What is Bitcoin (BTC)? A beginners guide.

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First and foremost, the definition says that Bitcoin is a peer-to-peer (P2P) electronic cash system, as described in the white-paper. It was first published on October 31st, 2008 by Satoshi Nakamoto. In January 3rd, 2009 the first block was mined which marked the actual creation of Bitcoin. 

The abstract of Bitcoin white-paper.

Bitcoin along with Satoshi Nakamoto presented an entirely new alternative to the traditionally centralized currency transactions. A system built by the people for the people. So the primary intent is that people are the ones, who control it. Bitcoin enables people to transact money between users without the need of a centralized authority. Because of blockchain technology, Bitcoin can offer a completely transparent way to transact payments. This system can entirely question the need or importance of Banks and other similar money transfer institutions.

Also, Bitcoin was the very first cryptocurrency in the form as we know them today. Bitcoin inspired thousands of new projects, as of today we have more than two thousand cryptocurrencies in the whole wide world. Since bitcoin code is open-source, everyone can copy it and try to evolve it in their own way. That is the reason why we have so many other “Bitcoins” in the market. Everyone wants to prove that they can make a better Bitcoin, but the cold hard facts are that Bitcoin, since its creation, has never lost its #1 position. Ever. And it is very doubtable that it ever will.

Other Bitcoins. Source: coingecko.com

In addition, Bitcoin has a fixed supply of 21 million BTC. Currently, there are 17,4 million coins in circulation.

How Bitcoin Works

Bitcoins are transferred via a peer-to-peer network. That means John can easily send money to Kate via this network. When John makes the transaction, miners create new blocks where this transaction will be recorded. By doing so, miners confirm this transaction. These transactions are tracked on the Blockchain, also known as the giant-ledger.

The Blockchain

Blockchain records every single transaction that has ever been made within the network. Bitcoin blockchain produces new blocks every ten minutes. Every block in the blockchain is built up of a data structure. If a single file is corrupt in a chain, then blockchain prevents it from damaging the rest of the ledger.

Source: https://www.g2crowd.com/categories/blockchain

Confirmation

So when John makes the transaction, it goes into the blockchain and now is waiting for confirmation. Usually, for small payments, it takes these ten minutes to be verified and recorded on the chain. For larger transactions, it could take up to even an hour when the blockchain needs to create at least six new blocks to avoid payment reversing. After the confirmation, Kate receives her Bitcoins.

When looking at a government which can print out as many bank notes as they want, thus producing inflation, Bitcoin works differently. That is, Bitcoin’s blockchain is built up in a way that it controls how many Bitcoins are made and how many are being produced.

Block halving

Bitcoins blockchain has a 4 year block halving period. That means that every four years, or 210,000 blocks, the reward for miners, who produce Bitcoins with their computing power, halves. Miners produce new blocks every 10 minutes. At the moment, for every block that a miner solves the reward is 12.5 BTC. Currently, there are 70,250 blocks left until the mining reward is halved. Also, there are only 2 block halvings left to occur in the future of Bitcoin. Respectively the reward will halve down to 6.25 Bitcoins. In the next block halving, which would occur in 2024, the reward will divide down to 3,125 and stay that way until all 21,000,000 BTC will be produced.

Bitcoin’s key features

Bitcoin is decentralized. No single person or a central authority has full control over it. That means no one can freeze, lock or dismiss your money. It is based on a Blockchain. It was the first blockchain ever created and since then the development of this area has skyrocketed. Blockchain developers today are the most demanding job position in the world.

Bitcoin has a limited supply. There can only be 21,000,000 BTC in circulation. Today we have around 17,496,875 BTC in circulation. In other words, around 80% of Bitcoins have already been mined. According to estimates, bitcoin will reach its final coin figure sometime in 2140.

Bitcoin compared to Gold and U.S. monetary base. Source: https://www.forbes.com/sites/laurashin/2016/06/02/4-reasons-why-bitcoin-represents-a-new-asset-class/#4731f35d3426

Bitcoin is deflationary. Some believe that Satoshi created Bitcoin to fight the money printing governments. It is awful that every year fiat money loses so much value. For example, during Fiscal Year 2014, the Bureau of Engraving and Printing delivered approximately 6.6 billion notes to the Federal Reserve, producing approximately 24.8 million notes a day with a face value of approximately $560 million.

Ron Paul described this very well in his website, calling the Fed crazy:

“When central banks create money, those who first get the new money enjoy an increase in purchasing power before the new money causes a real increase in prices. Those who receive the money first are members of the banking and financial elite. By the time the new money reaches the middle class and working class, inflation has set in, so any gain in purchasing power is more than offset by the increase in inflation. Thus, central banking causes income inequality.”

Ron Paul

Bitcoin, on the other hand, as already mentioned, has a fixed supply. And this is the model that Bitcoin Maximalists are defending. For most people, this would seem like a utopian dream, but bear this in mind.

Imagine a society, a world, where your money not only retains its value but increases with time. Bitcoin possibly can provide this. Once reaching the total supply of 21 million, its value can only go up.

The best performing asset of all time

Anthony Pompliano called Bitcoin the best performing asset of all time for a reason. Since the creation of Bitcoin in 2009, it outperformed S&P 500, DOW JONES, NASDAQ, etc. “during the longest bull run”. Bitcoin experienced multiple declines with more than -80%.

Nevertheless, Bitcoin is still up +56,146.22% since its creation. Because when Bitcoin started, it was worth 0$. At the time of writing the price of one Bitcoin is $3,523.20.

Who created Bitcoin?

Ten years ago the Bitcoin white-paper, also called as “Bitcoin: A Peer-to-Peer Electronic Cash System” was first published. It was posted by an anonymous pseudonym Satoshi Nakamoto on October 31st, 2008. To this day people are still exchanging opinions on what, who or they are. Some speculate that he could be Japanese because of the Japanese-like pseudonym. Some say that he might be British because of his perfect English writing style in his posts. Also, people believe that that might be a group of people rather than just one. Nevertheless, there have been multiple people claiming that they are the real Satoshi Nakamoto. Also, many journalists have tried to find out who the mysterious creator of Bitcoin is, but all evidence is circumstantial.

The advantages of investing in Bitcoin

Bitcoin along with cryptocurrencies as an asset class, opened the possibilities for lots of people to start learning about investments. Before then, millennials and other people interested in investing knew about investment opportunities such as:

Shares or Equities

A share or a stock is an indivisible unit of capital, expressing the ownership relationship between the company and the shareholder. Basically, this is a small portion of a company. You can only buy them as a whole, hence the indivisibility. Your shares are entirely dependent on the company and the wellness of their business.

Bonds

Bonds are also known as fixed-interest stocks. These are a form of IOU (abbreviated from the phrase “I owe you”) issued by governments and companies when they want to borrow money from investors. They pay a fixed level of interest, with higher-risk borrowers paying more in interest than lower-risk borrowers.

Commodities

Commodities such as Gold and Silver is one of the best investment opportunities of all time. There is a huge variety of commodities in the global markets. It includes Oil and Gas, Copper, Iron and even such agricultural commodities as wheat, rice, soya, lumber and so on. Similar to shares and bonds, commodity prices rise and fall depending on the supply and demand, and funds can take advantage of this.

Real-Estate

Property as an asset class is also considered as one of the best investment types in the world. If you buy land or a house, there are multiple Return of Investment opportunities. You can develop it and almost in all cases, the price will rise. Whether residential or commercial, the property has a good record in providing a financial return that beats inflation.

Investor as a slave

All these asset classes till now made the investor a sort of a slave to the specific asset class. A Broker takes care of everything. He also charges a fee for his work, which is logical. Considering this, people just handed over their money to people who they didn’t know. This makes the investor almost a slave to the particular service which provides the brokerage. Also, the investor needed to know everything about the particular market. This requires many hours of reading and understanding, especially, if we look at markets such as Commodities or Real-Estate.

Also, it required huge amounts of money to start with, and up until now investing seemed like only for the rich. For example, if you wanted to invest in stocks, you couldn’t just buy a portion of a stock, like a 0,2 part of the stock. You needed to buy one whole stock. If you wanted to invest in real estate, you basically needed the money to purchase a house or land. And those are not cheap.

However, Bitcoin introduced a whole different type of investing. It is possible to buy the smallest portion of BTC you need. People don’t have to buy a whole unit. You even can buy Bitcoin worth of $10. Or even less, if you want. People always say Bitcoin has a scaling problem, but it doesn’t. Bitcoin can be divisible into small fractions like 0.00000001 BTC, called Satoshis. 1 Satoshi is the smallest unit of Bitcoin.
Also, you don’t need a broker to do the purchasing for you. You just need to read a few beginners guides, and you’re all set. Not to mention that when investing in Bitcoin you are the core holder and owner of your investment. Of course, if you don’t use any third-party services.

The disadvantages of investing in Bitcoin

Bitcoin has been and still is a very volatile asset. It still is looking for a more stable market so we wouldn’t recommend it for short-term investments. However, lately, we can see that the BTC market is starting to mature. In the chart below you can see the weekly volatility compared to other asset classes. Bitcoin’s weekly volatility is only a percent higher than Oil.

In comparison Bitcoin’s market cap at the time of writing is only $62,4 billion compared to S&P 500’s $21.03 Trillion, or Dow Jones Industrial Average (DJIA) $7.5 trillion. You can only imagine how stable Bitcoin would be if it had a market cap of that scale.

Also, Bitcoin does not come with an insurance policy, like all the other above-mentioned asset classes. At the moment Bitcoin’s volatility is very high and it can come down as fast as it went up. Let alone the future regulations could improve or crash the price.

How Bitcoin has performed over the years.

The first data on Bitcoins’ (BTC) price goes back to July 7th, 2010, when the price was $0.05. So the first bull-run took it to $18.89 in May 29th, 2011. Then it went in a bear market for almost a year, cutting the price back to around $5. After that, a year of a slow bull market sent the price to $14, and at the beginning of 2013, it exploded to $142. Not long after, it surged its way to the first four-digit price – $1,205 in 2013 November. Then BTC went in on a two-year-long bear market lowering the rate to $228.50 in August 2015.

The biggest bull-run in Bitcoin history

After that, a three-year-long bull market began. The price completely exploded and reached unbelievable heights. The cost of one BTC was $19,000! In some exchanges, it reached even $20,000! Thanks to this bull market, lots and lots of people found out about Bitcoin. Media was covering it every day. CNBC was talking about how to buy Bitcoin and encouraging everyone on it. Everyone wanted to own a Bitcoin, which, preferably, he or she had purchased in 2013. During December 2017, it almost felt like Bitcoin is the only thing what interests people. The market was booming, new projects were coming out every two hours, and it felt like – this is it! Bitcoin has gained the needed attention – now we have to start using it.

Bitcoin chart, by Mircea Mihaescu

The problems

Along with massive popularity, came the networks’ usage problems. Bitcoin transaction fees skyrocketed and reached a shocking $37 per transaction in December 21st. That meant that small payments via BTC couldn’t be transacted. Since then the hype around Bitcoin has settled. Small payments now can be made through LightningNetwork – Bitcoins’ off-chain solution for micro-transactions. However now, the transaction fees are as low as $0,01.

The Future

Today Bitcoin accepts a total of 14,227 venues across the world. The most active areas being Europe and North America. The multiple payment cards and apps give us the possibility to spend our cryptocurrency as we want. You can buy cars, houses, boats, coffee, pay for rent, mobile services, and mainly use it as money, which it is. Just recently, during the Baltic HoneyBadger Bitcoin conference, The B Foundation was announced, which is an organization through which people will have the opportunity to finance Bitcoin.

Also, Bitcoin is slowly entering the traditional equity markets. CME and CBOE launched their first Bitcoin Futures markets back in 2017, January. Intercontinental Exchange (ICE) has launched a company called Bakkt, which will present Bitcoin Futures markets as well. However, they have failed to deliver a specific date for this launch. January 24th, 2018 was the date, but due to a government shutdown, it was postponed. Also, the SEC (Securities and Exchange Commission) soon will review the multiple Bitcoin ETF (Exchange Traded Fund) applications. These milestones can bring huge funds coming into Bitcoin, which could eventually increase the price.

However, are we all in this just for the money? Alternatively, are we in for the technological or the financial revolution? How long will it take for Bitcoin to reach mass adoption, and, in general – will it be Bitcoin?

You can read the original .pdf file of the Bitcoin White-Paper HERE.

Source:

https://citywire.co.uk/funds-insider/news/the-5-asset-classes-funds-invest-in/a568135
https://www.investopedia.com/terms/i/iou.asp
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https://cointelegraph.com/news/bitcoin-is-worlds-best-performing-asset-class-over-past-10-years-says-pompliano
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https://www.investopedia.com/news/only-20-percent-total-bitcoins-remain-be-mined/
https://www.treasury.gov/resource-center/faqs/Currency/Pages/edu_faq_currency_production.aspx
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https://cryptoiq.co/no-launch-date-in-sight-for-bakkt-physical-bitcoin-btc-futures/
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Cover photo by David McBee from Pexels