What is Bitcoin? . Welcome back to Poor Sheep, a blog about…Author: Mohak Mathur | The Capital | June 2021
Welcome back to Poor Sheep, this is a blog for people who are in the early stages of studying finance. In the previous blog, we discussed what blockchain is. In this article, we will continue to discuss cryptocurrencies (most of which are used in blockchain technology), with a special focus on Bitcoin.
If you are not familiar with blockchain technology, you can check my previous blog — What is all the hype surrounding the blockchain?
according to Investment Encyclopedia, “A cryptocurrency is a digital or virtual currency protected by cryptography, which makes forgery or double spending almost impossible.”
The first cryptocurrency in history was Bitcoin. It was introduced to the world by an individual or group under the pseudonym “Satoshi Nakamoto” in 2009. The true identity of this individual or group is still unknown, but several individuals do match the information.
In addition to Bitcoin (also known as altcoins), there are currently approximately 4,000 cryptocurrencies in existence. Based on market capitalization, some of the most popular altcoins are Ethereum, Tether, Binance Coin, Cardano, and Dogecoin. Despite the wide variety of altcoins available, Bitcoin’s market capitalization in the cryptocurrency market dominates over 45%.
Simply put, Bitcoin is a virtual currency that can be used for online transactions. It was created after the Great Depression in 2008, and its idea is to disintermediate financial transactions so that banks do not need to participate in every transaction. It is based on the principles of blockchain and is therefore “decentralized”, which means that there is no central authority to regulate this cryptocurrency. Instead, it runs on a peer-to-peer system, and transactions are verified through a mechanism called proof of work.
In order to obtain Bitcoin, you can use your computer as a node for mining, or you can purchase it from apps such as Gemini or CoinBase.
Mining is the process of solving password problems to generate new blocks. These problems are completely computational, and you need to invest a lot of money to upgrade your settings in order to profit from Bitcoin. A block is generated every 10 minutes and contains data for about 2,700 transactions. If miners solve a block, they will receive a reward of 6.25 bitcoins. However, this number is halved every 210,000 blocks, which takes about 4 years. Currently, out of a total of 21 million Bitcoins, slightly more than 18 million exist, and the rest are expected to be discovered in 2150.
Miners not only benefit from rewards, but also from transaction fees, which serve as incentives to record specific transactions in the block. This incentive is essential because each block can only contain a limited number of transactions (currently 2,700).
When we talk about Bitcoin mining, we also need to address the shortcomings. First, it requires a large amount of financial investment to purchase the required technology. Secondly, buying this technology does not guarantee a return on investment, because mining also involves “luck” factors. Third, it uses a lot of energy, which caused an uproar among environmentalists. To solve these energy problems, a mechanism called Proof of Rights is being studied, which is a more environmentally friendly alternative to Proof of Work. The use of ASIC mining is also increasing, which is more energy efficient than ordinary mining.
If you don’t want to take the risk of mining, it is recommended to use applications such as Coinbase and Coinswitch. These apps allow you to exchange bitcoins by broadcasting your transactions from their network to the blockchain. It is recommended to use an application that stores the “private key” in cold storage, as it helps prevent network hacker attacks. You can also send the purchased bitcoins to companies such as Blockfi through these apps, and they will pay you interest based on the deposited amount. However, using apps to buy cryptocurrency has its own set of disadvantages. Hackers have been able to enter the network of these applications in the past and steal bitcoins from other wallets.
You may have noticed that the initial coin offering sounds similar to an initial public offering. Unsurprisingly, both have the same purpose-to help a company raise capital. Funds raised through ICOs are usually used to create new coins or build new applications/services.
Investors interested in the product buy it and receive cryptocurrency tokens in exchange. The token can represent the shares of the company/project, or have a certain utility in using the products/services that the company will launch.
With this, we have come to the end of this blog. I hope you now have a better understanding of what Bitcoin is and how it works. To better understand blockchain technology, you can check my previous blog. Thank you for reading, please continue to pay attention to the poor sheep.