Bitcoin – Only A Hyped Digital Gold Rush?
Maybe the inventor of the Bitcoin had a vision for his digital currency reminiscent of gold exploration. Of searching and digging for the yellow metal in deep, dark tunnels, at risk for life and limb.
The reward or yield is a coinage that, unlike gold, is not physically tangible, existing only in digital numbers.
A coinage, however, that by its creation set a milestone within the digital revolution – marking perhaps the beginning of a new financial structure and also of social upheaval. Because one thing is obvious, namely that cash money is becoming less and less suitable in a more and more digitized world.
Sooner or later, tattered and dirty bills, heavy coins and even different currencies will be superfluous in people’s wallets.
The idea of digitizing money via Blockchain technology money has been around for some time, with the Bitcoin it was successfully implemented for the first time. For some years trading with Bitcoin from several brokerage accounts is allowed. Due to the high intraday volatility day trading of crypto currencies became very popular.
What Bitcoin is, how it was created and what is in it you will learn in the following article.
The secret of Bitcoin
On May 2nd, 2016, Australian computer expert Craig Steven Wright declared he was behind the pseudonym Satoshi Nakamoto, making him the inventor of Bitcoin.
After all, Wright was able to provide conclusive evidence that identifies him as a Bitcoin inventor, but the story is not very conclusive, because some questions remain open and some of the evidence in retrospect was revealed as counterfeit, as well.
Although the evidence presented and verified at least allow a clear identification of Wright as Nakamoto, but then again they are so sparse that they might as well come from the "real" Nakamoto, who might have presented Wright in order to remain anonymous.
There are other variations, as you will learn later. In any case, in the spring of 2017 Wright had filed more than 70 patents on bitcoin and the blockchain technology behind it with the UK Patent Office.
If there is actually another Nakamoto, he’ll certainly not put up with this and eventually emerge from hiding. If that’s not the case, Craig Steven Wright may well be the inventor of Bitcoin.
Then Wright is also an extremely wealthy man, because he holds at least one million of the 21 million possible Bitcoins. According to the current Bitcoin price (November 2017), that would amount to more than 5.7 billion dollars.
Today Wright states that he chose a pseudonym when inventing Bitcoin because he wanted to protect his personal environment.
Something he was right from today’s point of view, but in the early years of Bitcoin he would hardly have had to worry about gaining too much popularity or hostility.
How Bitcoin and the mysterious Nakamoto came into being
In 2008, Satoshi Nakamoto sent out a concept for a cryptographic currency via mailing list, based on the ideas of the US computer engineer Wei Dai, the likewise US-born computer scientist Nick Szabo, the British cryptography specialist Adam Back and Hal Finney, a game developer and computer scientist from California who died in 2014.
All four, Dai, Szabo, Back and Finney, were also on the mailing list of Nakamoto. In the following years there were repeated speculations about these four persons together, or at least one of them, hiding behind the pseudonym Nakamoto.
Who knows if this is not the case despite the revelations of Australian Craig Steven Wright?
The concept sent by Nakamoto also included an explanation of the benefits of a digital currency based on a cryptographic network.
The core thesis of this declaration is the elimination of the confidence prerequisite for analogous currencies or their managers such as the central banks and of course commercial and private banks.
These need to be trusted in the management of analogous money, even if the past and the present show that this trust is abused again and again, be it for political or economic reasons.
One year after the mail was sent, exactly on January 3, 2009, the Bitcoin network was born. The first two participants were Hal Finney and Satoshi Nakamoto. Finney received in this transaction 50 bitcoin from Nakamoto.
Again one might speculate about the pseudonym Nakamoto. At the residence of Hal Finney lived a certain Dorian Satoshi Nakamoto.
The then 60-year-old Dorian Nakamoto, a former employee of the US military intelligence and now – as a pensioner – model trains collector, denies having anything to do with Bitcoin.
The real Nakamoto, an American with Japanese roots, is obviously not rich. But he might have served as an alias for Finney in 2008.
With Hal Finney dying of ALS in 2014, there is a chance that an insider like Craig Steven Wright, who has been proven to have been involved with Bitcoin since 2009 and in communication with Nakamoto, may have assumed his legacy – whether justified or unjustified is undecided.
But all this remains speculation. Apart from this mysterious story, Bitcoin is undoubtedly an absolutely brilliant idea.
How does Bitcoin work?
Bitcoin is composed of two parts indispensably linked. One part does not work without the other part. On the one hand, there is the digital cash unit bitcoin, on the other hand, the payment system used to transfer and manage bitcoin.
This payment system is a decentralized computer network. In simple terms, each Bitcoin owner is co-administrator of all circulating bitcoin. There are no central servers, such as the mainframe of a bank managing all customer accounts, to which the bank user receives limited access via online banking.
Rather, every computer trading bitcoin or using bitcoin for payment transactions loads a database that lists all transactions ever made with Bitcoin. Really all and not just their own bitcoin.
These transactions are very heavily encrypted, which is why we talk about a cryptographic network. The high level of encryption as well as the distribution of data to all participating computers ensures that Bitcoin is absolutely secure against unauthorized interference.
It cannot be forged, unauthorized transfers or the clearing out of a Bitcoin account by criminals are also ruled out, and even the inadvertent transfer of money to a wrong account is not possible.
This makes it also safe from access by the state or regulatory authorities. Even the NSA admits to having failed to break the encryption.
Handling of personal passwords is the only risk for Bitcoin users, but like with any other application that’s up to the user.
There are plenty of ways to protect yourself from unauthorized access, but these often fails because of individual laziness. For example in 2016 the word "hello" was the number one password, followed by "password".
Some systems require up eight characters, consisting of uppercase and lowercase letters and at least one number. Some users proved extremely creative - “Hallo123” ranks third!
Bitcoin “mining”, or how bitcoins are “found”
The digital currency Bitcoin is not simply invented or spent in any way by a person or a company.
This would mean that at some point there would be so many bitcoin circulating that they would lose their value.
Bitcoin inflation is avoided by limiting the number of Nakamoto bitcoin ever possible to 21 million. Currently (as of November 2017) 16.66 million bitcoin are in circulation.
It is estimated that until about 2040 all 21 million bitcoins shall be “mined”.
What’s the significance of “bitcoin mining”?
The mining procedure is a very complex matter and that's good. Because the complexity together with the distribution of the individual processes on the entire network provides security against forgery as well as anonymity.
Simplified, it works like this: when bitcoin is traded, transactions are created. These transactions are initially stored only as encrypted files in the Bitcoin network.
This looks like the account statement in online banking, if something was paid by credit card. However, the Bitcoin encryption is already in place, preventing outsiders from reading anything, not even the sender and the recipient of the transaction.
These transactions are sent simultaneously to all computers of the network.
If, for example, the Bitcoin network includes 5 million people, that is, 5 million computers connected to the network and, again as an example, Mr. Muller purchases something from Ms Meier and pays for this item in bitcoin, this payment process is sent encrypted to all 5 million computers.
Then the transaction is by no means over, because the payment has to be verified, i.e. confirmed to be correct by the majority of those involved in the network.
Do not worry, no one handling bitcoin has to spend all day in front of the computer to confirm with a mouse click that the payment from Mr. Muller to Ms Meier has been in order. Rather, this confirmation process simultaneously serves to create new bitcoin.
During the process, so-called blocks are created in which transactions are combined in encrypted form. These blocks are part of a chain, thus: blockchain. To be able to produce such transaction blocks, a lot of computing power is needed.
The Nakamoto algorithms for blockchain technology assign or, better, allocate new bitcoin to those computers that have generated the most computing power to create the blocks. The degree of difficulty is adjusted upwards with increasing computing power.
That's why fewer and fewer new bitcoins are produced each year. As recently as 2013, experts assumed that by the year 2020 all 21 million bitcoins would have been found. Today, in 2017, one assumes this for the year 2040.
All about Bitcoin Trading?
Like almost every other currency, Bitcoin digital money allows for currency trading, namely bitcoin trading. The bitcoin is composed of units.
At the current price of >12,000 dollars for a bitcoin (as of 04.12.2017), a division into smaller units is absolutely necessary.
So right now, the smallest unit, a satoshi, the millionth part of a bitcoin, is worth exactly zero cents. Visible values that can be calculated in a conventional sense only materialize at 100 Satoshi, which correspond to around one cent.
The smallest Bitcoin unit was named after its inventor’s first name - Satoshi. Anyone who’d assume that such minuscule division of Bitcoin into a million units is utter nonsense is wrong.
Banks, for example, have long been juggling the remotest decimal points and doing very well out of it, without the bank customer even being aware of it.
For example, the currency exchange business often includes several decimal places in the conversion, beyond the existing units.
Who would demand the payment of 0.05 cents, the twentieth part of a cent, at the bank counter?
No one, exactly, and so these 0.05 cents go into the vaults of the banks. Multiplied by millions of transactions, this results in a decent profit for financial institutions, without anyone noticing or missing that money.
However, if a currency such as Bitcoin is divided into very small units right from the start, even the smallest amounts can be represented and tracked by everyone.
And there is another advantage – digitalization is increasingly promoting automated accounting systems with no clerks involved.
These are often very small amounts, so-called micropayments, such as the payment of digital goods.
These include today, for example, online newspaper articles or pieces of music for download. Here, too, globalization produces sums that actually have several decimal places.
In future, micropayment, and thus probably bitcoin, will play an important role in the transport sector, namely in supplying e-vehicles with energy.
Thanks to new technologies, charging takes place, for example, by means of induction in various locations, right up to the stop at traffic lights.
Usually only tiny sums are incurred for the respective providers whose billing must be automated to be economical. This needs a currency that can be divided into very small units, just like the Bitcoin.
Bitcoin Exchange – buying and selling bitcoin
To be able to buy or sell bitcoin, the future owner first needs a Bitcoin Wallet, the already mentioned digital wallet also available in as a Bitcoin app for smartphones.
Now there are several platforms on the Internet where bitcoin owners offer their digital currency for sale. For the purchase or sale of bitcoin the platforms charge transaction fees.
While Bitcoin itself is arguably the safest currency in the world, when using the various Bitcoin Exchange platforms, one has to check their security level, because such interfaces, where analogous money is exchanged for digital currency can be vulnerable for hackers and cyber criminals if they are insufficiently protected.
Targeted is primarily users’ analogous money, for example in the form of credit card numbers or pins for online banking. With stolen bitcoin, however, a thief cannot do anything, and besides, bitcoin is not easily stolen.
The Bitcoin, or digital, Wallet
In order to make payments with bitcoin, or to receive amounts from others in Bitcoin currency, the database software includes the Bitcoin Wallet.
This is a graphic interface similar to online banking, through which transactions can be made.
Even more convenient: the Bitcoin app!
Of course, in the age of smartphones and tablets, using a Bitcoin, or digital, wallet is not limited to laptops or PCs. T
hanks to a Bitcoin app now available for every operating system, Bitcoin transactions can be made from any mobile phone.
Is it worth to invest in Bitcoin?
The question of whether Bitcoin is a worthwhile investment can best be demonstrated by the performance. Probably no other tradeable object, whether digital or analogue, presently performs quite like this:After the first transaction in January 2009, Bitcoin was not traded on the exchange markets at all. In February 2010, the first bitcoin exchange opened on the internet.
At that time an unknown programmer paid 10,000 bitcoin for two pizzas, which would amount to more than 54 million dollars today.
It is likely that this programmer is now quite annoyed to have recklessly spent the at that time seemingly worthless digital money on two pizzas. But a year later, February 2011, the value of bitcoin was $ 1, and in August 2011 Bitcoin stood at $ 6.48.
Below is an overview of bitcoin development at intervals of one year:
- August 2011: $ 6.48
- August 2012: $ 8.00
- August 2013: $ 104.88
- August 2014: $ 376.65
- August 2015: $ 208.28
- August 2016: $ 517.99
- August 2017: $ 4,044.44
- December 17th 2017: $19,539.22
- November 18th 2018: $5,533.56
Certainly, this short overview does not present a complete picture. Bitcoin was devalued massively during the seven years of its trading history, and experience excessive upward swings as well.
Bitcoin came into being in the first year of a world economic crisis, triggered mainly by banks and their financial products. A crisis, that still keeps many countries on their toes today, well over 9 years later.The performance of Bitcoin does not depict just an object of speculation, but rather the hopes of many investors for a better and, above all, fairer financial system, working independent of manipulation.
That alone makes Bitcoin a worthwhile investment. Ultimately, a digital currency can make all other currencies redundant, serving as a means of payment for a fairer distribution of the world's resources.