What is Bitcoin?
You may have heard of this fascinating cryptocurrency given its recent prominence in the media. But what is it and how does it actually work? Read below to find out more about Bitcoin.
Bitcoin is the world’s first decentralized, digital currency. Created in 2009 by an elusive computer programmer under the pseudonym ‘Satoshi Nakamoto’, it uses blockchain technology to create a distributed ledger which cannot be manipulated by any one person, company or government. The ledger utilises cryptography to create and eternalise records pertaining to the creation and transfer of Bitcoin, so it can never be duplicated or double-spent, and can never be transferred without confirmation from the Bitcoin owner and the majority of the network.
While originally intended to be used as a means of exchange, Bitcoin is now very commonly used as a speculative investment asset by both those who have a vested interest in the use of Bitcoin and blockchain technology, as well as investors who are simply looking for significant returns on an asset that is being quickly adopted by people, countries and governments all around the world.
Its meteoric rise ‘to the moon’ as many crypto fans would say, from as little as ~$100 in 2013 to as much as ~$65,000 in 2021, has made it one of the most talked about topics in financial markets in recent history. FOMO ( the fear of missing out) from investors has played a key part in Bitcoin’s rapid rise in popularity, and this has fueled significant increases in its valuation particularly over the past couple of years. But the initial reluctance of investment banks, hedge funds and other major players to get involved is also starting to subside, and so the future prospects of Bitcoin are constantly evolving as wider market sentiment changes.
With the allure of currency speculation in mind, Bitcoin is also an exciting vehicle for short term traders of all timeframes. Cryptocurrencies markets are open 24/7, 365 days a year. That means opportunities for traders every day of the week, all year round.
Being completely decentralized, it could be argued that Bitcoin and other cryptocurrencies could one day be the technical trader’s most prized asset class, since no one entity can control its use or price and because it is free from government intervention. But while certain influential people (cough* Elon Musk) and governments (cough* China) manage to cause sudden and severe changes in its price with ease, this is still yet to be seen.
What there is no doubt about, however, is the sheer volatility and therefore opportunity in Bitcoin that should appeal to all traders. With consistent moves of 3-5% up and down, practically every day, and regular expansions or corrections of 10% or more in mere days and even hours, Bitcoin is quickly becoming an instrument of choice for traders.
What is the Blockchain?
The blockchain is essentially record-keeping technology, a database, that is used to create and record transactions into a distributed ledger using blocks of data that link together in a form of virtual data-chain. It is key to the implementation and success of Bitcoin. Where databases and ledgers previously needed to be housed in a central location (server) and were owned and maintained by a single entity, blockchain technology uses thousands of different computers and servers, owned by various unrelated entities, and spread across many different geographical locations to store and confirm the accuracy of its data.
In the case of Bitcoin, the data being created and stored is information about the creation and transfer of Bitcoins. Think timestamps, buyer and seller IDs and quantities. The numerous computer systems that communicate with each other, referred to as “nodes,” compile new data about Bitcoin transactions and store it as a block until its capacity is full. The more nodes there are, the greater the security of the network becomes.
Through a process known as “proof of work,” one node (the prover) works to solve an arbitrary mathematical puzzle (called the hash), and upon completion the rest of the nodes in the network work to verify the result. Once a majority of nodes (51%) in the network have successfully verified the hash, the new block is then created and chained to the previous block in chronological order.
In this way, the data contained in the block can never be corrupted or manipulated, since nodes housing contrary information in the blockchain would be cross-referenced against the majority which contain correct information. These rogue nodes would then simply be thrown out of the network as they cannot reconcile with the majority sources of truth.
The only way for changes to be made to a blockchain is for the majority of nodes in the network to come to consensus on a particular change. For this reason, making changes to the blockchain becomes infeasible for any one entity or even a group of entities, given the sheer power consumption, technical capabilities and finances required to operate 51% of the Bitcoin network.