What Is Bitcoin?
Bitcoin is shaking up the financial sector. The world took notice when the price increased to $20,000 in late 2017. The meteoric rise from $780 in 2016, which represents a 2400% increase, created over 18,000 millionaires in the 12 month timeframe.
In April – June 2020, Bitcoin sparked new interest from investors and banks as its price doubled despite the US economy declining by 33% (the lowest decline since the Great Depression).
Bitcoin offers investors an alternative asset class that offers diversification from traditional securities and bonds. Similar to other investment classes, Bitcoin requires a basic understanding of the fundamental and how the market works. As Warren Buffett has said, “Risk comes from not knowing what you’re doing.”
To start off, Bitcoin is a digital currency that can be used to purchase goods or services online – similar to the Dollar or the Euro. Plus, Bitcoin is used as a store of value – similar to gold and real estate.
While Bitcoin has similarities to traditional currencies, there are two main differences between them. The primary difference is how it is issued and governed.
Bitcoin is a currency that is created and supported by an interconnected network of computers that are distributed around the world. The community, who operate these computers, have created a system that governs itself and introduces new monetary policy based on general agreement (or “consensus”) across the members. There is no single person or authority who has controlling ownership of Bitcoin.
In contrast, this differs from the traditional financial system where governments and central banking authorities have full control over the entire process. The central ownership of financial systems create situations where corruption and inflationary strategies can seep into national economies, as seen in numerous countries throughout the world.
Furthermore, Bitcoin differentiates itself from paper and coin currency by having a finite supply. The founder of Bitcoin created a governing system that would ensure a limit of 21 million Bitcoin.
Who Founded Bitcoin?
The true identity of the Bitcoin founder remains a mystery. Moreover, whether the creator of the network was a person or a group is yet to be determined. Prior analysis could, however, help demystify and identify the creator of Bitcoin.
Nonetheless, there are few facts about him or them. In the early days, a male account holder operating under an alias “Satoshi Nakamoto” said he was a 37-year-old from Japan. Later on, a deeper analysis of his writing style and English levels revealed reasonable doubts about his claims.
Furthermore, evidence from Satoshi Nakamoto’s sleeping cycles indicates that he was likely American and a very skilled programmer who valued his privacy.
Satoshi Nakamoto left the development of the Bitcoin network to Gavin Andersen in mid-2010 and has never resurfaced or commented in any Bitcoin forum ever since.
Satoshi mined the first Bitcoin block—called the Genesis, and by the time he left, it is said he owned one million BTC worth over $10 billion at current prices.
Who Controls Bitcoin?
Before he departed Satoshi Nakamoto was the lead developer of the Bitcoin system. This lead developer role was primarily focused on enhancing the Bitcoin system with new software developments and addressing any technical issues that arose.
From a control and ownership perspective, the Bitcoin system was under the hands of the community. Specifically, this control fell to members of the community – known as “miners” – who devoted time and resources to maintain and secure the Bitcoin system. Miners are distributed and the network has become even further decentralized, increasing its security and independence from governments and central authorities.
How Does It Work?
As previously noted, the Bitcoin system is decentralized and distributed. Computer and computer systems – known as “nodes” in the cryptocurrency world – power the Bitcoin system throughout the world.
As early mentioned, the Bitcoin source code is open-source and without a central authority. Therefore, developers can propose changes to improve the network either making the Bitcoin system more secure, scalable, or efficient.
Before changes are made, their proposals must first be discussed by the community and receive support from most miners. The open-source nature of the Bitcoin source code and its community explains why the network is robust with comparatively low transaction fees.
Statistics from GitHub shows that Bitcoin is one of the most developed platforms even though it has no development fund.
There will be only 21 million BTC ever created. Right from launch in 2009, the Bitcoin system rewarded full nodes for channeling computing power and securing the network.
In the early days of Bitcoin, people could download the Bitcoin ledger and mine straight from their laptops and home computers. However, competition has ramped up globally to mine Bitcoin as overall adoption and prices of Bitcoin continue to increase.
At the moment, only those with finely tuned mining computers can “pool” their computing power with others to at least win a coin or two a day.
Given the decentralized and distributed nature of Bitcoin, there are several key advantages that it possesses over national government-issued currencies, such as the US dollar and Euro:
Bitcoin is new-age money where you can send Bitcoins worth billions of dollars across borders straight from your hard disk. It is unlike gold or cash where securely moving them from one place to another is very expensive and risky.
The Bitcoin network is highly decentralized. Consequently, Bitcoin transactions cannot be subject to local-specific regulations, such as limitations on who can own and use credit cards. Centralized systems with governing bodies can decide to implement new policies and restrictions without consulting or providing notice to impacted citizens or businesses.
The Bitcoin network is a secure network that has significant advantages over traditional banks and credit card companies. According to Proofpoint, a leading cybersecurity and compliance company, 33% of Americans have experienced identity theft. In fact, there is an identity theft globally every 2 seconds. There needs to be a solution to the current model in our financial system.
The decentralized and distributed nature offers significant protection against hackers, who are unable to target a single computer server (or small number of servers) to access customer information. Any effort would be futile since they can’t identify who or where the millions of independent computers are that each have a copy of the latest Bitcoin “block of data.”
Furthermore, Bitcoin offers its owners much greater identity theft protection than banking and credit cards since the customer’s real name and address are never used. Instead, each Bitcoin owner is identified by a series of 26-35 letters and numbers that represent their address on the blockchain. This address cannot be accessed unless a special digital password – known as a “private key” – is used to initiate and validate the transaction. An example of how secure this is would be this: it would take a hacker over 10 billion years to break into your Bitcoin account. Financial institutions are hacked many times every single day.
BTC coins can be used to pay transactions and the same coins can be used to pay for other services because of the safety checks placed by miners. Miners keep a copy of the Bitcoin system. At all times, the copy stored by each miner must mirror copies of transactions helping stamp out fraud.
How is Bitcoin Regulated?
Still, there are legal issues around Bitcoin in some jurisdictions. Countries like China banned trading of Bitcoin and crypto.
In the United States, anybody can trade, own, or mine virtual currencies; however, there are different ways that US government agencies and financial regulatory bodies classify Bitcoin and cryptocurrency. As it relates to buying and selling Bitcoin, the Internal Revenue Service (IRS) classifies Bitcoin as property, which differs from stocks and bonds which are taxed based on capital gains or income on your annual tax return. Taxes can be complicated, but we break it down in easy-to-understand terms in our Getting Started in Bitcoin and Cryptocurrency video course for those who want more information.
In the last few years, there has been considerable regulation and policy changes that have spurred significant investment by leading investment banks, such as Goldman Sachs and Fidelity. Furthermore, these banks have also been granted approvals to store Bitcoin for its customers.
Given the rate of positive policy and regulation for Bitcoin in the US, the foundation has been laid for mainstream adoption of Bitcoin by investors, banks and businesses. As policy and regulation is an ongoing focus in the Bitcoin and cryptocurrency world, please check out our Taxes & Regulation section for the most up-to-date information.