The curtains are drawn, the lights turn on to reveal a man neatly dressed in a gold tuxedo, hair pulled back, and a bow tie fitted nicely around his neck. He opens his mouth to speak and bellows:
“I am not like other men. You can see me, but you can’t touch me. You can’t fold me into your wallet, or tuck me into your pocket. You can’t spray me at parties, neither do I get lost on the streets. I am cryptic, I am Mr Bitcoin“
Cryptic and Encrypted
“Virtual currencies, perhaps most notably, Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us” – Thomas Carper, US Senator.
To understand Bitcoin, you must first understand the term ‘cryptocurrency‘. The word ‘crypto’ is used because this type of currency makes use of cryptographic functions, and deals with many codes that are not easy to decipher.
However, without complicating things, cryptocurrency is a form of digital currency. It is a type of payment (just like cash) that can be traded in exchange for goods and services. The only thing is that it is virtual; you cannot see it physically or hold it in your hands, but you can do with it, every other thing you do with the physical money.
There are currently about 4,000 cryptocurrencies available (as of January 2021) and Bitcoin is in fact, the first.
In the Beginning…
It all started in 2008, precisely the 31st of October, when an unidentified person under the pseudonym – Satoshi Nakamoto, published a white paper about the idea of bitcoin, its workings, and opportunities. In the white paper, Satoshi described it as “an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party”.
On the 12th of January 2009, the first bitcoin transaction was made. Bitcoin is a decentralized currency, which means that, unlike money which is regulated by the central banks, Bitcoin is not regulated by any central authority. Unlike physical money, it has no middlemen. It uses peer-to-peer technology which makes it easy for people and businesses to transact with each other and make instant payments.
How it works
Each Bitcoin is a computer file stored in a digital wallet which is like an app on your smartphone or computer. Just as you can send and receive files, you can also send and receive bitcoins from people via the digital wallet app.
Bitcoin is built on a digital record called ‘blockchain‘ (yes, a chain of blocks, basically). Think of it as several blocks that are linked together. Each block unit contains information about each transaction, i.e. the date and time it was made, the persons involved. For each transaction or exchange, there is an encrypted 16-digit code attached to it, which makes it traceable.
The unique thing about a blockchain is that it is decentralized – it is not controlled by any organization. Once a new block is added to the existing chain, it becomes accessible to anyone. This creates what can be termed a public ledger. This has built trust over the years because anyone can look through the ledger, trace transactions, monitor exchanges, etc.
Once a new block is added to the blockchain, anyone who has access to the link gets an update. However, the fact that many people have access to the link does not make it risky, as every block being added to the blockchain must be verified by bitcoin holders and the code being used must synchronize with the encryption pattern.
New bitcoin, anyone?
How are new bitcoins created? Surely the number of bitcoins did not move from 1 to 21 million by thin air, it happened through the process called Bitcoin Mining (which is as tough as mining for golds and diamonds, trust me!).
Bitcoin mining is a difficult job, so difficult that miners are compensated with new bitcoins just to keep them going. Bitcoin mining happens through a process called “proof of work” whereby computers are used to solve the mathematical problems that verify transactions. What makes the process very tasking is that the Bitcoin code was made to become harder over time. It requires powerful computers and lots of electricity to make the process work.
The mining process is not just used to create new bitcoins, but also to confirm bitcoin transactions and to add new blocks (transactions) to the blockchain (this usually takes about 10-20 minutes).
Two sides of a coin
You can buy bitcoin with real money, or you can have someone send it to you in exchange for something you sell to them. All Bitcoins are stored in a digital wallet (as we have earlier said) and this has its perks and of course, its disadvantages.
Think of the digital wallet as your mobile banking app, you do not need to go to the bank to get debited or credited, right? However, unlike mobile banking apps, a digital wallet is riskier. All bitcoins stored in your digital wallet can be deleted (yes, even by mistake!), they can be destroyed by viruses on your computer and they can even be hacked!
Like every other thing in life, this is, unfortunately, one of the risks that come with transacting with bitcoins.
Head or Tail?
Bitcoin transactions cannot be reversed. Once they are confirmed, nobody can alter it or change it, not even Satoshi, the creator.
Immediately a bitcoin is sent, you cannot get it back, you can only get a refund from the person it was sent to. If a wallet gets hacked, it might be difficult to retrieve.
However, bitcoin wallets are not easy to hack because they make use of private keys which are usually a set of alphanumeric characters that help prevent theft and unauthorized access. Bitcoin transactions are also anonymous (like its creator), transactions and accounts are not connected to real identities. You can use a pseudonym and no one has to who you are.
The continuous rise of Bitcoin
In the year 2009, one bitcoin was worth about 10 dollars. In December 2013, the prices went up to $1,079; as of March 13, 2021, the price of bitcoin rose to an all-time high of $61,000 (I know right!). While some organizations (such as Paypal, AT&T) and countries (such as the USA, Canada, etc.) are making use of bitcoin as an acceptable means of exchange, countries like Australia, Japan, China, and recently, Nigeria have laid some restrictions on its usage.
Bitcoin has grown, tremendously; from being created by an unidentified person (whom nobody knows, till now), to being endorsed by business magnate, Elon Musk and now being worth over $61, 000. Its performance over the last 12 years has been nothing short of commendable. The Bank of Singapore even stated that Bitcoin could replace gold as it has become that valuable!
One can only look forward to the continuous rise or maybe drastic fall of the bitcoin; whichever way it goes, it sure has had its lion’s share in the financial market.
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