The concept of Bitcoin was originally proposed by Satoshi Nakamoto on November 1, 2008, and was officially born on January 3, 2009. It is open source software, designed and released based on Satoshi Nakamoto’s ideas and the P2P (peer-to-peer) network on which it was built.
Bitcoin is a P2P form of digital currency, and its transaction records are open and transparent. The transmission assumes a decentralized payment system. Unlike most currencies, Bitcoin is not issued by a specific monetary institution, but is generated by a large number of calculations based on a specific algorithm.
The Bitcoin economy uses a distributed database of nodes throughout the P2P network to confirm and record all transactions, and uses cryptography designed to ensure the security of all aspects of the currency’s circulation. The decentralized nature of P2P and the algorithms themselves ensure that there is no artificial manipulation of the currency’s value through mass production of bitcoin. The cryptography-based design allows bitcoins to be transferred or paid for only by the real owner. This also ensures the anonymity of transactions related to the possession and circulation of the currency. The total number of bitcoins is limited to no more than 10.5 million for a period of four years, after which the total value will be permanently capped at 21 million.
History and development of Bitcoin
In 2008, the global financial crisis erupted, and on November 1 of that year, a man calling himself Satoshi Nakamoto published a bitcoin white paper on the P2P Foundation website, “Bitcoin: A Peer-to-Peer Electronic Cash System,” outlining his new vision for the electronic currency. This was followed by the creation of the Bitcoin Genesis blockchain on January 3, 2009.
Unlike fiat (fiat currencies), Bitcoins do not have a centralized issuer, but are generated by the computation of network nodes. Anyone can participate in the creation of Bitcoins.
They can circulate worldwide, be bought and sold from any computer with Internet access. Anyone can buy, sell, receive or mine Bitcoins, no matter where they are, and no one can identify the user during the transaction. On January 5, 2009, Bitcoin was created without the control of central banks or any financial institutions. It is now a digital currency consisting of a complex string of code generated by a computer. Currently, economic analysis seeks to determine whether Bitcoin can become a mainstream currency of the future. The broad debate often focuses on its deflationary nature. How to mine Bitcoin and where to buy it? Does bitcoin have characteristics? We write about it below.
How is bitcoin mined?
The network generates new bitcoins by “mining” them. So-called “mining” is essentially the use of computers to solve a complex mathematical problem to ensure the integrity of the Bitcoin network’s distributed accounting system. The network automatically adjusts the difficulty of the math problem so that it receives a qualified answer about every 10 minutes. The Bitcoin network then generates a new amount of bitcoin as a block reward for getting the answer.
In 2009, when Bitcoin was created, the block reward was 50 Bitcoins. Ten minutes after its birth, the first 50 Bitcoins were generated, and the total amount of the currency at that point was 50. Thereafter, the rewards increased at a rate of about 50, every 10 minutes. When the total reached 10.5 million (50% of 21 million), the block reward was halved to 25. When the total reached 15.75 million (50% of the new production of 5.25 million, or 10.5), the block bonus was halved again to 12.5. Such mining rewards lead to the anti-inflationary nature of this cryptocurrency.
What is bitcoin and how to buy it?
Users can buy bitcoins and also use computers to “mine” them by performing extensive algorithmic calculations.
To “mine” bitcoins, users must use their computers to search for 64-bit numbers, and then compete with other miners by repeatedly solving puzzles to provide the bitcoin network with the needed numbers.
Due to the decentralized programming of the Bitcoin system, only 25 Bitcoins can be obtained every 10 minutes, and by 2140 the maximum number of Bitcoins in circulation will reach 21 million. In other words, the Bitcoin system is capable of self-sufficiency, having been encoded to withstand inflation and prevent others from manipulating these codes.
Bitcoin – what it is and how a transaction using it takes place
Bitcoin is electronic cash similar to email, and both parties to the transaction need a “bitcoin wallet” similar to an email address and a “bitcoin address” similar to a bank account number. Similar to sending and receiving emails, the party sending the money pays the bitcoin recipient directly from their computer or smartphone to their address.
A bitcoin address is a string of letters and numbers about 33 digits long. The software can generate addresses automatically and does not require an Internet connection to exchange information when generating addresses. There is a wide range of bitcoin addresses available. Addresses and private keys come in pairs and are related like bank card numbers and passwords.
A bitcoin address is used like a bank card number to record how many bitcoins you have in it. You can generate as many addresses as you want. When each bitcoin address is generated, the corresponding private key is also generated for that address. This private key proves that you have ownership of the bitcoin at that address. We can simply think of a bitcoin address as a bank card number, and the private key for that address as the password for the corresponding bank card number. You can only use the money on the bank card number if you know the password to the bank. So keep your address and private key when using your bitcoin wallet.
Transaction flow
A transaction is pre-confirmed when bitcoin data is packaged into a “block.” It is further accepted when the block is merged with the previous one. After six, consecutive confirmations, the transaction is essentially irreversibly confirmed.
Bitcoin’s peer-to-peer network stores the history of all transactions in blockchain technology. This chain is constantly expanding, and once a new block is added, it cannot be deleted again.
Blockchain is actually a decentralized group of nodes on the user side and a distributed database of all participants and a record of the history of all transactions. Satoshi Nakamoto predicted that as the amount of data grows, the user side will want this data not to be stored entirely on its own nodes. To achieve this, he is using the introduction of a hash function mechanism. This will allow the user side to automatically sift out parts it will never use, such as some of the very early records of bitcoin transactions.
Bitcoin controversy
Some are concerned that bitcoin is being used for black market transactions such as drug trafficking, money laundering and other illegal activities. A website called Silk Road, which established a platform for unscrupulous people to trade bitcoin, has already been shut down by US authorities. U.S. police reported on October 25, 2013 that they had found $2.8 million worth of bitcoins in the computer of the site’s owner, Ross William Ulbrich.
Reuters reported that the site had been operating since 2011 and had created a trading platform for a number of criminals. The site had heroin and other drugs for sale, and even offered firearms. More than 900,000 registered users of the site used bitcoin to trade drugs. Court documents show that the site made $1.2 billion worth of bitcoin transactions over two years of operation, charging 8 to 15 percent for each transaction. AFP reports that bitcoin is not yet effectively regulated in any country or region.
Bitcoin – how is it issued?
Bitcoin is issued by a system that automatically generates a certain number of bitcoins as a reward to miners for completing the process.
They act here as the issuer of the currency, and the process by which they obtain bitcoins is also known as “mining.” All bitcoin transactions must be mined by the miners and recorded in this ledger. Mining is actually a series of algorithms that are used to calculate the required hash value to access the ledger. The first miner to calculate the correct value gets to package a bitcoin transaction into a block, which is then stored across the blockchain and is thus rewarded with the corresponding bitcoin. This is how bitcoin is issued, and it also motivates miners to keep the blockchain secure and immutable. At the beginning of the project, the designers set the total number of bitcoin at 21 million. Initially, each miner who fought for the right to keep the ledger was to receive 50 bitcoin as a reward, which would then be halved every four years. It is expected that by 2140 bitcoin will no longer be able to be shared further, ending the issuance of all currencies.
What is bitcoin and what are its characteristics?
The cryptocurrency itself has its own specific characteristics. Among them, it is worth mentioning the following:
- Decentralization: Bitcoin is the first distributed virtual currency in which the entire network consists of users and without any central bank. Decentralization is a guarantee of Bitcoin’s security and freedom.
- Worldwide circulation: Bitcoins can be managed from any computer with Internet access. Anyone can mine, buy, sell or receive bitcoins, no matter where they are.
- Proprietary property: A private key is required to manipulate bitcoins, which can be stored in isolation on any storage medium. No one has access to it except the user himself.
- Low transaction fees: Bitcoins can be transferred for free, but eventually a fee of about 1 bitcent will be charged for each transaction to ensure faster processing.
- No hidden costs: as a means of payment from point A to point B, bitcoin has no onerous limits on amounts or paperwork. Payments can be made by knowing the bitcoin address of the other party.
- Cross-platform mining: users can use the computing power of different hardware on multiple platforms.
Bitcoin – what advantages does it have?
- Completely decentralized, there is no issuer and no way to manipulate the number of issues. Its issuance and circulation is done through an open-source P2P algorithm.
- Anonymous, free of taxes and regulation.
- It is characterized by robustness. Bitcoin is based entirely on the P2P network, there is no issuing center, so it cannot be externally shut down. The price of Bitcoin may fluctuate, crash, and many governments may declare it illegal, but Bitcoin and the vast P2P network will not disappear.
- No borders – To send money abroad, you go through layers of exchange control agencies, and the transaction history is recorded by multiple parties. But with bitcoin transactions, all you have to do is type in a digital address, click your mouse, wait for the P2P network to confirm the transaction and a large amount of money is on the other side. It doesn’t go through any regulatory authorities and leaves no record of cross-border transactions.
- Since the Bitcoin algorithm is completely open, anyone can download the source code, change some parameters, transform it and create a new P2P currency. However, these cryptocurrencies are extremely vulnerable to attacks. Any person or organization that controls 51% of the computing power of a P2P currency network can manipulate transactions and currency values at will, which can be devastating to P2P currencies. Many cryptocurrencies have died this way. The Bitcoin network is already so robust that the number of CPUs/GPUs required to control 51% of the Bitcoin network’s computing power would be astronomical.
Bitcoin’s drawbacks
- Vulnerability of the trading platform – While Bitcoin’s network is robust, its trading platform is fragile. Such a platform is usually a website, and such a solution is susceptible to being hacked or shut down by authorities.
- The price is extremely volatile – The large number of speculators involved has caused the price of bitcoin to fall and rise like a rollercoaster. This makes bitcoin more suitable for speculation than anonymous trading.
- Popular lack of understanding of the rules and resistance from traditional financial practitioners – Active Internet users understand how P2P networks work and know that bitcoin cannot be manipulated or controlled by humans. In the eyes of traditional financial practitioners, an issuerless currency is worthless.
