What is Bitcoin? What’s it have to do with a chain of blocks? And who is this Satoshi bloke everyone keeps mentioning? In this article, you’ll learn everything you need to know to be caught up on this thing called Bitcoin.
What Is Bitcoin?
Bitcoin is a decentralized digital currency that’s secured using cryptography. Bitcoin, and other digital coins like it, are called cryptocurrency.
Bitcoin users “mine” and “store” individual units of the cryptocurrency, and all units of Bitcoin are linked together by a central ledger (i.e. record of transactions). That ledger is a core Bitcoin feature called the blockchain. The blockchain validates and records every single transaction made using Bitcoin, ensuring the integrity of the Bitcoin network.
However, unlike regular fiat currency, there is no central Bitcoin bank or government. The creation and regulation of Bitcoin is controlled by an algorithm and is entirely digital. You cannot hold a physical Bitcoin in your hand, but you can hold physical hardware that contains data that corresponds to the Bitcoins you own.
Bitcoin is expensive. There aren’t many who can afford to buy one entire Bitcoin outright; instead, most people buy fractions of a Bitcoin. This is possible because Bitcoins are divisible to eight decimal places, meaning you can own as little as 0.00000001 BTC. You can’t do much with it, but you can definitely own it.
For example, let’s say you have $1,000 USD and want to buy some Bitcoin. As of this writing, that much cash would net you around 0.15 BTC. If the price of Bitcoin were to rise, so would the value of the Bitcoins you own, and vice versa should the price of Bitcoin fall.
In this sense, Bitcoin has morphed from a fledgling digital currency into a commodity. Or perhaps, it’s more accurate to say that Bitcoin straddles the line between a digital currency and a traded commodity. While there are many vendors who now accept Bitcoin and other cryptocurrencies as a payment method, cryptocurrencies are still primarily used for investing and trading.
Before trying this yourself, we recommend reading our articles on the risks of investing in cryptocurrency and the safest time to invest in cryptocurrency.
The Pros and Cons of Using Bitcoin
I’m not going to sit here and wax lyrical about the positives of Bitcoin without giving you the other side. Like all technology, Bitcoin has its pros and cons. Here’s are few for you to consider:
Bitcoin Pros
- Freedom: Users can send and receive Bitcoin anywhere in the world, irrespective of local currency.
- Decentralized: There is no central bank to control new Bitcoin. As we’ll explore in a moment, users mine new Bitcoin using computers, meaning the users are in control of the network.
- Transparent: The blockchain ledger underpinning Bitcoin is available to anyone who wants to download it. It currently stands at over 240GB. There are, however, numerous sites you can use to double-check transactions while keeping personal information hidden.
- Privacy: While there are ways to trace Bitcoin transactions back to their source, Bitcoin is largely anonymous. In addition to privacy, Bitcoin transactions protect against identity theft and credit/debit card fraud by using only digital wallet IDs, never your actual details.
- Supply: There is a finite supply of Bitcoin; only 21 million Bitcoin will ever exist. Several million are already presumed irretrievably lost, increasing demand for the rest. Meanwhile, Bitcoin is the baseline for almost all other cryptocurrencies measure against.
- Protection: Unlike regular currency, you cannot counterfeit Bitcoin. Sure, there are scams out there to steal Bitcoins, and unscrupulous individuals will try and sell fake Bitcoin, but you cannot fake a Bitcoin.
Bitcoin Cons
- Fees: In the early days, Bitcoin transaction fees were minimal. In December 2017, the average transaction fee peaked at $55, up from November’s high of $19. Fees could continue to rise, too. While $55 is extremely high and likely involved a large sum of Bitcoin, many balk at general fees.
- Instability: Price instability makes Bitcoin difficult to use as currency. Many vendors are unwilling to risk their incoming payments decreasing in value by the time it processes. Unlike a regular US dollar, the value of your Bitcoin could disappear overnight, leaving you with nothing (jibes at centralized currency, quantitative easing, and inflation aside).
- Refunds: One of the positives of Bitcoin is payment privacy. Unfortunately, is also a downside. If you send money to the wrong Bitcoin address, there is no way to claim it back. Similarly, if you purchase something using Bitcoin and it never arrives, there is no charge-back function.
- Competition: Some argue that competition is healthy for the cryptocurrency markets, and I agree. Bitcoin holds the most value and is still the most attractive investment opportunity, but other cryptocurrencies offer more regarding privacy, security, and functionality. They cost less, and could eventually overtake Bitcoin.
- Unregulated: Similar to the lack of refunds, some Bitcoin-related scams are essentially impossible to recover from. Law enforcement can do nothing once your coins are gone, other than commiserating and filing a report.
- Loss: It is possible to irretrievably lose Bitcoins, be that through destruction, encryption, or similar.
- Adoption: For most of the reasons above, Bitcoin has low adoption rates among businesses, and will continue to struggle for many years. In conjunction, Bitcoin is slow to process payments, processing a theoretical maximum of seven transactions per second (compared to regular banking systems like Visa that processes thousands every second).
Regarding the final point on Bitcoin adoption rates, this situation is slowly changing. More vendors now accept bitcoin for goods and services than ever before, but it is still a fraction of those accepting regular payments.
The Future of Bitcoin
The future of Bitcoin is difficult to predict. Most people want to know if their investment will rise to the moon once more, but the interim is full of uncertainty. There are absolutely no solid guesses.
What is clear, however, is that looking at a chart doesn’t make the picture easier to understand. Bitcoin price predictions are a dime a dozen.
For instance, when this article was first published in 2016, it included some price predictions made by high-profile entities:
- Saxo Bank: $60,000 in 2018, before crashing back to $1,000 before 2019
- John McAfee: $1,000,000 by 2020
- James Altucher: $1,000,000 by 2020
- Masterluc: $40,000 to $110,000 by 2019
- Gavriel Shaw: $10,500 by January 1, 2019
- Tim Draper: $250,000 by 2022
At the time of writing, only Gavriel Shaw’s prediction of $10,500 per Bitcoin has come to pass. The other predictions were either way off of the mark or still waiting for their time to come.
The true future and legacy of Bitcoin isn’t in the individual coin value, but the underlying blockchain technology.
During Bitcoin’s massive price rise in 2017, blockchain became a buzzword. Listed corporations bumped their stock a few points by merely mentioning their product in conjunction with blockchain research.
For example, US-based Tulip BioMed changed their name to Bitcoin Services and saw their stock rise 42,500 percent, while China-based JA Energy switched to UBI Blockchain Internet Ltd and received a 20,445 percent stock increase for their troubles.
The bubble effect of sticking “blockchain” in a corporate name doesn’t last. A recent study found that the positive effect lasts for around two months before many companies experience a serious downturn after half a year. Whereas other companies, such as Kodak, found their name tarnished after Kodak-branded cryptocurrency mining hardware appeared at CES 2018 despite it having no serious link to Bitcoin mining.
If you look past the hype, name changes, stock manipulation, and the laughably strange proposed applications of blockchain, you find a technology with deeply interesting credentials for lasting change.
Bitcoin “Layer 2” Protocol
One of the biggest issues facing Bitcoin is sustainable growth. Simply put, the Bitcoin network cannot process enough transactions to compete with fiat currency solutions or the expansive pressure on the existing infrastructure. Several proposals would mediate this issue.
One such solution lies with “Layer 2” Bitcoin network protocols. Layer 2 protocol solution aims to increase network capacity and decrease transaction times without requiring a hard fork. Instead, a Layer 2 protocol sits atop and interacts with the existing Bitcoin network. The most notable example is the Lightning Network.
There is even discussion regarding another protocol layer between the main Bitcoin network and Layer 2 protocols to increase transaction speed further.
Bitcoin Power Consumption
Bitcoin isn’t all good clean fun, mind. You might have read about the appalling amount of power the Bitcoin network consumes. There’s no beating about the bush: the global power consumption of the Bitcoin mining network is staggering.
From early 2017 to late 2018, Bitcoin’s energy consumption almost trebled. Bitcoin’s energy consumption now continuously ranges between 60TWh to 80TWh per year, using more power than Colombia or Austria.
Check out the University of Cambridge Centre for Alternative Finance Bitcoin Electricity Consumption Index chart below:
Even countries like Iceland that run almost exclusively on renewable energy are struggling to cope with Bitcoin mining demand. Iceland has long had extensive power consumption issues through its aluminum smelting industry (using more than 70% of the country’s entire power), but now Bitcoin mining is sucking up more energy than the entire population uses to power their homes for a year.
There is another downside, too. While geothermal and hydro plants have a smaller environmental impact than a fume-spewing Chinese coal plant, it isn’t neutral. Furthermore, most of the Bitcoin mining requires no staff, returns very little in taxes to the Icelandic people, and isn’t worthwhile to the country. To the world, yes, renewable energy for Bitcoin mining is excellent. But for the host nation? Not so much.
Global Bitcoin Mining Dominance
Cheap power doesn’t necessitate bitcoin mining dominance, either. For all the energy Iceland expends on Bitcoin and other cryptocurrency mining operations, it isn’t a) the cheapest place to mine, and b) doesn’t mine the most cryptocurrency.
The cheapest country in which to mine bitcoin remains Venezuela. For all of Venezuela’s considerable societal problems, energy to mine cryptocurrency remains cheap due to the country’s vast oil reserves (recognized as the largest in the world). Venezuela President Nicolas Maduro launched a national cryptocurrency, the “Petro,” as a method of skirting international sanctions, although its technical implementation is shaky at best.
But the country mining the most Bitcoin? That title belongs to China. China has a colossal amount of electrical output and as such is home to several of the largest global mining pools. Chinese power companies allegedly direct excess power toward cryptocurrency mining businesses at even cheaper rates than usual to ensure as little power waste as possible.
China is, therefore, the largest miner of bitcoin, as well as the world’s largest exporter of cryptocurrency. It is no wonder Bitcoin and cryptocurrency markets react strongly to negative cryptocurrency regulatory news from the Chinese government.
And in case you’re now wondering, South Korea is the most expensive place to mine Bitcoin.
What Is Bitcoin? The Future
Bitcoin’s journey is still in its infancy. Bitcoin might not last the distance, but it has set the cryptocurrency and blockchain ball rolling.
Despite the well-documented highs and lows of Bitcoin, the price of a single token remains high. Why is Bitcoin so expensive?