A Basic Bitcoin Breakdown
27 Jun 2019
3 min read
Cryptocurrency, blockchain, bitcoin. These three terms are all in reference to a digital currency scheme that has swept the world since it’s invention in 2008. In 2008 the world’s first cryptocurrency Bitcoin was created by the anonymous “Satoshi Nakamoto”, as a response to the finical crash. The topic can often leave everyone a little confused, so lets try and break it down.
The Concept: Cryptocurrency
The term cryptocurrency refers to the concept and mechanism that is a means of exchange, carried out by digital transactions. These virtual, digital currencies are independent of governmental or other authoritative control i.e. the currency doesn’t go through a centralized banking system. Therefore, when you send your virtual currency via a digital transaction it goes from A the giver to B the receiver in one transaction and skips any middle men.
The Technology: Blockchain
For these virtual currencies and digital transactions to have some form of value they need to be securely encrypted and to be verified to prevent fraud or double spending. This tool for transaction verification is referred to as ‘Blockchain’
Blockchain is a public ledger of all the digital transactions that have occurred of the cryptocurrency. It’s essentially a long record book of the transactions that continues to grow and build on itself as more transactions continue. The blockchain is public, accessible, updated and all the versions of it are the same. Once a transaction has been verified by ‘miners’ using algorithms known as the ‘cryptographic hash function’ they are added to the blockchain.
The actual confirmation of the transactions, done by performing algorithms such as the ‘cryptographic hash function’ takes up a lot of power and massive amounts of hardware, so it is a difficult process for people to complete. In reward for completing the verification of a transaction and adding it to the block chain, you get given a set amount of cryptocurrency; currently the rate for bitcoin is for each transaction confirmed you get 12.5 Bitcoin. However, in order to get this reward, you need to be the quickest at completing the algorithms and many people are fighting for that bitcoin reward.
The Brand: Bitcoin
‘Bitcoin’ itself is a type of cryptocurrency. It is the largest, most popular and first decentralised cryptocurrency that currently has the value; 1 Bitcoin = £2708.79. There are many other cryptocurrencies such as Litecoin, Ethereum and Ripple, all with different levels of success and value.
As mentioned previously bitcoin was invented in 2008 in response to the financial crash. Bitcoin operates on a fixed market cap system, as in there are only ever 21 million Bitcoins in circulation. This is in part the reason the currency has such high value; supply and demand. If there were endless amounts of bitcoin and everybody could get their hands on some it would be worthless.
By cryptocurrencies being decentralised you can avoid matters like this. Many people support the currency based on this point, as its potential benefit for developing countries who struggle when their real currency such as rand, dollar, rupee drops in value.
As said previously the value given to this bitcoin is driven by the market, supply and demand, and the current ‘hype’ that surrounds it, but can you use this money in real life? Well you can sell you bitcoin at its current rate, obviously how much money you make off it depends on the rise and fall of the currency. If you bought your bitcoin at £1000 and now sell it for £9000 then great you’ve made £8000 but if you don’t get the market right and suddenly your bitcoin starts dropping in value and everybody starts trying to sell it for ‘real world money’ you could lose out. This is much the same as stocks and shares; it’s a very difficult thing to predict and it is a risky game to play.
The future of bitcoin and other cryptocurrencies is highly debated. Though the value of the actual digital currency may change, the value in the technology in this process is great.