A History of Bitcoin: Get to Know the Basics
If you haven’t heard about Bitcoin recently, we can only assume that’s because you were stranded on a desert island without TV or internet connection. The cryptocurrency has seen a meteoric rise in popularity, no thanks of course to the fact the value soared to almost $20,000 in late 2017.
Bitcoin fans have called it the “future of money”, predicting it will transform the global financial system, but others are more sceptical. However, it’s easy to get caught up in technical jargon if you don’t understand the basics. Many on the outside looking in would view Bitcoin as something only those intent on criminal activity would use, but as cyber crime solicitors, we wanted to make sure you were fully versed on the in’s and out’s of the cryptocurrency with impartical, fuss free advice.
What is a Bitcoin?
Bitcoin (or BTC) is a virtual digital currency (often referred to as a cryptocurrency) that can be exchanged between two parties without the need for a middleman. BTCs are essentially pieces of computer code that represent monetary units. In many ways, they’re similar to how money in a bank exists only as an entry on a bank’s digital ledger. The difference is that cryptocurrencies such as Bitcoin aren’t controlled by any bank or country and the price is set by the open market. This in turn, is purely based on what people are willing to buy and sell them for.
How Do I Buy Bitcoins?
Well, you can buy them using real money (£, $ etc) via a bitcoin exchange, such as Bitstamp or Coinbase. However, at the moment you will need quite a large amount of collateral if you want to make a dent in the market. The exchange rate can change dramatically on a daily basis, and for the moment, it remains quite volatile. Each Bitcoin can be split into 0.00000001 BTC (also known as a Satoshi) and it’s currently worth around 0.008 of a pence. That said, if the value continues to grows as is expected, this may be updated to allow further subdivisions in future.
Before buying your own BTCs, you’ll need to set up a Bitcoin wallet on your computer or phone and make regular backups to keep them secure. Like with any bank, failure to keep your details safe and secure could leave you open to issues. Your Bitcoin wallet contains a private key that is used to sign transactions as proof you are the owner of said Bitcoins, so be sure to keep this private.
The Bitcoin Beginnings
Like anything, Bitcoin has evolved over many years. Now in its 10th year since conception, let’s take a look at where it all started and the significant turning points that lead us to what we know of it today:
- In 2008, the domain bitcoin.org was registered. A movement to create a peer-to-peer network which would generate “a system for electronic transactions without relying on trust” was outlined in a white paper by Satoshi Nakamoto. It’s also worth noting that Nakamoto is almost certainly a pseudonym for an individual or group that has never been revealed.
- By early 2009, the Bitcoin network came online and the first batch of the cryptocurrency was issued. 50 Bitcoins were released at a time every 10 minutes or so, these were essentially free to anyone that was willing to help update and maintain the Bitcoin ledger, or ‘blockchain’ as it’s referred to.
- In simple terms (because it gets very complicated), anyone who wanted to claim these free Bitcoins would have to maintain the ledger by processing any recent transactions. This then generates a new Bitcoin code, which participants compete to solve – this is known as ‘mining’. The successful miner wins the Bitcoins.
- Once a user had won a bundle of Bitcoins, they were free to keep or distribute them to any other user with a Bitcoin address. Initially this was done free of charge, whereas today Bitcoins change hands for many thousands of dollars/pounds.
What Is Bitcoin Mining?
Bitcoin “mining” is a term that’s used to describe the process of obtaining the cryptocurrency. The simple point to make here is that “mining” is a misleading term. Mined Bitcoins are the reward for devoting computing power to administering the decentralised ledger. By processing and storing transactions on the blockchain, miners provide a vital service without which Bitcoin couldn’t operate. In return for doing so, they can receive mined Bitcoins but also generate transaction fees. Anyone that is registered to the Bitcoin network can “mine”, but what does it involve?
In simple terms, there are a few key steps that need to be taken to “mine” successfully:
- Step 1 – Someone initiates a transaction, so they buy something or send money to someone.
- Step 2 – The transaction is then bundled with others into what is known as a “block” which forms part of a “blockchain”.
- Step 3 – An alert is sent to everyone in the Bitcoin network.
- Step 4 – Those in the network then approve the transaction if it’s deemed to be valid.
- Step 5 – This is where it starts to get more technical… The header from the previous block gets inserted into the new block as a large piece of code, or “hash algorithm” as it’s known.
- Step 6 – Those registered to the Bitcoin ledger are then given the opportunity to solve this algorithm.
- Step 7 – The member who manages to solve the algorithm first is awarded with brand new shiny Bitcoins, and the original transaction can proceed.
- Step 8 – The block then gets added to a blockchain, which will provide a record of all previous transactions.
- Step 9 – The money is processed.
This may seem like a very long process, however with the right computer and set-up, it can take just a few seconds.
DID YOU KNOW? There are currently around 11 million Bitcoins in existence and by 2140 there will be 21 million. No more Bitcoins will be released beyond this point.
How Do I Spend Bitcoins?
Once upon a time, Bitcoin was notorious as a payment method for illegal goods online. As time went on and popularity grew, it became a reputable and reliable currency which can be used to buy goods and services from thousands of companies across the globe. This includes companies such as Etsy, WordPress and Amazon; you can find out more about where to spend Bitcoins here.
A Dark Past – A Bright Future
So why was Bitcoin so attractive to the unsavoury sort in the beginning? Well, because payment was instant, free and without either party revealing their identities there was very little chance of being traced. However as time has gone on, IP addresses have been tracked successfully by law enforcement officials, but this can be a slow and laborious process. Bitcoin are pseudonymous; the difficulty is ascribing a wallet to an individual. They provide a degree of security because of that, but fundamentally every transaction is openly viewable on the blockchain.
Whilst sites selling illegal products for Bitcoin still exist on the dark web, that lack of anonymity is a problem for criminals and other cryptocurrencies have sprung up to fill that gap – Monero, for example, anonymises through encryption, the transaction, the sender and the recipient. It’s a far better bet for money laundering (theoretically) than Bitcoin.
There is increasing interest in using it for legitimate purposes though. This could include sending funds to people who don’t have bank accounts or government IDs, such as immigrants. Small online payments which would normally incur an additional fee if paid for with a credit card can also be taken care of.
There’s also hope that Bitcoin could revolutionise the way banks deal with transactions, with some banks already looking to the Bitcoin blockchain ledger for inspiration to allow cheaper, faster stock trading. Other companies that are racing to adapt blockchain for their own uses include UBS, Microsoft, IBM and PwC. The Bank of Canada is also experimenting with Bitcoin technology.
So What’s The Plan?
Is the bubble about to burst? Here are 6 signs that suggest it could be:
- Rivals: Disagreements about how Bitcoin should work has led developers to create their own offshoots with different rules and processes. Some of these rivals such as Litecoin have seen success and could potentially unseat Bitcoin as the king of cryptocurrencies. Another big threat is “mainstream” financial products taking away the need for Bitcoin. For example, in 2009 we didn’t have contactless credit cards, Apple Pay or PayPal. All of these things have grown up since the introduction of BTC and are arguably quicker, easier and safer.
- Increased Regulation: Originally designed to avoid regulation by financial institutions, Bitcoin has made few friends with regulatory bodies. If Bitcoin gets too big, there’s a chance the regulators could enforce a complete crackdown on it and other cryptocurrencies.
- Historical Comparisons: Bitcoin has many of the hallmarks of previous bubbles, such as the dotcom bubble in the 1990s and the tulip craze of the Netherlands in the 17th Century.
- Hacked: Recent hacks of Bitcoin exchanges have exposed huge thefts of up to half a billion dollars worth of Bitcoin. News of the hack caused values to dip slightly, albeit only briefly.
- Reputation: The general view of Bitcoin by many is that it’s imaginary money, and unlike gold, it holds no intrinsic value. However, the intrinsic value is in being able to show through cryptography that a BTC you hold is unique and cannot be held/spent by someone else.
- Scalability: One of biggest problem facing BTC at the moment is “scalability”, ie getting the network to deal with increased traffic. In basic terms, because the block creation rate is fixed by maths, it gets harder to solve the algorithm the more computing power is devoted to doing so, thus the number of transactions that can be added to the chain is also limited. That means transaction confirmation can be very slow indeed. One way around this problem is higher transaction fees
All advice is correct at time of publication.