What is Bitcoin and Why Do We Need it

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What is Bitcoin

Most people around the world are already familiar with the name Bitcoin. Although, the real questions are, what is Bitcoin and why do we need it?

On a short review, when Bitcoin’s value skyrocketed exponentially at the end of 2017, it ushered in a massive wave of interest in cryptocurrencies among the masses. At the start of 2017, Bitcoin’s value stood at only $909. By the end of the year, a single Bitcoin was worth $19,650. That is about a 2,162% rise in value in less than a year! When you look at the rapid surge in value that the cryptocurrency underwent, it comes as no surprise that anyone who does not live under a rock became interested.

Okay, we have established that Bitcoin is perhaps the most widely known cryptocurrency around the world, but what is it, and why is there a dire need for it?

Dawn of Crypto

The world of today is much more advanced than it was a decade or two ago. Breakthroughs including the internet and electronic technologies have shaped modern society into what it is today. Online international trade, information exchange, and the relatively private dark web all owe their inception to these technologies.

In such a technologically progressive time, using ancient paper-based currencies is a little old-fashioned and not very suitable for certain online applications. The major problem with older currencies arises due to them being centralized systems. Such systems allow online transactions to be reversible by bank mediation. You could receive payment for performing a certain service, but your client could dispute the payment after the fact and reverse the payment through their bank.

The centralized nature of traditional currencies necessitates the existence of trust between a buyer and a seller. This can be a huge problem for online trade when your buyers are mostly anonymous. Additionally, the mediation by banks brings up the cost of online transactions. This is the problem Bitcoin and other crypto-currencies aims to solve along with many others.

Definition and Advantages of Crypto-currencies

Cryptocurrencies are strongly encrypted digital assets that work as a medium of exchange to facilitate financial transactions. They use strong cryptography methods to ensure the security of transactions, control the creation of additional units, and verify asset transfers.

If all of the above sounds like a mouthful to you, here’s the TLDR: cryptocurrencies are online currencies with strong encoding to maintain security and verify online transactions.

Paper vs digital

One major differentiating factor between traditional paper-based currencies and cryptocurrencies is that the latter uses a decentralized system. Decentralized currencies use a bank-free method of transferring wealth between people. Apart from the afore-mentioned irreversibility of transactions, decentralized currencies have a number of benefits over centralized systems:

  • Free of any national monetary policies. If you live in a country with destabilized currencies, a cryptocurrency can be a viable stabilizing alternative
  • Shield users from aggressive bank policies and fees
  • Protect the common man from bank failures and collapses
  • Allow for instantaneous and cheap international payments
  • Immune to traditional inflation or deflation
  • Anonymous

Blockchain and the Emergence of Bitcoin

All of the advantages associated with cryptocurrencies are due to the use of a distributed ledger technology. In the case of Bitcoin, the ledger is a blockchain. Blockchains are growing lists of records secured by cryptography. The publicly available Bitcoin ledger contains information on every Bitcoin in circulation and transactions in the past.

However, no single party or group of parties controls this ledger. By design, a blockchain is resistant to modification of the data inside. This is why we can “record translations between two parties in a verifiable and permanent way.” [1]

Bitcoin Inventor

The credit of Bitcoin invention goes to a person named Satoshi Nakamoto. However, the identity of this person (or group of persons) remains unknown to this day. The brilliant inventor left an email saying, “I have moved on to other things” after he created the first blockchain for Bitcoin, and no one has heard of them since. [2]

The world owes Mr. Nakamoto a lot for his/their work in pioneering blockchain technology. Satoshi was the first person to solve the problem of double-spending (duplicating your currency file and using it more than once) without the need of a centralized server or trusted authority.

He published his work on blockchain technology in a publicly available white paper that you can see for yourself here. Since Bitcoin, his open-source blockchain technology has found its way to smart contracts, banking systems, and video games, among many other applications.

An Unconventional Form of Currency

When Bitcoin started in 2009, it aimed to break the reliance on traditional bank systems to regulate online transactions. As it was a very unorthodox form of currency, people around the world treated Bitcoin with suspicion. Many others felt that it was an unfeasible form of currency because of the lack of a centralized body regulating its value.

The fact that Bitcoin value was extremely volatile in its initial years made these matters much worse. The currency underwent many rallies and crashes from 2013 throughout 2017, but these are insignificant when compared to what happened to Bitcoin values from 2017 to 2018.

2017 Bull Market

2017 marked the year of the meteoric rise of Bitcoin. Bitcoin value started to rise rapidly in the fall of 2017 and broke through $5,000 in October. This value doubled to $10,000 in November and peaked around $20,000 in December. Such an exponential rise was unheard of for many currencies and sparked a global debate on the practicality of modern crypto-currencies.

Many critics called Bitcoin out as a speculative bubble, and when its value plummeted by 65% at the start of 2018, these fears were somewhat validated. Other crypto-currencies followed in Bitcoin’s footsteps and experienced similar devaluation after a brief rise in value, bringing about the great crypto crash of 2018.

Price Volatility

By December of that year, Bitcoin’s value collapsed as much as 83.8%. Since its peak value of $19,650 in December 2017, it fell to an all-time low of $3,183 in December of 2018. Bitcoin seemed like a passing fad that was down on its knees, begging for survival. Thankfully, the value relatively stabilized at the end of 2018, wavering between $3,000 and $4,000 till March 2019.

The value of Bitcoin started creeping up again in April of last year and reached a peak of $11,865 in June. Then again, the value followed a downward trend until December, when it dropped to $7,071. However, these rises and falls are nowhere near as steep as those that Bitcoin experienced in the 2017-2018 time period.

The value of Bitcoin has been steadily creeping upward since then and comes in at $9,225 at the time of writing for this article.

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