So, what is Bitcoin?
What is cryptocurrency, how does it work and why should you care?
What is Bitcoin?
Bitcoin is a decentralised, purely digital currency that relies on advanced peer-to-peer software and cryptography rather than a government entity.
How does it work?
A public ledger records all bitcoin transactions and copies are held on thousands of servers, known as nodes - which can be established by anyone with a powerful enough computer. Every transaction is publicly broadcast to the network and shared from node to node, as can be viewed on Blockchain.com. Every ten minutes or so these transactions are collected together by miners into a group called a block and added permanently to the blockchain. Due to this process, every single bitcoin transaction ever made is recorded -permanently.
Why is this process safe?
Consensus on who owns which coins is reached cryptographically across these nodes rather than relying on a central source of trust like a bank. So, if a validator node receives a transaction and other nodes receive something seemingly different from the same wallet address - the transaction could be fraudulent and thus, consensus rejects it.
Can someone take my Bitcoin?
Bitcoin is built on the SHA-256 algorithm and the digital wallets that hold Bitcoin, like Metamask, secure your currency with public and private keys. In short, without knowing your private key, the chances that somebody could get into your wallet and actually withdraw all your Bitcoin is quite slim due to validator consensus as discussed earlier. Mathematically, unless you click on a fraudulent link and get phished that way - a hacker would need to guess-and-check a particular input within the SHA-256 hash function. In other words, they would need to compute through 2^256 input functions.
This number is beyond astronomical.
What is the purpose of Bitcoin and what problems does it solve?
In a general sense, Bitcoin's purpose is to act as a digital currency free of any centralised medium to which a transaction has to pass through in order to get to the recipient. This means no middle-man.
As for the underlying benefits of Bitcoin replacing the traditional financial system - fiat currency - these include:
Reversibility of electronic payments can track fraudulent activity.
Could eventually be a hedge against inflation due to the 4-yearly Bitcoin halving.
Financial transparency and accountability through permanent encryption of transactions in the blockchain.
Minimise corruption through decentralisation, putting financial authority in the hands of the public.
Provide a store of value for those in developing countries.
I could cover these quite extensively, so I won’t right now. Check out these links:
The Impact of Crypto Currencies on Developing Countries
What problems can Bitcoin solve?
Can Bitcoin be used as a tool for criminal activity?
Just as with any other form of currency, yes it absolutely can.
However, as discussed in my explanation of the Bitcoin network and consensus - fraudulent activity cannot avoid being traced forever, which is why most hacked Bitcoin funds are retrieved after some amount of time.
But bitcoin is decentralised and anonymous, right? Bitcoin is pseudonymous, not anonymous, which means that a transaction can always be traced through it’s block- “chain”. However, exchanging currency between two specific parties for illicit purposes is completely viable - except cash does the same thing, but better.
A low and ever-decreasing trend in criminal transaction volume in cryptocurrency is being recorded by one of the most famous blockchain data platforms - Chainalysis - whereby 2.1% of crypto transactions were tied to illicit purposes in 2019 - and decreased significantly in 2020 to 0.34% due to innovation and security improvements.
In contrast, between 2 and 5% of the world’s global GDP is associated with illicit activity. While cryptocurrency sounds like some totally encrypted way to be a criminal under the radar - you and your transactions are traceable and thus, cash is genuinely a much better option. Additionally, who wants to risk receiving $100 in Bitcoin for drugs - just for it to be worth $60 the next day? That’s volatility for ya.
Most significant Bitcoin hacks and scams over the years
Despite the secure, cryptographic algorithms that govern the Bitcoin protocol, the network as well as the cryptocurrency space in general is only in the early stages of innovation - thus, it has not been free of some pretty detrimental hacks and scams over the years.
Mt Gox hack of 2014 - Approx. $460 million of Bitcoin stolen.
In 2014, the most popular crypto exchange at the time (accounting for 70% of transactions), Mt Gox, was gradually seeped of over 850,000 Bitcoin - worth over $450 million dollars at the time. There are even more recent occurrences like this on newer exchanges, but I will keep the examples minimal for the sake of preventing this blog becoming a thesis.
Hong Kong-based exchange, Bitfinex, gets hacked for $72 million.
A cryptocurrency exchange with an almost-completely anonymous team, Bitfinex, also behind the USD stablecoin, Tether, lost over $72 million in investor funds in 2016 due to a fault in their transaction processing method - multisig. Most of the money lost was repayed out of pocket to investors via airdrop, although this was still not a good look.
The Bitconnect Ponzi scheme of 2018 - “Bitconneeeeeeccctttt”.
Founded by Satish Kumbhani, but charismatically advertised by Carlos Matos, Bitconnect was a Ponzi scheme (pyramid scheme), that promised 1% returns per day and once defrauded - the token BCC sold off from $500 to 50c.
Is Bitcoin bad for the environment?
Yes. Bitcoin is currently run on a cryptographic algorithm called Proof of Work (PoW), which uses exponentially high energy when looking at the sheer number of Terawatt-hours used per transaction - equivalent to the average American household over 74 days (Reiff N, 2022) - or when acknowledging its higher annual energy use than the Netherlands, Ireland, Argentina and Greece to name a few. Numerically, the University of Cambridge Bitcoin Electricity Consumption Index estimates that the Bitcoin network uses between 80 and 120 Terawatt-hours of electricity annually. This excessive energy use is due to the computing power required to mine a "block", whereby miners solve complex mathematical functions to prove that the transactions within that block are not fraudulent.
Are there any alternatives to Proof of Work? Some alternatives to Proof of Work include Proof of Stake, Delegated Proof of Stake, Proof of Burn and Proof of Authority. We will see in due time if any of these assume dominance over Proof of Work.
Of these however, Proof of Stake (PoS) is the most popular and second-biggest cryptocurrency, Ethereum, is aiming to transition to it by the end of 2022.
In short, this is a good thing, as the Ethereum Foundation projects - “Ethereum will use at least ~99.95% less energy post merge,” (Beekhuizen C, 2021).
An additional nuance to keep in mind when judging the energy expenditure however, is the public appeal for more renewable algorithms and energy sources to be used. Since Bitcoin is decentralised, the opinions of the people have a significant impact on the implementations within the protocol. Albeit, this will need to outweigh the growing number of Bitcoin validators migrating to places like Kazakhstan, where fossil fuels are the primary energy sources.
How would you invest in cryptocurrency?
Search up “best cryptocurrency exchanges in [insert your country here]”.
In my case, I use Coinspot. Never invest more than you are willing to lose and remember to remain emotionally reserved from your investments. Market Psychology says you tend to make terrible decisions when you panic.
So why should you care about Bitcoin?
Maybe you should, maybe you shouldn’t. I don’t know!
Invest where you feel confident - confidence gained from research. Searching your questions on google or using SOME Youtube sources are how I go about doing it. Check out:
Further Research:
NFT’s:
Books on the subject:
The Basics of Bitcoins and Blockchains
The Bitcoin Standard: The Decentralised Alternative to Central Banking
Other great financial reads:
Atomic Habits: the life-changing million-copy #1 bestseller
The Simple Path to Wealth: Your road map to financial independence and a rich, free life.
The Millionaire Fastlane: Crack the Code to Wealth and Live Rich for a Lifetime
Have you considered investing in cryptocurrency or think it’s shady? Let me know yo!
Cya guys.
Riley C.
References:
-Sparkes, Matthew. “What is bitcoin and how does it work?” New Scientist, https://www.newscientist.com/definition/bitcoin/. Accessed 19 June 2022.
-https://www.youtube.com/watch?v=bBC-nXj3Ng4
-Foy, Anthony. “#ProofofKeys: 7 ways private keys have been compromised (and how you can protect yourself).” Qredo, 29 December 2019, https://www.qredo.com/blog/proofofkeys-7-ways-private-keys-have-been-compromised-and-how-you-can-protect-yourself. Accessed 19 June 2022.
-“10 Ways To Hack A Bitcoin Wallet In 2022 | News Blog.” Crypterium, 24 January 2022, https://crypterium.com/news/post/10-ways-to-hack-a-bitcoin-wallet-in-2020. Accessed 19 June 2022.
-Reiff, Nathan, and Erika Rasure. “Can Bitcoin Be Hacked?” Investopedia, https://www.investopedia.com/articles/investing/032615/can-bitcoin-be-hacked.asp. Accessed 19 June 2022.
-Copeland, Tim, and Mitchell Preffer. “7 most-damaging Bitcoin scams and hacks of all time.” Decrypt, 5 April 2019, https://decrypt.co/6236/biggest-hacks-and-scams-in-bitcoin-history. Accessed 19 June 2022.
-Latto, Nica, and Joseph Regan. “Is Bitcoin Safe? | Why Bitcoin is (Mostly) Secure.” AVG, 18 June 2021, https://www.avg.com/en/signal/is-bitcoin-safe#topic-5. Accessed 19 June 2022.
-Anderson, Somer. “Proof of Work (PoW) Definition.” Investopedia, https://www.investopedia.com/terms/p/proof-work.asp. Accessed 19 June 2022.
-Shendruk, Amanda, and Tim McDonnell. “How much energy does bitcoin use? — Quartz.” Quartz, 25 June 2021, https://qz.com/2023032/how-much-energy-does-bitcoin-use/. Accessed 19 June 2022.
-“FAQ.” Bitcoin.org, https://bitcoin.org/en/faq#how-does-bitcoin-mining-work. Accessed 19 June 2022.
-Reiff, Nathan. “What's the Environmental Impact of Cryptocurrency?” Investopedia, https://www.investopedia.com/tech/whats-environmental-impact-cryptocurrency/. Accessed 19 June 2022.
-“What problems can Bitcoin solve?” Cyprus Mail, 23 July 2021, https://cyprus-mail.com/2021/07/23/what-problems-can-bitcoin-solve/. Accessed 19 June 2022.
-“The Impact of Crypto Currencies on Developing Countries.” NewsWatch, 23 June 2021, https://newswatchtv.com/2021/06/23/impact-crypto-currencies-developing-countries/. Accessed 19 June 2022.
-Schmidt, John. “Why Does Bitcoin Use So Much Energy?” Forbes, 18 May 2022, https://www.forbes.com/advisor/investing/cryptocurrency/bitcoins-energy-usage-explained/. Accessed 19 June 2022.
-Haupt, Gudrun. “Can cryptocurrency ever be environmentally friendly?” DW, 24 February 2022, https://www.dw.com/en/bitcoin-can-cryptocurrency-mining-ever-be-environmentally-friendly/a-60818440. Accessed 19 June 2022.
-“Proof of Work vs. Proof of Stake: the Ecological Footprint.” Medium, 16 March 2021, https://medium.com/tqtezos/proof-of-work-vs-proof-of-stake-the-ecological-footprint-c58029faee44. Accessed 19 June 2022.
-“How to do your own research (DYOR) in crypto.” Digital Surge, https://digitalsurge.com.au/education/how-to-do-your-own-research-dyor-in-crypto/. Accessed 19 June 2022.
-“//.” // - Wikipedia, https://www.forbes.com/sites/haileylennon/2021/01/19/the-false-narrative-of-bitcoins-role-in-illicit-activity/?sh=7bf8a6b13432. Accessed 19 June 2022.
https://metamask.io/
I’ve made many mistakes when building my own $200+ week purpose-driven YouTube channel… But this post contains none of those mistakes. If you want to go viral with online content while fulfilling your Life Purpose, then you’ll like this post. (also took 10 long hours to write)