Depending on who you speak to, from a non-definitive perspective, Bitcoin might be ‘the future reserve currency of the world’, or it might be a ‘complete scam’. It’s a highly divisive topic. Investors have got involved for many reasons, including just for fun, out of FOMO (fear of missing out), as part of a diversified portfolio, or even as a way of life.
From a definitive perspective, Bitcoin is the world’s biggest cryptocurrency, taking up roughly half of the total crypto market cap. Bitcoin, like other cryptocurrencies, exists outside the framework of traditional, centralised finance. Bitcoins are transferred peer-to-peer from one digital wallet (acquired from crypto exchanges) to another. Bitcoin is the first decentralised crypto, founded in 2009 by the mysterious Satoshi Nakamoto (who we still don’t know the identity of).
The most accessible place to buy cryptocurrency is through the many crypto exchanges on offer, such as Binance, Coinbase or Gemini. Before you purchase, you’ll need to have the following:
Bitcoin has become most famous for providing life-changing returns to many of its investors over the years.
(market cap = total value of all coins that have been mined, based on the latest traded price)
Deciding to be an early investor in cryptocurrency has quite often turned out to be a life-changing decision. Bitcoin, amongst other cryptocurrencies, has made many people extremely rich. Ultimately, gaining such levels of wealth (noted below) in such a short period (and with such ease) is what continues to draw users into cryptocurrency.
(Accurate as of October 2023. Source: BitInfoCharts).
Bitcoin uses a proof-of-work consensus algorithm to validate transactions and broadcast new blocks to the blockchain. The proof-of-work concept existed before Bitcoin, and its primary aim was to prevent cyber attacks.
The process of creating new Bitcoin is known as mining.
Bitcoin mining has two objectives:
To ‘mine’ Bitcoin, miners on the Bitcoin network compete against each other to solve complex computational problems. Mining Bitcoin is very energy-intensive, so you won’t be able to mine it off an everyday computer.
Everything on-chain is validated by Bitcoin miners, who record transactions and add them to the blockchain ledger. As new transactions are eventually added, they are put into groups known as blocks. Ultimately, these blocks become ‘full’, and at this point, an additional block is added to the blockchain.
The addition of one new block is broadcasted to the entire network, meaning every computer is updated to reflect the change. The whole network having information about the new block added, rather than being stored in a central database, makes the blockchain challenging to interfere with.
For a miner to receive their reward (Bitcoin), a miner must:
The ‘challenge’ of solving complex computer problems becomes increasingly difficult (and, therefore, more energy-intensive) as more Bitcoins are mined. Although the reward for mining has, on average, become greater over time, as has the cost of mining, plus the likelihood of miners being unsuccessful in mining. This is due to a combination of Bitcoin’s increased value further incentivising others to mine + fewer Bitcoin available to mine. The end result is more miners competing over fewer Bitcoin.
As mentioned earlier, the proof-of-work concept's main aim is to prevent cyber attacks. To add a malicious block to the Bitcoin network, somebody would require a computer more powerful (greater mining hash rate) than 50% of the network (known as a ‘51% Attack’)!
Bitcoin’s supply is limited to 21 million, with each Bitcoin broken down into 100 million smaller units, known as Satoshis or ‘sats’. Not all 21 million Bitcoin were made available in 2009, but rather, they are continuously mined. Roughly every four years (or 210,000 blocks, to be precise), the number of Bitcoin entering circulation (i.e. being created) halves. In 2009, the Bitcoin system mined 50 coins per 10 minutes, whereas today, it is roughly 12 being mined every 10 minutes.
The maximum supply of Bitcoin is unchangeable unless the whole Bitcoin community agrees on it. After all, its capped supply is a huge selling point - you’ll see Bitcoiners use it to form a narrative such as “there isn’t enough Bitcoin to go round for every millionaire in the world to own half a Bitcoin! Buy now, we’re still early!”. Therefore, for as long as capped supply remains hugely influential in determining its high market value, it is unlikely that its monetary policy will change.
(Block subsidy = number of new Bitcoin minted in each block.)
In short, somewhat limited.
You can use Bitcoin to buy and sell goods wherever accepted, but the issue is that acceptance is not very widespread. Bitcoin's wild price volatility means that if two people were ever to use it as a medium of exchange, one of them would probably get screwed over pretty quickly. As of October 2023, only El Salvador classifies Bitcoin as legal tender, but advocates will note that its use cases are growing. Its most high-profile use case *was* the ability to buy a Tesla with it; however, that offer is currently unavailable on environmental concerns.
Most Bitcoin owners do not purchase it in the hope that they will be able to buy next week's groceries with it, but rather in the belief that it will be worth more in years to come - a process commonly known as ‘HODL’ (hold on for dear life) - a reference to holding onto Bitcoin throughout its wild price swings, though said to have been originally a typo! In addition, those who believe Bitcoin's value will further appreciate in years to come may use it as a hedge against inflation. The argument is that uncontrolled money printing by central banks will lead to fiat currency debasement and inflation, but Bitcoin, having a limited supply as above, will avoid that.
Bitcoin is highly volatile. Ironically, for a decentralised asset, its price can be highly influenced by a small number of people (talking about you in particular, Elon).
One of the most significant downsides to decentralisation is that, unlike traditional banks, there’s no centralised body to provide consumer protection. If you lose money through exchanges going bust, getting scammed, or if your wallet gets hacked, then tough luck; there’s no legislation to protect you!
Nobody knows what the future holds for regulation in the sector. Some believe that cryptocurrency will soon be embraced by sovereign states, while others believe that central banks and governments will put measures to weaken, or maybe ban, cryptocurrency.
The value of cryptocurrency theft worldwide increased by 39% in 2020, so looking out for scams is essential. Be cautious about the apps you download, websites you visit and emails you open relating to cryptocurrency.
According to the University of Cambridge’s Bitcoin Electricity Index, Bitcoin’s current* annualised energy consumption is 130 TWh.
How that annualised energy consumption compares to the total energy consumption of countries:
*accurate as of 25th October 2023
WHAT IS BITCOIN? COMPLETED. ✅
Sources:
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