Bitcoin explained

Updated: Dec 2, 2020

Bitcoin is the first decentralized digital currency, currently the sixth largest world currency by market capitalization. Let's see more in detail:

Who invented bitcoin?

Bitcoin was invented in 2008 by the mysterious Satoshi Nakamoto, who is probably the pseudonym used by one or more people who worked on the bitcoin project, and who perhaps has or wanted to avoid the spotlight to ensure protection from anonymity, and to give complete freedom to the project.

Some argue that Harold Thomas Finney II, a programmer from Southern California, was likely Satoshi Nakamoto.

Finney said he received the first transaction from Satoshi a few days after the genesis block.

He probably sent the transaction to himself. Satoshi used an @ email address. Finney was the first person to post on Bitcoin's SourceForge page using an @ address. His post writing style is very similar to the one used by Satoshi Nakamoto.

The technology behind bitcoin: The blockchain

The technology that makes bitcoin work is called "blockchain". The distributed ledger that has all the information contained in the block chain is present in all computers connected to the network. Once written, the data in a block cannot be retroactively altered without all subsequent blocks being modified. This step, due to the nature of the protocol and the validation scheme, would require the consent of the majority of the network. This means that bitcoin does not belong to a centralized institution, such as a central bank.

What Bitcoin aims to do

Satoshi Nakamoto's work aims to remove trusted third parties from transactions through a purely peer-to-peer version of electronic money, as stated in the white paper he wrote (you can find the link in description). This means that there would be no banks or other institutions to which you should entrust your bitcoins and you can freely transact with anyone around the world and at any time.

As the common motto says:

With Bitcoin you can be your own bank.

Bitcoin is also designed to not be printed as needed like current national currencies.

The strengths of bitcoin are many, let's now see the 3 main ones:

  1. Decentralization: There is no central entity that controls and decides

  2. Transparency: All transactions carried out are visible in an alphanumeric form, therefore not linkable to a specific person

  3. Complete control of cryptocurrencies: Since we can have full control of the funds without the intermediation of third parties.

Hence another common motto:

If you don't own your private keys, you don't own your bitcoin.

What supports the progressive increase of bitcoin in circulation

Bitcoin uses a transaction verification system called Proof of Work (PoW). In this process, miners provide the network with computing power and try to solve complex math problems to create the next block of the blockchain. Each block contains the information of different transactions made in bitcoin. The miner who manages to solve the puzzle first receives a certain defined amount of bitcoin as a reward. The difficulty level of the block resolution is automatically updated by an algorithm within the protocol, based on the speed with which the miners are able to mine the block. The process that will determine the end of the coins in circulation is called "halving".

Even if a miner acts maliciously or is compromised, all other participants in the network will still verify the accuracy of the transactions. As such, there cannot be a single point of failure in the network, as all computers will have to show the same results.

Every 4 years, after 210.000 blocks have been extracted from the system, the miners' rewards are reduced by 50% (hence the name "halving"). The current reward for miners is 6,25 bitcoins for each block mined. In 4 years, therefore, the reward per block will be halved to 3,125 bitcoins.

Production will end around 2140, when miners' rewards will reach zero.

Bitcoin is designed to have a maximum of 21 million coins in circulation, and each coin is divisible, meaning it is possible to buy a fraction, called Satoshi. In 1 bitcoin therefore we can find 100.000.000 satoshi. So, when we eventually reach the maximum 21 million bitcoins that can exist, it means that we would have of Satoshi as circulating supply.

People have confidence in the bitcoin?

Like all things at the beginning, such as credit cards and ATMs in the 1950s and 1960s, they are seen by the general public as a threat, simply because they differ from their habits of the moment, and this initially generates distrust ( as it certainly must have been at the end of the 19th century when horses were slowly replaced by combustion engines). Who would ever want to replace a quiet, "relatively" fragrant horse with a smelly, noisy machine? with probably not so many petrol stations or maybe not at all?

Bitcoin is going through the same moment of distrust of the masses. But things are slowly changing. Precisely during this year 2020, with the pandemic and economic crisis, important institutional investors worldwide are buying large quantities of bitcoin to hold in their wallets, which suggests that bitcoin is maturing over time, and is increasingly understood and appreciated, even by authoritative institutions with a certain experience and influence in the financial field.

How will bitcoin evolve over time?

We still don't know what bitcoin will be in the future, but in the past 10 years we have seen huge changes in the cryptocurrency industry. From simple speculators acting on the price of bitcoin, to a store of value and a safe haven. It is very likely that one day bitcoin will be considered by banks and financial institutions as a valuable asset to be placed as a collateral.

Currently, we can see that the demand for bitcoin and derivative products continues to rise. Just during one of the most difficult moments for bitcoin in March 2020, when many institutional investors had given up the blow by withdrawing over 31 billion dollars from bitcoin exchanges, Grayscale Investments distinguished itself by transforming the financial collapse due to Covid-19 into opportunity.

Furthermore, this year is the inclusion of PayPal in the bitcoin markets. The entrance of such an important and widely used payment network has triggered the attention of many people and institutions: If other companies also choose to invest in cryptocurrencies, the bitcoins currently available in the market will run out soon.

The scarcity of Bitcoin

As Satoshi Nakamoto had announced, anyone who wanted to get a share of cryptocurrency should have done so considering a halving of the global number of assets every 4 years.

Some data collected during 2020 confirm that:

  • almost 2 million bitcoin addresses have between 1 and 10 BTC

  • more than 4 million bitcoin addresses have between 10 and 100 BTC

  • almost 4 million addresses have assets between 100 and 1.000 BTC

  • almost 6 million addresses have assets between 1.000 and 10.000 BTC.

The interesting aspect of this data is that if there are almost 8 billion people in the world, and there will be a maximum of 21 million bitcoin , this means that there is not enough for everyone. This is why the price only rises in correspondence with the scarcity of the asset. Bitcoin is like gold: there is none for everyone and the scarcer it is, the higher the amount that will have to be invested to buy it. These logics move large investors who invest in bitcoin.

The interest of Grayscale Investments and other companies that own large quantities of bitcoin lies in its extraordinary potential. For the first time in history, with this invention we can send money anywhere, without limits of space and time, with the same speed with which we send information. All in safety and without any trustee third party necessary for its operation.

And we're just getting started. The field of application for bitcoin is very vast, we can expect numerous inventions in the future. Just think now of several companies that are filing patents related to the blockchain and bitcoin. One of them is Coinbase, a famous US exchange, which has filed a patent that will allow the exchange of cryptocurrency via email. So maybe one day we will attach payments to emails, as we attach documents and images today.

Beyond economic magnitude, bitcoin value goes much further, founding a system of trust based on a democratic, fair and transparent model. This asset is capable of completely transforming the legacy systems of the world, driving possible applications towards technological growth like few others.

Should we buy bitcoin?

The choice of having an asset which is a legal tender currency or cryptocurrency is purely a personal decision. The reasons for including bitcoin among the various investment options are many. One above all is to become part of a new way of thinking about money: considering it free from legal and economic constraints that can prevent its progress. Bitcoin is the currency of everyone, of the people and not of governments: only for this reason it has already won.

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