the maximum number of Bitcoins cannot exceed 21 million coins. This is what makes Bitcoins a valuable monetary unit, and distinguishes it from fiat currencies.
Today, the price of Bitcoin is no longer determined by the amount of electricity spent on its production, but is supported only by demand for it. And its limited amount, with increasing demand, increases the price of the coin itself. In addition, Bitcoin also has a number of features that are distinguishable from traditional money.
- Decentralization and accessibility. The network of the first cryptocurrency is a combination of client wallets and a distributed blockchain database, a chain of blocks that is stored on each computer where the full client is installed. The blockchain is fully open to view the registry of all operations in the system. Connection to this registry is possible using your own wallet or the web interface of special monitoring services from anywhere in the world, without passwords and any other authorization.
- Transparency of calculations. The history of any payment can be (theoretically) traced to the very moment of coin generation and it will never be deleted from the database. Knowing only the Bitcoin address, at any time you can find out all the transactions received at this address or sent from it.
- Free choice of degree of participation. You can install the official Bitcoin Core client, which saves the entire transaction history. If you do not need autonomous work and blockchain analysis, you can install one of the light or mobile wallets that require much less resources. If you are only going to pay for small purchases on the go or just try the technology, a mobile or online wallet will be enough. For maximum security, there are hardware wallets with additional degrees of protection.
- Network Support Award. New Bitcoins come into circulation as a reward for those who carry out computational operations that ensure the transfer of transactions. The calculation was called ‘Mining’, from the English word ‘mining’ – mining. Those involved in these calculations are called the Miner. Their task is to write down in one block all the transactions that have taken place on the network since the previous release (on average 10 minutes), and “seal” it with a complex cryptographic signature. The next block is calculated based on the signature of the previous one, which guarantees the irreversibility of transactions, and also prevents “fake” banknotes from entering the system. So the blocks interlock with each other, forming a chain – blockchain.
- Increased protection. With each new block, the computing power needed by the miner to calculate the entire chain from scratch grows, and the longer the chain, the more difficult it is to “break” the network. Today, Bitcoin is a decentralized computer network, the performance of which is more than 8 times (in terms of calculating the SHA-256 hash) exceeds the total computing power of all supercomputers in the world. In order to seize even limited control over it, huge resources and costs of hundreds of millions of dollars are needed.
- Warranty. Since each subsequent page-block depends on the previous one, if someone wants to change the data of an already “sealed” page, he will also have to change the content and cipher of all subsequent pages. And to do it yourself, given the growing complexity of computing each next code, is simply impossible.
- Transaction rate. Transferring cryptocurrencies with the help of the system is fast enough; after confirming the operation, it cannot be canceled and the transfer returned.
- Low commission for the transfer. Due to the lack of transaction intermediaries, the fee is relatively low compared to banking transactions.
The data of Bitcoin users and their balances are saved as a binary file, which is called Wallet. At the same time, the user can view the current balance, transaction history and addresses available for sending funds. At the same time, to carry out a transaction (more precisely, to receive Bitcoins) it is not necessary that your computer be online 24/7, since all transactions are stored in a distributed database.
And the principle of protection proof-of-work (proof of work) makes it impossible to double payment (when the same Bitcoins are sent to two or more addresses). This in turn prevents any cryptocurrency fraud attempts.
Disadvantages (criticism) of Bitcoin
The above features of the first cryptocurrency give it a number of advantages compared to traditional monetary assets. However, it is subject to shortcomings for which Bitcoin is often criticized.
- The use of Bitcoin in illegal activities. State regulators express their fears that with the help of Bitcoins, money can be laundered, purchases of illegal goods, such as weapons and drugs, and terrorism can be financed. This phenomenon is primarily due to the anonymity of transactions, with which state authorities are trying to fight … (For this, verification is introduced for crypto-wallets, on platforms and exchanges).
- Speculativeness. The lack of sufficient regulation of the cryptocurrency sphere and its relatively small share (compared to the stock market) makes it vulnerable to manipulation of exchange rates. And first of all, this is reflected in Bitcoin.
- Significant energy costs. Since the complexity of mining is constantly growing, (which we will discuss in more detail in the next paragraph), the energy consumption for the extraction of one block is also growing. According to the latest tunes, Bitcoin mining consumes as much electricity as whole New Zealand.
- Dishonest initial distribution. The initial distribution of coins provides significant benefits to those who started issuing earlier. So mining one Bitcoin coin is now 500,000 times the amount of work to create the first coins.
Ways to get Bitcoins
Today, there are several ways to get Bitcoins …
The most obvious and easiest of them is the purchase. You can buy BTC using your wallet or on cryptocurrency exchanges (such as Binance, Okex, Kraken, Poloniex, etc. The first cryptocurrency is listed on almost all cryptocurrency exchanges).
Another way to get Bitcoins is through classic mining. Buy an ASIC miner, connect to the pool and get Bitcoins as a reward for the work of your Miner. About buying cryptocurrency or mining, an article appeared on our site … I recommend reading it!
Cloud mining. Unlike the previous method, you do not need to buy expensive physical equipment. It is only necessary to rent, in the form of a contract, a cloud mining service and receive a reward from its capacities. Examples include HashFlare, Genesis Mining, and IQ Mining. (I would not recommend contacting unverified services, since there is a high probability of stumbling upon charlatans).
There is also such a method as “cranes”, where you need to click on the advertisement and get a reward for it. It is completely free, but the income from it is extremely scanty, so I would not consider it seriously.
Well, the key question is, why do Bitcoins serve? What can be done with their help?
First of all, Bitcoins can serve as a way to pay for the cost of goods and services. Cross-border payments can be added to this function of Bitcoin. Based on the features of Bitcoin, it has several advantages in comparison with traditional currencies that have already been voiced (low transactions, lack of intermediaries, lack of borders and speed of transaction confirmation), which makes it convenient to use.
Bitcoin can also be used to store value or invest. Given that there are a finite number of Bitcoins, and the demand for it is gradually growing, there will obviously be a tendency to increase prices for 1 BTC. (For example, at the beginning of 2017, the price for 1 BTC was less than $ 1000. At the end of the same year, its price was already about $ 20,000). In addition, as we have said, cryptocurrency is not subject to inflationary processes. However, one should take into account market volatility and the speculative component (which we talked about in the shortcomings).
Bitcoin is a prime example of new money and the confrontation of the traditional economy and new technologies. He absorbed the characteristics that surpass traditional currencies, but also carries certain risks that they are deprived of.
I think it will take time to cope with these risks without fundamentally damaging the basic principles of cryptocurrencies, such as anonymity. However, I am sure that in the near future, Bitcoin will take pride of place in the global economy.
Will Bitcoin be used as the primary means of payment? I don’t think … Most likely, this function will be successfully performed by such coins as XRP or NEM, which are more suitable for quick payments. And Bitcoin, in my opinion, will most likely fulfill the role of a certain “Gold Standard”, only in the world of cryptocurrencies. And most likely, it will be used to store value …