Bitcoin is a virtual currency. It only exists digitally and not in physical form. Essentially, like all cryptos, Bitcoin is a piece of software for sending information securely over a network.
Bitcoin, like other cryptocurrencies, was created as an independent unregulated means of payment, clearly with the aim of avoiding government control and interference.
To own bitcoins or other cryptocurrencies and to transact with them, you need a “digital wallet”. This is called a 'Wallet'.
The wallet owner has a “public key” (similar to your bank account), a “private key” and a “recovery seed”. In addition to the online “wallet”, you can purchase your hardware “wallet”. This is a handy USB device that is completely separate from your computer and where you can store your bitcoins and keys, protected against hackers, viruses and malware.
Note: If you lose your “private key” and your “recovery seed”, you will irrevocably lose the contents of your “wallet” (all your bitcoins, say).
Bitcoin makes it possible to transfer large sums worldwide within a few minutes at a very low cost. This is what all websites that facilitate trading in Bitcoin state.
The transaction costs may well be low. It will be a different story when people want to buy or sell Bitcoin themselves as an investment.
On average, the difference between purchase and retail price appears to be around 5%, with surges of up to 8% on some platforms.
When the market is rather turbulent and exited (rapid and large fluctuations in value), it happens that buying or selling bitcoins does not go so smoothly and takes a long time to implement. Of course, this causes problems with implementation at the proposed price. There are even reports that some platforms are simply not active.
Anonymous payment transactions are one of the most important properties of bitcoin. Transactions cannot be linked to individuals, companies or any other organization.
All payments in bitcoin are made without the knowledge of the banks or the tax authorities, in short, the government in general. So you can say that bitcoin transactions are like virtual cash payments and, due to the absence of any government control, even virtual black money.
Anonymity is actually even stronger, because even the seller you're paying to can't link the transaction to your personal information. No one, but no one, has any insight into your possession of bitcoins, nor the transactions you carry out with them.
Because of this anonymity, bitcoin is often used for:
- money laundering
- the online trading of drugs, weapons and other illicit goods via the dark web.
It is therefore not surprising that Bitcoin is being eagerly used in the fraudulent and criminal spheres. For example, for purchasing illegal goods (drugs) on the dark web.
No government recognizes bitcoin as legal tender. Officially, it is considered a medium of exchange.
Bitcoin is currently not a stable currency. Due to its high volatility and lack of regulation, it is currently not suitable as an everyday currency.
Very few payments are made with bitcoin anymore.
The acceptance of payments in bitcoin is only voluntary, by mutual agreement between buyer and seller. No one can be required to pay in bitcoin or accept payment in bitcoin.
So we've seen that the bitcoin:
Nevertheless, bitcoin is widely known and is highly promoted on the internet. It is mainly presented as an investment tool that allows you to get rich quickly. Is that true? (read more)
In the current currency, its value and stability are linked to the strength of the issuing country's economy and central banks act as regulators.
Bitcoin has no underlying support, neither from an economy nor from any other physically valuable asset (gold, for example). The websites that facilitate bitcoin trading argue that the value of Bitcoin is determined by the game of supply and demand.
The absence of a controlling and regulatory authority leads to untransparent price formation, sometimes resulting in violent, unexplainable, unreal price fluctuations.
Some even claim that parties in the crypto market are active that manipulate prices and thus make lucrative profits.
The entire bitcoin system is based on the blockchain technology. The inventor would be Craig White (there was a lot of mystery about this at the start). He is the creator of both the blockchain and the Bitcoin that was launched in 2009.
Blockchain technology has been called by some as the greatest invention since the Internet.
The Bitcoin blockchain operates in a closed network formed by the owners of a Bitcoin Wallet and guarantees anonymity. This means that every member can see numerically what transactions are placed on the network, but not whomsoever that performs actions.
The Bitcoin blockchain is public, anyone who wants can participate.
In the blockchain, transactions take place directly between 2 parties that belong to the network, without the intervention of a third party (e.g. Bank).
The transactions are stored heavily encrypted (cryptography) in blocks that are linked to each other. Each new block contains unique information about the previous block, which in turn contains unique information about the block before, etc... This creates a sequence of unambiguously traceable information in a chain.
A blockchain is a decentralized database where transactions are stored in cubes in heavy encrypted form (cryptography). One block can contain multiple transactions. Each new block contains unique information about the previous block, which in turn contains unique information about the block before, etc... This creates a chain of information-containing blocks in an unambiguously traceable sequence.
Classic databases are managed in one centralized location, managed by one person responsible. Only there in that central location can the responsible person make and store changes. Only then will the database be shared with other stakeholders.
With blockchain, the opposite is true. There is no central database. The complete database is located at each user (node) and each user can make changes. Through a process of control and approval by each user, the transactions are recorded and each user has the exact database (blockchain) at all times.
'Mining' means acquiring newly created bitcoins and bitcoin fees. Mining is done in the manner briefly described below. The terms “miners”, “diggers”, “diggers” are terms chosen because of a vague parallel to gold mining. Gold miners look for cubes of pure gold in a gold vein; the bigger the block, the better.
According to the general code of the blockchain, a new empty block is created every 10 minutes. Consider this item as a (virtual) box where transactions should be stored. To get those empty blocks, the 'miners' must solve a complex puzzle. Once they have such a block, they look for newly launched transactions and place them in the block. Finally, they add the block to the blockchain.
For performing these tasks, the “miner” is rewarded in the form of newly created bitcoins (currently 12.5 bitcoins per block) and the fee added to each transaction.
A transaction is only really executed if all of this has been done effectively. A validated transaction is irrevocable; it cannot be reversed.
The 'miners' are thus rewarded with newly created bitcoins. Currently, there are around 18,000,000 bitcoins in circulation. The maximum number of bitcoins that can ever come into circulation is set at 21,000,000. This means that around 3,000,000 more can be “mined”. It is estimated that by 2040, all bitcoins will be “mined” and in circulation. From then on, the 'miners' will no longer be rewarded with newly created bitcoins. They will then have to make do with the fee that a writer adds to his transaction.
Today, 'mining' is extremely difficult and no longer a job you can just do at home on your computer. Mining with a regular PC now costs more in energy costs than Mining itself generates.
To solve the puzzle to get a new block, the 'miner' must have mining software and powerful computers with strong video cards. The system is designed in such a way that the difficulty of the puzzle increases as more “miners” are active. Just to give you an idea. If in 2009, when Bitcoin launched, the difficulty level to solve the puzzle was 1, now it is 13 trillion times harder.
For each new block that the system launches, a fierce battle ensues among the miners to be the first to solve the puzzle in order to get the block. Only then can he continue the process and receive his reward.
Fishing in the memory pool
Good to know is that the miners do not work according to the 'first in, first out' principle.
A wallet owner who wants to see a transaction executed adds a “fee”, a reward for the “miner”. This newly launched transaction ends up in a kind of fishing pond, the so-called “Memory pool”.
Using the mining software, the 'miner' first tries to catch the biggest fish (the transactions with the largest fee) from the 'Memory pool' in order to also be the first to put them in the obtained block.
People buy Bitcoins
The many websites that promote Bitcoin, where you can create a 'wallet' and buy bitcoins, claim that buying bitcoins can generate high profits in a short period of time.
However, since the value of bitcoin is highly volatile, you are just as likely to incur substantial losses in a short period of time.
As stated above, Bitcoin transactions are completely anonymous and completely outside the radar of the government, taxes and police forces.
If Bitcoin is ever more widely accepted as a legal means of payment, the demand for bitcoins will rise sharply and so will its value.
The news that PayPal will offer its US customers the ability to buy, sell and store bitcoins is barrier-lowering and would be one of the reasons for the recent increase.
The number of bitcoins that will be put into circulation will be absolutely limited to 21 million. This limitation has been permanently programmed this way from its inception.
Scarcity supports the price. This includes the precious metals gold and platinum. There are only a limited number of these in our world.
For the current currency, money is printed regularly. As long as the money supply does not grow faster than the amount of tradable goods and services (growing economy), everything is ok. The money then retains its value. If the money supply does grow faster, there is inflation.
With inflation, everything gets more expensive. Or in other words, your money will be worth less. It is also the central banks that are trying to control inflation. For example, the European central bank's goal is for an inflation rate of up to 2% per year. An inflation rate of 2% per year means that what you buy in-store in Europe becomes 2% more expensive each year. Or in other words, a Euro is worth 2% less each year.
In countries where inflation is skyrocketing (e.g. some South American countries), Bitcoin can offer protection against inflation. One problem, however, is the high volatility of Bitcoin. You must be careful not to fall from the drop into the rain.
Predicting the future for Bitcoin is like looking for coffee grounds. I don't know and no one can say for sure where it's going, triumphing or dying.
His strengths can become his weaknesses.
Bitcoin is based on 2 strengths, which may well become pain points in the future.
The blockchain is a very interesting innovative technology that has already been picked up by tech giants (including Facebook) and other innovative companies. They also are able to launch a cryptocurrency.
For example, Facebook is working on a cryptocurrency, the Diem (formerly Libra). The value of the Diem would be linked to the dollar and ensure that it cannot be misused for money laundering.
Due to anonymity, all assets and transactions in Bitcoin remain under the governments' radar. So the content of a Bitcoin wallet is actually black money and the system allows black money to be laundered unnoticed. It also facilitates the purchase and sale of illicit goods. In addition, the government is missing out on taxes on Bitcoin sales. All these situations are a pain in the side of the authorities. By the way, no government has recognized Bitcoin as legal tender yet.
It is therefore not inconceivable that the same governments will not tolerate Bitcoin in the future, impose strict restrictions on it, or even ban its trading altogether. If this happens, Bitcoin will be pushed completely into the illegal corner and will become less attractive.
In Belgium, it is prohibited to offer a product whose return depends directly or indirectly on cryptocurrencies, including Bitcoin.
If you plan to invest in Bitcoin or any other cryptocurrency, read this blog very carefully and critically examine the proposals and promises they make.
Investing in cryptocurrencies is a risky business.
