Magic Internet Money: The Rise of Bitcoin
Bitcoin. When was the first time you heard about it? This summer? Last year? Well, had you known about it in 2009 and invested around $100 in it, you’d be sitting on $71 million right now. Bitcoin has been one of the biggest reasons for the spike in the number of millionaires in the world and is one of the most volatile markets.
My interest in Bitcoin first spiked in 2014, when it’s price hit record $700 and made headlines everywhere. I decided to study more and invest a small sum a couple of years later, just to satisfy my whims. It was only in 2017,when I saw its price rocket up to $2000 and decided to start trading Bitcoin and other alternate coins.
Putting all the earnings you might have made aside, what is a Bitcoin? It definitely doesn’t look like a coin and it definitely doesn’t exist in the real world. It’s virtual. It does not reside in your wallet, but in the hard drives of your devices. To flaunt some technical jargon, Bitcoin is not a coin, it’s a series of characters and digits known as a ‘Hash’. Now, this hash could be any alphanumeric series that follows the SHA-256 encryption. For example, let it be 9du4w62jd90ka2jq3op45nn1. Let’s call this hash ‘Key’ for simpler reference. This key is generated when a CPU/GPU is successful in solving complex and tedious calculations which is known as mining. Mining is the only way new Bitcoins can be generated and as more CPUs /GPUs are involved in mining, the tougher it gets to solve these calculations- the network adapts itself to the miners and adjusts the difficulty of mining.
Why does the Bitcoin network need mining?
To answer this, we need to ‘mine’ deeper about its origins and the vision laid out by Satoshi Nakamoto, the inventor of Bitcoin. As much as we don’t know who Satoshi is in real life, we do know that he has made one of the most important inventions of the 21st century after the Internet. According to Nakamoto, he wanted to build a peer-to-peer payment system— which simply means that value can be transferred without anyone apart from the transactor and the transactee being involved. This is huge. But why? Because, there is nobody who can control the network unlike banks and governments. You can send 10$ from here to any part of the world and there wouldn’t be a soul who could stop it. The power is given to the users of the network, and this is termed as decentralisation. To draw out a very apt analogy, decentralisation is democracy brought to technology and its users.
To add another advantage, Bitcoin is mostly anonymous, as the details of the users are never required, all one needs is some Bitcoins to send it to another person, unlike tedious bank processes. Coming back to mining, all the transactions that happen in the Bitcoin network are recorded in a ledger known as a blockchain. The blockchain keeps track of every transaction that ever took place and arranges them in chronological order. To sort and arrange all transactions and to separate fake ones from the original, one needs to calculate the hash of all the transactions that ever happened. Connecting the dots are you? Miners are needed to keep the network intact and secure. Miners preserve the integrity of the blockchain by constantly checking for legitimate transactions and recording them in the blockchain. In return for their efforts, the blockchain awards them with a fixed amount of Bitcoins. Anybody can be a miner if they the suitable equipment and this essentially eliminates the need for a central authority, giving power to the people who maintain the network.
Traditional mining has been rapidly replaced by the use of extremely powerful GPUs that are specifically built for this purpose. With millions being invested in Bitcoin mining, an average computer stands no chance of competing against them. This results in mining farms controlled by people who own a lot of processing power and may lead to slight centralisation. Although this is a concern, one can never have enough processing power to control the entire blockchain network. Bitcoin’s value is the vision that embraces it—decentralisation. This is definitely being appreciated in a world where nothing seems to be private anymore, and is clearly observable from the sheer hike in Bitcoin’s popularity.
All this being said, Bitcoin is a high risk high reward market and potential investors/users need to be fully aware of the risks involved. These risks pertain mostly to the price of it as Bitcoin is still very new and a very volatile commodity. It’s a system completely based on its users. The past 8 – 9 years of Bitcoin has been a roller coaster ride. It is the new blood the current century’s innovation needs and is only here to stay.
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution” -Satoshi Nakamoto
– Sai Srikar