What is Bitcoin?
Bitcoin is the world's first cryptocurrency. It was developed by Satoshi Nakamoto as a response to the 2007-2008 global financial crisis. As of 2020, the real identity or identities of Satishi are unknown. The Bitcoin blockchain was released to the public in January of 2009. Bitcoin’s primary characteristics are its distributed control and low transaction fees. Almost of the world’s money is controlled by a central authority. Bitcoin is the first instance of truly decentralized value transfer. In regards to cross border payments, with FIAT currencies, it can cost as much as 15% to send money from one nation to another. A standard Bitcoin transaction costs about $0.20 which is significantly cheaper than wiring funds across borders.
Bitcoin is also the world’s first currency that is purely digital. There is no physical form of Bitcoin. It does not have coins or paper notes. Every Bitcoin exists as the unspent value within a Bitcoin wallet. The network of nodes, that manage the Bitcoin network, validates that wallet addresses have the correct balance and ensure that the same bitcoin is never spent twice.
Bitcoin Technology
Satoshi Nakamoto invented ‘‘Nakamoto Consensus’ and added the feature to Bitcoin’s protocol. Nakamoto Consensus represents the biggest technological breakthrough that stemmed from the invention of Bitcoin. This is considered a brilliant innovation because it solved the ‘double-spending’ problem that was inherent to all previous forms of digital currency. And it did so without requiring any trusted third parties.
How to mine Bitcoin?
Bitcoin blocks a mined by computing power that attaches a hash to a nonce with the goal of getting a SHA256 output that begins with a predetermined amount of zeros. That is referred to as Bitcoin’s difficulty. As more zeros are required at the beginning of the hash output, this lowers the odds of finding the right output which requires more hashes (more difficulty) to mine the block. For example, the current mining difficulty level may require there to be 16 zeros at the beginning of the hashing output in order for the block to be mined. The miners computer begins to combine a random SHA256 hash with a nonce until the solution is found. This can require trillions and trillions of guesses before the right answer is found. This means that your computer must be powerful enough to generate trillions of hashes.
Anyone with the right equipment can mine bitcoin. It is recommended that you have at least the combination of a Graphical Processing Unit (GPU) and An Application-Specific Integrated Circuit (ASIC). GPU’s work particularly well with the logic required to apply hashes to Bitcoin’s hashing algorithm. The ASIC amplifies the frequency that a hash can be applied to a nonce. This gives the miner better odds of finding the correct hash that will mine the a block.
Risks of Bitcoin Trading
Investment Risk Bitcoin is known to have one of the highest risk to reward ratios of any asset that has ever traded on a market. The price of bitcoin regularly moves a lot in very short periods of time. This means that bitcoin is a very volatile asset. Increasing volatility is generally seen as an increase in the overall risk. Bitcoin, being only 10 years old, doesn’t have the liquidity of the stock market, whenever there is a large buy or sell order the price will reliably make a significant move Security Risk Bitcoin’s security risks are more complicated than other assets such as stocks or real estate. It is important to reduce your attack surface as much as possible. You can do so by holding your bitcoin in a wallet that is not connected to the internet. This requires a hacker to get your private key before they could gain access to your wallet. When using a wallet that is connected to the internet, a hacker may only need your password to a website in order to steal your bitcoin. When using an offline wallet with a properly recorded and stored private key, you have significantly reduced your attack surface. Regulatory Risk Bitcoin has regulatory risk that stems from it being partially anonymous. Governments know that bitcoin can be used to launder money and they have a general lack of incentives to help Bitcoin as they see it as a competitor to their national FIAT currency. Because of this, there is a possibility that governments could apply unusually harsh regulations to using or owning bitcoin. They could even ban the digital currency outright and make its use or possession against the law. This is a major risk as any such action taken by a powerful nation could negatively affect the value of the Bitcoin blockchain.