Cryptocurrencies are complicated because it combines two topics that most people shrug—or even cringe at: sophisticated technology and finance/banking. To have a complete understanding of this subject, you may have to go earn a few master’s degrees and publish some research about it. However, if you can understand the rationale behind the creation of Bitcoin and how it works from a very general perspective, the cryptocurrency space may seem a bit more clear to you.
To start, we have to talk about Satoshi Nakamoto. Revered as the mastermind behind the creation of Bitcoin, Nakamoto printed a research paper called the ‘Bitcoin whitepaper,’ which explains why the cryptocurrency was created along with how it would be implemented. It was titled “Bitcoin: A Peer-to-Peer Electronic Cash System” and he launched the first version of it 10 years ago, Jan. 9th, 2009. Another part worth noting, Nakamoto never released his identity, which was a critical part to the creation of Bitcoin—more specifically the creation of a decentralized network (that I will explain later in this article).
Simply put, individuals can exchange real currency for virtual Bitcoins and then the individual can send Bitcoins to any other individual who has a so-called Bitcoin wallet. Bitcoin is obviously an extremely volatile currency. For example, Bitcoin’s market share soared to $20,000 at the start of 2018, but has lost about three-quarters of that value since. Now, why would anyone want to invest their hard-earned money into a cryptocurrency that could depreciate overnight to an amount worth next to nothing? Well, that’s because the system is censorship resistant.
The censorship-resistant aspect of Bitcoin is very important and the core of Bitcoin/Nakamoto’s philosophy. Since governments, banks or private companies have no control over Bitcoin, there is no way for them to dismantle the infrastructure or stop transactions. This is partly because Bitcoin is not physical, but also because transactions are sent through blockchain technology. The blockchain is used to keep identities secret by creating fake IP addresses, which conceals the computer’s location, even though there are accessible records of the transactions (the records only show the amount of Bitcoin transferred). On top of being a system that cannot be infiltrated, Nakamoto created it as an open-source software that no person owns and that means there are no insiders with access to your information or funds.
Another main theme is the decentralized system and that goes hand-in-hand with being an open-source software. Open-source software is simply software free to use by anyone. Decentralization, on the other hand, relates to the structure of the people who own/operate the company. For example, a centralized system within a business concentrates the most power into the hands of a few, like a CEO. The problem with having all of the power concentrated in the hands of a few is corruption. A whole system can be destroyed by a single person’s ulterior motives—not with Bitcoin, though.
The people who keep Bitcoin running are called ‘miners’ and they are ordinary people just with powerful computing systems. To take a step back, Bitcoin travels through blockchain technology, and in simple terms, the technology writes a node (or just a complicated message of letters/numbers) for another computer to confirm the transaction. These miners are third parties to these transactions, using their computing power to confirm blockchain nodes (for verification that it is safe and real), then transfer the Bitcoin and, finally, the miner is rewarded a small share of Bitcoin. This system benefits everyone involved, keeps a somewhat even distribution of Bitcoin and enables Bitcoin to be completely independent.
Bitcoin is here to stay and here’s why. Unless the United States abolishes the First Amendment, Bitcoin cannot be regulated. In a comprehensive article about this topic by Hackernoon, they describe that Bitcoin in the U.S. is not represented as currency under law. It is actually considered text because the nodes are simply a message and that falls under the category of the Freedom of Speech. Also worth noting from the article is that wherever in the world Bitcoin is regulated, a new Bitcoin hotspot will sprout somewhere else in the world, since you can use it anywhere else that isn’t regulated. It cannot necessarily be regulated to the point where people cannot use it; some governments try to issue ‘BitLicenses’ that make the process harder, but are ultimately unsuccessful.
At the crucial 10-year milestone of Bitcoin, a different cryptocurrency called Ethereum Classic was hacked, with CNBC calling it ‘confidence-breaking.’ It was called a ‘51 percent attack,’ which is when someone falsifies transactions and spends the same amount of cryptocurrency more than once. This quickly disrupts trust in the system, particularly because it was $500,000 worth that was duplicated. The attack has shut the platform down for now as Coinbase investigates, even though the Classic version is one of the less popular cryptocurrencies. Ethereum, however, is the second most popular cryptocurrency to Bitcoin and that is a very troubling sign for them along with other startup cryptocurrencies. Bitcoin apparently has fixed 51 percent attacks from happening.
From its spectacular climb to its over-a-year-long downward trajectory, Bitcoin has captured the world’s attention. An electronic payment system that enables two individuals on Earth to exchange a currency with little-to-no restriction is revolutionary, especially in a time where people are being banned from payment processors. Court rulings in New York defined that Bitcoin is a commodity, not the equivalent of money, which means KYC/AML do not apply to it. With very little blocking Bitcoin’s path to world adoption, we should anticipate that Bitcoin is here to stay.