Everything You Need To Know About Bitcoin

Sridhar P
14 min readFeb 17, 2021

BITCOIN is Eating the Financial and Software world , with all the good and bad attention it is receiving from mainstream media and other popular sources , it would be enlightening to understand what it is and why does it matter to us as we progress.

Let's deep dive

What Is Bitcoin ?

Bitcoin is a blockchain based electronic cash (Cryptocurrency) based on security and math . Unlike other currencies Bitcoin is not physical in nature, It exists on the distributed ledger .This ledger exists on the computers and machines across its network, Bitcoin is permission less , censorship resistant and encrypted with most secure cryptographic code which helps to make transactions between P2P (peer to peer) instantaneously without any trusted entity or middlemen(Ex:Banks, Remittance services, Brokers).

Bitcoin is derived from the idea of macro economic school of thought and is based on Blockchain technology .

Some history would really help to understand more precisely.

The concept of secure digital currency is not new and has been around since the 1980’s , there have been currencies like DIGICASH, BITGOLD, HASHCASH created by cypherpunks for many reasons, one of the fact that the traditional financial systems like banks and governments mostly work on large amount of trust to exchange value and conduct transactions leading to issues like manipulation, fraud and theft . The privacy is highly compromised with in the system .The Cypherpunks mission is to build trustless open source systems to defend privacy for everyone in this technological era.

In October 2008 after the global economic crisis which almost bankrupted many governments and caused systemic collapse a white paper appeared on an online mailing list by a pseudonymous author named Satoshi Nakamoto whose origin is unknown , and in the next year 16’th January 2009 there was a software release of Bitcoin version 0.1 and first Bitcoin was mined. Since then it went viral, gained lot of traction from tech communities around the world especially in fintech space and completely transformed the way financial transactions work.

Blockchain forms the bedrock for Bitcoin.Blockchain is open source technology otherwise known as distributed ledger which keeps & maintains list of generated records stored in blocks ,each block contains the history of every block, it is being constantly verified ,updated and shared between thousands of computers across the globe ,these computers are called nodes, because of the fact that there are so many computers updating and verifying transactions throughout the world ,it is technically unfeasible to hack the entire blockchain.

How Does Bitcoin work ?

The Bitcoin network operates on a blockchain based cryptographic protocol. Users send and receive bitcoin by broadcasting digitally signed messages to the network using bitcoin wallet software.

There are many blockchain protocols that regulate the process of validating the transactions to achieve consensus (protocol is nothing but a set of rules which govern how the system should operate to achieve the desired consensus) the most popular ones being Proof-of-Work(POW), Proof-Of-Stake(POS) and Delegated Proof Of Stake(DPOS).

Bitcoin uses “Proof-of-Work” protocol to achieve consensus.

Proof-of-Work (PoW) protocol works on the principle that no single entity should own more than 50% of the network “HASHPOWER(is the speed at which a cryptocurrency mining device operates) because of the fact that these entities can effectively control the system by sustaining the longest chain, the hashpower they own can have a decision making capabilities to validate the transactions by creating separate block from any previous arbitrary block which can create 2 versions of the same chain , apart from that they can also launch a double spending attack on the network by initiating a transaction on the main chain and replicate the same transaction on other fakechain which results in both the transactions sending the same coin, but only one of them can be validated and the replicated ones remain invalid . The term “51% attack” is most common these days in the weakest chains of other cryptocurrencies because of their security vulnerability. Any entity with more than 51% can take a hold on the network and attack the system . So the integrity of PoW chain depends on how many diversified miners the network has to secure the system and it is now evident with today’s network hashrate that Bitcoin has the most diversified network of all POW cryptos.

New bitcoins are produced through a competitive and decentralised process called mining (minting) , they can be mined by using the most advanced and powerful mining hardware maintained by the Validators (Miners) throughout the globe , with recent record rise in mining hashrate (Hashrate is the speed at which a computer is completing an operation in the Bitcoin code) is a clear indication that as a network Bitcoin is becoming highly secure.

Why Is Bitcoin so important ?

In the current social , geographical and economic turmoil many experts around the globe are betting on BITCOIN as inflationary hedge against Fiat currencies. Fiat currencies (Ex-Dollar,Pound,Euro,Rupee,Yuan,Dirham etc) are inflationary in nature , Inflation decreases the purchasing power of a currency and increases the price of goods over time. Fiat currencies are controlled by respective central governments, they are printed based on the principle of supply and demand,the value of fiat currencies comes from public's faith in the governments and central banks and the stability of the issuing governments , factors like political deterioration, regulatory uncertainty , foreign exchange controls can play a big role in influencing the central banks to force print new money and lose trust. we all know one of the richest countries like venezuela lost trust from the public by inflating the economy for various political , and economic reasons, the money supply of venezuela increased from 3.3 Million to whopping 3.3 trillion during the period of January 1993 AND OCTOBER 2016. In 2015 the venezuela had over 100% inflation highest in the world at that time.that's because the debt based economies cannot survive they does not keep going.

The Root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of Fiat currencies is full of breaches of that trust”- Satoshi Nakamoto

How is Bitcoin transforming the Modern Financial world ?

Both the formal and informal economic actors across the global financial system who facilitate national and international flows of financial capital for the purposes of investment and trading is now considering Bitcoin as safe haven asset and promoting the use of Blockchain technology for their activities to ease the workflow and minimise the risks associated with middlemen.

In the recent times the investment arms from the most prestigious institutes like Harvard,Stanford,Yale and MIT have started exploring and investing in bitcoin and other crypto currencies which gives legitimacy for this new asset class.

Unlike Fiat currencies Bitcoin is deflationary in nature because of its limited Supply , only 21 million bitcoins will ever exist and there will never be more than that, 80 percent of total supply has already been mined. according to the recent statistics around 20% of the total supply of Bitcoin hasn’t been spent in over 5 years, meaning these are being held for the long term(Store of Value) by HODL’ers and some of them maybe even lost due to forgotten keys and passphrases of respected wallets, Bitcoin can be seen as a cyber equivalent to gold but more advanced in terms of its use because of its divisibility. Each bitcoin is divisible by 8 decimal points ,the smallest unit is called “Satoshi ” a hundredth of a millionth bitcoin which means 1 satoshi = 0.00000001 Bitcoin. Therefore, each Bitcoin can be broken down into 100,000,000 satoshis.

Sending money across with bitcoin is as simple as sending SMS, Sender can transfer portions(satoshi) or full bitcoin from his bitcoin digital wallet to receiver’s bitcoin digital wallet address, all it takes is just a click and the transaction is done, the transaction charges are nothing when compared to fiat currencies ( based on the amount you send). Especially in cross border transactions it cuts heavy transaction charges because of the fact that it is eliminating the middleman(Banks) and their conventional systems like NEFT, RTGS & SWIFT etc, Bitcoin charges between 0.0001 to 0.0005 BTC for transactions which is far less than what above wire transfer services can offer, especially since most of them have standard fees as well that are not percentage based. Most recent development of Layer-2 Protocol on bitcoin called “Lightening Network is making the transaction time almost instantaneous when comparing with traditional banks which might take anywhere between 3 to 7 days — This attracted investors interested in improving the money transfer system currently employed , Investors are not the only ones Bitcoin has attracted ,cross border giants like-

  • Western Union,Swift and MoneyGram have started contemplating whether they should offer solutions in the future that contain possibilities related to Bitcoin and Cryptocurrencies.
  • Visa an American multinational financial services corporation recently released its bitcoin and crypto banking roadmap and had announced its plans to help banks roll out buying and trading of Bitcoin and other crypto currency services with a Visa crypto software program. Visa also partnered with Circle Pay to bring USDC (currently the world's leading digital US dollar stable coin which exists cryptographically on Ethereum blockchain) to the masses .
  • PayPal which offers financial services in most of the countries launched services which enable users to buy, sell and hold crypto currencies.
  • Bitpay a leading payment service provider headquartered in United states recently revealed that Samsung Pay and Google Pay is rolling out a service later this quarter to pay with Bitcoin and Crypto for regular transactions, They have also announced that their Bitpay mastercard holders can use Apple Pay to make instore,in-app and online purchases.

If crypto reaches mass adoption , the need for these services will be minimal as the main purpose of cryptos is to eliminate these middlemen to be cost effective and transparent.

Where does the value of Bitcoin comes from ?

Skeptics and people from conventional finance say Bitcoin or other Cryptocurrencies has no real value. This cannot not be true from the standpoint of Economics.

In Economics money is essentially a good , the value of any good is determined by its supply and demand and demand for other goods in the economy…A price for any good is the amount of money it takes to get that good . inflation occurs when price of good increases ..it means the money becomes less valuable relative to goods you are exchanging.

This scenario is possible when :

A) available supply of money goes up for different reasons.

B)the supply of exchangeable good goes down.

C) demand for money goes down or the demand for the goods goes up.

Money is valuable because people believe that they will be able to exchange it for goods and services in future. This belief will continue to exist as long as people have confidence and do not fear inflation or the failure of the issuing agency like central banks and its governments. it is a well known fact that one of the key reasons behind inflation is the increase of money supply in the economy , we all witnessed one of the richest countries like Venezuela , and other countries like Zimbabwe collapsed because of its aggressive monetary policies in printing more money.One of the largest country Iran recently approved a plan to cut four zeros from its currency rial after losing its value by 60% against US Dollar is one of the best examples we have seen so far on Hyper-Inflation.

Bitcoin is scarce in nature ,as discussed its maximum possible supply is just 21 Million. Bitcoin has huge intrinsic value ,the value comes from the “Network effect” .

Metcalfe’s Law” says that a network’s value is proportional to the square of the number of nodes in the network. The end nodes can be computers, servers and simply users which means the value or utility of a network is proportional to the number of user’s of the network. Social media platforms like Facebook ,Twitter , Instagram and messenger applications like Whatsapp, Telegram are so valuable because of their huge Social network effect , Uber is valuable because of its huge Transport Network effect , similarly Bitcoin is valuable because of its strong network effect in Store of Value, exchange of value and payment systems, When a network effect is present, the value of product becomes strong as there will be constant engaging and exchange of value(data) happening.

Blockchain even though is a new technology it is evolving rapidly , many corporations already started involving in the process to adopt the technology. they are transitioning from the conventional idea of trust by going from institutional trust to technological trust , going from trusting people to trusting math/computers.

After MicroStrategy and Tesla announcing their purchase of BITCOIN to their balance sheet , Miami the third most populous metropolis on the East coast of the United States announced it is now considering to hold BITCOIN in their treasury and want to pay workers in Bitcoin. EL SALVADOR a country in central america recently approved a law to allow Bitcoin to be accepted as a legal tender for all goods and services.

After all these surge of recent events the whole space changed and emerged into a new arena where majority of the wall street whales and rest of the financial world started collaborating to involve in the process of innovation realizing its not worth ignoring the space anymore , many of them now believe that Bitcoin has evolved from contrarian idea to consensus idea.

Some common misconceptions about BITCOIN

For those who encountered Bitcoin as a fresh-faced Neophyte must surely be hearing both good and bad about this new asset class and working with an alien looking public and private keys might be daunting , some misconceptions widely popular in the amateur internet communities may really confuse to the core.

Lets understand better ...

  1. “Bitcoin is used by criminals and money launderers because it is anonymous”

A: This is simply untrue, because every Bitcoin transaction leaves a digital footprint and permanently recorded in digital ledger on a blockchain, because of it being stored in the most secure blockchain system, Bitcoin transactions are actually some of the most transparent and traceable in the world. Statistically most of crimes is facilitated by fiat currencies and not bitcoin. moreover we can now use Bitcoin to make payments at most of the popular retailers like Microsoft ,AT&T, Expedia etc to use services. we can also use Bitcoin to donate to nonprofit organizations like Unicef ,Wikipedia etc.

2. Is Bitcoin used only for speculation ?

A: This is simply inaccurate, after the recent surge Bitcoin Network approximately settles around $10 Billion worth of transactions everyday, Bitcoins average number of transactions around 300,000 is not far behind Fedwire, the Federal Reserve's settlement system for wire transfers between some financial institutions

3. Is Bitcoin UNSAFE ?

A: This may be popularized because of few Bitcoin Exchange hacks happened in the past, people think that Bitcoin is not safe and prone to hack, this is untrue…Bitcoin blockchain has some of the strongest security standards and safety protocols in the world and never been hacked. it is very important to be mindful about which exchanges or wallet service we utilise to store or transact. Industry leaders along with security experts always been in the forefront to help bitcoin network scale and secure, recently MIT Media Lab Launched New Bitcoin Software and Security Effort to further strengthen the network.

4. Do I have to buy a whole Bitcoin ? that's just too expensive

A: This is untrue , Bitcoin is highly divisible in nature and we can buy a mere fraction of bitcoin.

Bitcoin is one of the most revolutionary inventions of human history which has radically transformed the idea of how we perceive money and trust. it is seen to have both scarcity and utility, it can be the single best hedge along with precious metals like GOLD & SILVER against traditional finance system when they fail to perform.

A recent study from the University Of Cambridge estimated a total of 101 million of unique crypto asset users across 119 million accounts opened at service providers in Q3 of 2020 alone.The article also stated that it is not just the institutional investors who is driving the market this time but large number of retail investors pushing the space further indicates early stages of adoption has started.

While countries like China, INDIA & NIGERIA is trying to impose ban on Bitcoin for various reasons , other developed countries like United States, Japan , South korea, El Salvador etc are recognizing the potential of the bitcoin space and pushing the space further to reap the benefits as a front runner. countries already banned or trying to ban will soon realize banning crypto currencies is like banning financial internet entering the country. It will reverse the economic liberalization and take us backwards.

As the progress happens , mainstream adoption of Bitcoin by technical efficiency and crypto-economic mechanism becomes inevitable,opposed countries will soon join the race to participate and compete with other nations, afterall we are living in aggressively competitive world and nobody wants to be left behind. cryptocurrency is a doorway to digitally powered future.

Disclaimer :

Please be advised that I own a diverse portfolio of cryptocurrency as I wish to remain transparent and impartial to the cryptocurrency community at all times, and therefore, the content of my media are intended FOR GENERAL INFORMATION PURPOSES not financial advice. The information contained herein is for informational purposes only. Nothing herein shall be construed to be financial legal or tax advice. The content of this article is solely the opinions of the writer who is not a licensed financial advisor or registered investment advisor. Purchasing cryptocurrencies poses considerable risk of loss. The writer does not guarantee any particular outcome. Past performance does not indicate future results. This information is what was found publicly on the internet. This is all my own opinion. All information is meant for public awareness and is public domain. Please take this information and do your own research.