Humans have used multiple ways to exchange value throughout history.
In the early days of human civilization, people would barter goods and services until gold became the universally accepted form of currency.
The honey-hued metal remained the cornerstone of every commercial transaction before paper money took over. Then in the 17th century, card money was invented to carry out business exchanges, though it didn’t obsolete paper money, which is still widely used worldwide.
As technology kept advancing, so did the methods of payment and exchanging value. And that’s how in 2008, a technological breakthrough led to the invention of an electronic payment system known as Bitcoin.
Bitcoin is essentially virtual money developed through the use of cryptography, the study of making, and deciphering codes.
It was the first successful cryptocurrency; however, many more contenders have now entered the virtual money market. But bitcoin is still the largest of them all.
Although bitcoin is a pretty common terminology today, many people don’t really understand the electronic concept. As mentioned earlier, bitcoin is an electronic payment system, a conduit used by people to make payments over the internet.
Simply stated, it is a piece of software that allows people to make commercial exchanges. Despite all the widely shared and circulate pictures of glistening gold coins with a B inscribed on top, the reality is that bitcoin is merely an online channel by which two parties can transact virtually.
- 1 A Brief History of Bitcoin: Who Created the First-Ever Cryptocurrency
- 2 What is Blockchain?
- 3 Price fluctuations
- 4 Government Laws and Regulations Around the World
- 5 What Are The Advantages And Disadvantages Of Bitcoin?
- 6 Is Bitcoin Worth Investing In 2021?
- 7 Mining Bitcoin
- 8 Buying Bitcoin
- 9 The Bitcoin Split To Bitcoin And Bitcoin Gold Explained
- 10 What Are Bitcoin Faucets?
- 11 Taxation And Regulation Of Bitcoin
- 12 Famous Heists And Wallet Shutdowns
- 13 How Does Bitcoin Perform Compare To Other Crypto Currencies?
- 14 The Financial Takeaway
A Brief History of Bitcoin: Who Created the First-Ever Cryptocurrency
The origin of Bitcoin is rather obscure as an anonymous entity, operating under the pseudonym Satoshi Nakamoto, disclosed the phenomenon to the world.
Nobody knows if Satoshi Nakamoto is a person or an enterprise with more than one employee; hence the beginning of Bitcoin remains a mystery. However, we can trace back its journey from its early days after inception till today.
In November 2007, Satoshi Nakamoto published a document, known as the white paper, on an online cryptography forum, describing the then-novel concept.
Nine months later, in August 2008, an online domain, Bitcoin.org was registered that was powered by a technology called the blockchain.
For the longest time, blockchain and Bitcoin were used interchangeably, even though the two phenomena are anything but the same. (More on it later in the article)
From 2008 onwards, Bitcoin didn’t pick up much traffic until, in May 2010, the first real-Bitcoin transaction took place when a programmer named Laszlo Hanyecz offered to pay 10,000 bitcoins ($25) for a pizza.
From then on, Bitcoin began gathering attention and finally hit an all-time high in 2013.
Although now Bitcoin is a well-known concept, there is a lot people don’t know about it. Bitcoin is a decentralized electronic payment system, meaning no single authority has control over it, unlike paper money.
Traditional money is fiat money, which means its production is authorized by governments. This way, a central authority gets to keep track of the produced money and its circulation.
Simply put, the government commands the state bank to print currency bills; one management controls the money present in an economy.
The same is the case with digital money, where banks have all the control over customers’ accounts. Having a centralized currency system gives unimaginable power to a single agency to control how money is created and distributed, which can lead to corruption.
One example of this is Wells Fargo, whose employees created numerous fake credit card accounts without their customers knowing about it for years.
When an entity has absolute power over something, it’s bound to slip and misuse its authority. But that’s not the case with Bitcoin.
Bitcoin is a transparent, decentralized payment system that controls the flow of virtual money without a central authority. People have complete access to the online ledger so they can see the balances and transactions.
In a nutshell, Bitcoin came as an alternative method to exchange value without a single institution overlooking the flow of currency. But how exactly does the virtual system manage that?
What is Blockchain?
As previously stated, Bitcoin is a digital system; therefore, like any other online network, it runs on a protocol, which is known as the blockchain. Simply put, blockchain is the technology that powers cryptocurrencies such as Bitcoin, Ethereum, etc.
The workings of blockchain are pretty straightforward. A single blockchain consists of multiple blocks or pockets/files carrying data that are arranged chronologically. The information stored in a blockchain’s boxes can be certificates, contracts, land agreements, or any other asset titles.
Basically, blocks carry bonds between two parties that warrant an exchange of virtual money, eliminating the need for a third party, such as a bank, to mediate the transaction.
This system allows people to exchange finances independently, creating endless possibilities for peer-to-peer transactions. Satoshi Nakamoto also used the same terminology, a peer-to-peer electronic cash system, to describe the function of Bitcoin in their white paper.
In Bitcoin’s early days, many believed it was the same and blockchain, but that’s not true. However, even today, sometimes, when people say blockchain, they could be referring to Bitcoin blockchain and not the technology.
A blockchain is also referred to as a distributed ledger, alluding to the system’s public nature. All the blockchain records are publicly available and can be accessed by anyone at any time.
But all the information on the blocks in a chain is anonymous and denoted by long strings of numbers and letters, so nobody can know who owns what.
One might assume that due to the openness of a blockchain, it might be alterable, but that’s not true. Tampering with the data in a blockchain is practically impossible.
Every block in a chain carries a hash number, its own reference number, and a pre-hash number, which is the reference number of the previous block in the chain. Let’s say A, B, and C are three blocks in a Bitcoin blockchain.
Because every block carries the hash of the previous block as well, that is, each link points towards the last one, binding them all together.
If someone tries to tamper with block B, its hash number will change, rendering the following blocks invalid because the reference numbers will not match. Therefore, altering the data on blockchains is not easy.
(Note: Block A doesn’t have a previous hash number as it is the first in the sequence and is called the genesis block.)
Bitcoin or any other cryptocurrency carries immense value, which is why people invest in it. But like regular currency, bitcoin also faces changes in prices. Let’s take a look at bitcoin price fluctuations.
Ever since its inception, Bitcoin has faced price fluctuations frequently. It has gone from an all-time high to a dangerously low point more than once, which clearly illustrates its volatility.
Noteworthy Bitcoin trading began in 2013 when the price went from $13.50 per bitcoin to a whopping $220 in early April. However, the surge was short-lived, and the fare dropped back to $70 by mid-April.
October and November of the same year saw a significant increase in bitcoin value.
The price went from $100 to $195 by the end of October while going over $200 to more than $1075 from early November to the month-end. The boost in the bitcoin price around this time is attributed to the entry of many Chinese miners.
Moreover, the famous Bitcoin player, Mt. Gox, was also thriving back then, which further contributed to the increase in the bitcoin price. However, the surge in value didn’t last long, dropping from $1079 on December 4 to $760 by December 7
January 2014 brought a slight rise in the bitcoin price, recording an increase from $760 to $920. Yet again, the spike was followed by a crash. The value dropped from $850 to $580 in early February.
From July 2014, the bitcoin price experienced a steady decline, dropping from $600 to $315 by the beginning of 2015.
The summer of 2015 turned out to be better, but November saw a decent jump in the price. From $275 in October, the value went up to $460 by early November only to drop down to $360 by month-end.
Through 2016, the bitcoin price steadily rose, breaking through $1000 in early 2017. In the fall of 2017, the cost of bitcoin increased further, touching $5000 in October and breaking through $10000 in November.
The increase in the price didn’t stop there, and in December it went up to $20000. But just a few weeks later, the currency suffered a significant drop, crashing all the way to $7000 by April 2018 and below $3500 by November of the same year.
In 2019, the bitcoin price enjoyed a boom, going up to $10000 per coin in June.
Following its past pattern, bitcoin’s value dropped down to around $7000 by the end of the year. The year 2021 has not been extraordinary for the bitcoin price, going up to only under $10000 at the beginning before hitting a low of about $5000 in March.
However, staying true to its history, bitcoin has been recovering since then.
Government Laws and Regulations Around the World
The world is divided over its stance on the burgeoning bitcoin. Some continents have embraced the advanced system with much enthusiasm, while others have been reluctant to accept it.
The United States of America doesn’t have an official federal law in place for managing Bitcoin dealings. Every state has the right to decide how they wish to regular bitcoin matters.
So far, New York, Maine, Vermont, Arizona, and others have released bills acknowledging bitcoin and other blockchain leaders as authentic and reliable means of record keeping. Thus, allowing their use.
The federal government has yet to pass a legal bill on bitcoin but, it has given out categorical statements on how citizens are bound to report their profits (capital gains to the IRS) and tax payments.
Europe is considered the cryptocurrency capital as it has been keen to integrate the bitcoin network into its financial systems.
The 19-country union believes that cryptocurrency is the way forward.
Most of Asia is on the fence about bitcoin’s efficacy and reliability; however, Japan is leading by example in the region.
The Land of the Rising Sun is cryptocurrency-positive country and recognizes bitcoins as a legal means of payment, though not traditional. This means, holding or dealing in bitcoins isn’t illegal in Japan, but the banks do not dispense the virtual currency.
Australia is regarded as a recent haven for blockchain as the country has labeled bitcoin as money, thus making it acceptable for use in Down Under.
What Are The Advantages And Disadvantages Of Bitcoin?
Even though bitcoin has attracted much attention from around the world, there are both advantages and disadvantages associated with it.
Unlike regular banks that oversee all the transactions, Bitcoin is transparent in its workings.
Anyone can access the ledger online, either the entire record or just the bits relevant to the user.
Independence for financial systems
Since bitcoin is a decentralized peer-to-peer electronic cash system, it doesn’t rely on a centralized authority to manage the transactions.
People have complete control over their dealings with other parties.
Almost every currency has suffered a decline in its value due to inflation, but cryptocurrencies are safe from that. At the time of launch, only a specific amount of cryptocurrency is released.
The source code determines how much of a currency will be released. For instance, there are only 21 billion bitcoins so far in the world. That means as the demand for bitcoins increases, the value will increase as well, which prevents inflation in the long run.
Bitcoin is absolutely safe as the ledger containing the details of balance and transactions doesn’t display names or any other easily trackable information of its users.
All the data is organized using cryptic values containing letters and numbers. The anonymity of the system makes it completely safe.
Moreover, as mentioned earlier, the blocks in a chain are linked with their hash numbers, so nobody can tamper with the data on each block because doing so will render the following data cells invalid.
Major Disadvantage: Volatility
One disadvantage of bitcoin is the volatility in its price. Bitcoin prices rise and drop drastically, which poses as a deterrent for many investors.
If a hacker gets its way into the bitcoin system, the entire network can crash, and all your investments can get lost in the process with no recourse. In other words, buying bitcoins is pretty much a gamble.
Is Bitcoin Worth Investing In 2021?
Even though bitcoin prices plummeted earlier this year, they are beginning to pick up the pace again. But that doesn’t guarantee that the prices won’t drop again or that a bug will not crash the entire system, leaving you without funds.
The risks associated with bitcoins are indeed frightening; however, the gains are equally enticing. Therefore, you need to weigh the pros and cons yourself and figure out if you wish to play safe or jump in headfirst.
Bitcoin mining is the process of creating new bitcoins by solving computational puzzles.
It is done using high-tech computers as the problems that are to be solved in order to generate bitcoins are enormously complex and can wear out even the most advanced computer systems.
The effect on bitcoin mining is two-way. When a miner deciphers a mathematical problem, they generate bitcoins while making the entire network safe and reliable.
Buying bitcoins is pretty similar to buying stocks but riskier because the fluctuation in bitcoin prices can be pretty steep.
But regardless of the risks, investing in bitcoins can be quite beneficial when the value soars occasionally.
Here is how you can buy bitcoins
- Open a brokerage account with a company that allows crypto investments.
- Deposit funds into your brokerage account.
- Buy BTC.
- Later sell the crypto for a gain or loss.
Some popular and reliable brokerages for you to choose for your bitcoin dealings are
- TD Ameritrade
The Bitcoin Split To Bitcoin And Bitcoin Gold Explained
Bitcoin became immensely popular after its price spiked drastically in 2017. But despite being a relatively common concept, many people do not know about the different forms of bitcoins. Bitcoin primarily has two types; bitcoin cash and bitcoin gold.
Bitcoin cash is developed to bridge the lag in transaction time that the monetary system began experiencing after gaining much traffic. The load on the network slowed it down.
As a result, the creators developed bitcoin cash that was much faster and more efficient as it uses a large amount of MBs, 8 to be precise (which is 700% more than regular bitcoins).
Bitcoin mining, the process used to produce bitcoins, is an energy-intensive procedure requiring expensive hardware, called AISC hardware. Henceforth, the primary or the original method of bitcoin generation landed in the hands of elites.
Consequently, creators developed a system to make bitcoin gold, which doesn’t require specialized computers or equipment. This gives regular people the opportunity to get involved in the bitcoin business.
Simply put, bitcoin gold is a process of bitcoin generation that can be done on regular computers, making the system accessible to all, much like how the network was in its early days.
What Are Bitcoin Faucets?
Lucky draws or gifts are liked and appreciated by pretty much everyone. Whenever a person receives a reward for something, they dearly cherish their receiving. With bitcoin faucets, a visitor can get bitcoins as a gift, though a small fraction.
As the name suggests, bitcoin faucets are like taps that dispense small amounts of bitcoins as rewards for people to claim. These faucets work for all kinds of cryptocurrencies and not just bitcoin. They release the free digital currency at specific intervals for people to collect.
Bitcoin faucets are generally not used by experienced investors and are mostly preferred by newbies who are just starting their journey into the world of bitcoins.
Taxation And Regulation Of Bitcoin
Taxation authorities worldwide have been trying to chalk out a clear-cut taxation plan for bitcoins, but the novel nature of the virtual currency stands in the way.
That is, even though bitcoin is technically a form of money, tax institutions insist that it should be treated as an intangible asset and not currency because state banks don’t issue it.
The IRS in America and all other corresponding authorities seem to have a similar stance on the subject, i.e., treating cryptocurrency as an asset.
Resultantly, users have to pay taxes if they transact bitcoins. For instance, if someone buys groceries using bitcoins, they’ll have to pay capital gain tax. Aside from that, one will incur tax payments in the case of any of the following scenarios.
- Selling bitcoins, mined personally, to a third party.
- Selling bitcoins, bought from someone to a third party.
- Using bitcoins, which one may have mined, to buy goods or services.
- Using bitcoins, bought from someone, to purchase goods or services.
Time also plays a factor in the application of the tax on bitcoins. Bitcoins held for more than a year incur long-term capital gains tax while those held for less than a year incur short-term capital gain tax.
Short term capital gain tax has the same rate as the ordinary income tax. That said, determining the accurate value of the tax on bitcoins is tricky because the prices rally and plummet drastically within the same trading day.
To ensure some form of consistency in tax regulations on bitcoins and attain a semblance of fairness, the IRS imposes first in first out (FIFO) and (LILO) rules of accounting. That means if someone purchases bitcoins at a time of high prices, they will use the same value for sales too.
Famous Heists And Wallet Shutdowns
One of the biggest drawbacks of bitcoin is the irredeemable loss of assets. If a cryptocurrency exchange/wallet is hacked, all the funds are lost forever. There is no way to get one’s investments back in case of a heist or wallet takeover.
- Date: Jan 2018
- Crypto amount stolen: Approximately 500 Million NEM
- Fiat equivalent at the time: ~ 58 Billion Japanese Yen (532 Million USD)
A very successful and popular cryptocurrency wallet of their time, Coincheck suffered colossal damage in 2018 when hackers took control of their system, transferring approximately 500 NEM (a form of cryptocurrency) into 19 wallets.
- Date: Feb 2014
- Crypto amount stolen: 850,000 BTC
- Fiat equivalent at the time: ~470 million USD
At the time of the heist, the total of bitcoin was less than $1000. However, later the prices soared, reaching close to $9000, which amounted to approximately 8 billion USD in losses.
- Date: Aug 2016
- Crypto amount stolen: 119,756 Bitcoin (BTC )
- Fiat equivalent at the time: ~ 72 million USD
This particular incident unfolded suspiciously as the funds were stolen using the customers’ accounts. The hack was reported on August 2, but the details came out much later.
How Does Bitcoin Perform Compare To Other Crypto Currencies?
Ether is the cryptocurrency that functions under a monetary network called Ethereum.
Ethereum allows users to create their own decentralized applications (dapps)’ and create ‘smart’ contracts, generating an unlimited supply, which makes the currency susceptible to inflation. Conversely, bitcoin is not inflationary.
Ripple operates on a system known as RippleNet, which is used by many financial institutions, such as American Express and Santander.
Ripple works at lightning speed, but there are some concerns about its decentralization as the network behind it can work with other digital currencies as well. But in the case of bitcoin, that can’t happen.
Founded by Charlie Lee, Litecoin is often referred to as the silver to bitcoin gold. But the difference in the supply of the two currencies is massive. LTC has a collection of 84 million coins, which is four times higher than bitcoin gold.
Another difference between bitcoin and litecoin is the market capitalization, which is much lower in the case of litecoin and much higher in the case of bitcoin, making bitcoin the bigger and more reliable between the two.
Tether is a relatively newer breed of cryptocurrency, called stable coins. Operated by Tether Limited, Tether is backed by fiat currencies and carries a relatively stable price, unlike the starkly volatile bitcoins.
The Financial Takeaway
Whether you should invest in bitcoin in the uncertain economic climate of 2021 depends upon your capacity to take risks and bear the consequences.
If you think you can pass through unfavorable outcomes, should they appear, you should try your luck because the gains from bitcoins trump the potential risks any day!