The Fundamentals of Cryptocurrencies - - Bitcoin
For this reason, I dedicated a category to cryptocurrency, where I talked about how to earn free bitcoin online, investment opportunities in bitcoins, news and general tutorials. In this guide, I will talk about some fundamentals of cryptocurrency.
Let's dive in right away!
In this lesson, you'll learn:
- What are cryptocurrencies and why are they valuable?
- Why Bitcoin is the world’s top cryptocurrency (This is probably mostly due to what is known as “first mover” advantage. There are several coins in the world of cryptocurrency, but Bitcoin tops them all largely because it's the first coin to hit the market)
- How the mysterious Satoshi Nakamoto created bitcoin
- Why bitcoin is still in its infancy with plenty of room for growth
- Why cryptography and decentralization are so important for cryptocurrencies
What Are Cryptocurrencies?
The term “cryptocurrency” is short for “cryptographic currency”. The term refers to a new type of digital money.
Bitcoin was the world’s first cryptocurrency. Today, there are over 1500+ cryptocurrencies – including well-known tokens like Ethereum and silly ones like Weedcoin. And more are still being created.
Cryptocurrencies are analogous to regular currencies in the sense that they can be used as a medium of exchange, settlement of debt or a store of value; (do your high school definition of money?). You can buy products and services with cryptocurrencies. Or, you can store your wealth in cryptocurrencies. Just like you would buy gold, diamond or other precious metal to store as a measure of your wealth, you can equally store your wealth in cryptocurrencies.
Why Cryptocurrencies Are Valuable
Why the need to launch an entirely new wave of currencies? What’s the value behind cryptocurrencies? The value lies in three core principles, namely: Decentralization, Fixed Supply, and Transferability. Let's have a look at each of these in details.
Decentralization
Traditional currencies – like the Nigerian Naira – are controlled by institutions like the Nigerian Federal Reserve System called the Central Bank of Nigeria. Other countries have their own central banks – like the Bank of Canada or the Bank of England. These institutions restrict the control and supply of currency to the governments. They can “print” units of this currency whenever they choose to.
When a government prints money, that money is called a fiat currency. “Fiat” simply means “by decree”. A piece of paper only has a value “by decree” when the government of a country puts their stamp on it and calls it whatever unit of currency it's meant to be, e.g. a Hundred Naira Note is just a piece of paper, but it's no longer an ordinary paper because of the seal of government on it.
However, cryptocurrencies work in a different manner. Unlike fiat currency, cryptocurrencies are not controlled by any governmental or private institution. They’re not controlled by any specific person, neither are they controlled by a government or bank. Cryptocurrencies e.g. bitcoins are “decentralized” meaning the control is spread across the entire network of bitcoin users.
Fixed Supply
Cryptocurrencies also work differently because their supply is capped. For instance, there can only ever be 21 million bitcoins in existence. Meanwhile, traditional fiat currencies like the Nigerian Naira have no fixed supply: the government can print off more of it whenever they like. That’s why we have inflation. The total amount of Naira Notes in circulation is increasing every year, which means the value of each Naira Note in circulation is gradually decreasing.
Bitcoin and other cryptocurrencies have a fixed supply that leads to deflation instead of inflation – which is why the value of bitcoin has steadily increased over time.
Transferability
The other unique thing about cryptocurrencies is their transferability. Cryptocurrencies can easily be transferred electronically anywhere in the world without the need to rely on a third party – like a bank. You can send bitcoin anywhere in the world without needing to verify your identity or attach personal information to a transaction.
Most cryptocurrencies also have comparatively low fees. It might cost as much as $50 to transfer $200 with Western Union, for example, but only $0.05 to transfer $2 million worth of Bitcoin. This is a huge benefit to anyone in the world – whether you’re a millionaire seeking to transfer money securely and cheaply or you’re a migrant worker sending money to friends and family overseas.
Cryptocurrency transfers have another advantage which is, transfers are irreversible and secure, which means merchants don’t have to worry about the cost of fraud or chargebacks.
Why Bitcoin Is a Big Deal
Bitcoin was introduced online in October 2008. By January 2009, the bitcoin blockchain had released its first bitcoin. So began the age of cryptocurrencies.
Bitcoin was the first to introduce the concept of a distributed ledger – something we know as the blockchain. Today, Bitcoin remains the largest and most popular cryptocurrency by market cap. In fact, Bitcoin has not been dethroned once since 2009 – despite challengers like Bitcoin Cash (BCH), Ethereum (ETH), and Litecoin (LTC) coming close at various points in history.
Bitcoin grew in popularity for all the reasons listed above: it’s easy to transfer. It’s decentralized and censorship-resistant. And it can be accessed without the need for traditional banks.
In terms of cryptocurrencies, however, bitcoin isn’t the best cryptocurrency in the world today. It’s not the fastest cryptocurrency. In fact, a bitcoin transaction takes about 10 minutes to complete, unlike other new cryptocurrencies that take just milliseconds to transfer. Bitcoin is also plagued by relatively high fees – transactions can cost several dollars compared to fractions of a penny on other blockchains.
So, as we can see from the preceding paragraph, Bitcoin clearly has drawbacks. Bitcoin, however, remains popular because of its first mover advantage. Bitcoin was the first cryptocurrency to emerge on the scene – and that’s why it remains so popular.
Satoshi Nakamoto: The Mysterious Creator of Bitcoin
Bitcoin, like a good superhero, has an intriguing origin story. You may have heard about Satoshi Nakamoto. Satoshi created bitcoin.
Satoshi isn’t some Japanese computer programmer. Instead, Satoshi Nakamoto is an anonymous individual – or an anonymous group of people – responsible for the creation and early development of bitcoin. Nakamoto first published bitcoin’s research paper online on October 31, 2008. The paper was titled, “Bitcoin: A Peer-to-Peer Electronic Cash System.”
Satoshi continued to develop bitcoin until mid-2010. Satoshi actively communicated with other bitcoin developers while contributing to the bitcoin source code. Then, Satoshi suddenly disappeared. Satoshi handed control of the bitcoin source code repository to another core developer named Gavin Andresen. Satoshi also transferred several domains to various prominent members of the bitcoin community. Then, Satoshi was never heard from again.
The main innovation in Satoshi’s Bitcoin invention was the development of a distributed computation system known as the “proof-of-work algorithm” that conducts global transaction validation every 10 minutes, allowing the network to validate and come to consensus agreement about the state of each transaction.
Bitcoin was the first decentralized digital currency to use the blockchain technology and after its proven record of success and practicality, it has gain acceptance among both merchants and consumers.
The Growth of Bitcoin
The bitcoin network launched in January 2009. In the early days, you could “mine” bitcoin with an ordinary computer. You could also purchase bitcoins for a fraction of a penny. The value of the currency grew over the years. Eventually, people recognized the value of a decentralized, global currency. Retailers began accepting bitcoin and software developers started creating bitcoin tools. Thus, the value and usability of Bitcoin continued to grow.
The day bitcoin hit parity with the USD was a huge deal. Bitcoin users celebrated like they had just won the lottery. Finally, one bitcoin was worth $1 USD. Bitcoin reached parity with the USD in February 2011.
A few short years later, bitcoin hit an all-time high of $1400 USD. Then, it crashed back down to $300 or $400 after the Mt. Gox hack. In 2017, bitcoin hit a new all-time high of $20,000 before settling back to $10,000.
The exciting news if you are reading this today is that the digital currency has not reached mass adoption yet. Is safe to say we are just scratching the surface for the potential of Bitcoins and cryptocurrency.
With cryptocurrencies transactional value going up every day, a pre-fixed market cap and the supply of cryptocurrency decreasing over time, the value of Bitcoin should continue on a rising trend. As opposed to fiat currency that usually decreases and loses value over time.
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