An Introduction to the World of Bitcoin

After the 2008 financial crisis, a lot of individuals suffered massively and lost faith in the traditional banking system. This led to the rise of Bitcoin, the first cryptocurrency ever created. Bitcoin was created by an unknown entity named Satoshi Nakamoto. It is a decentralized digital peer-to-peer currency without a central bank or authority and does not need any intermediaries for a transaction to take place. This means that if person A wants to send money to person B, they do not need an intermediary like a bank or financial institution to make the transaction happen. Think of bitcoin as digital cash. When you give cash to someone, you directly do it, without the need of a third party.

Bitcoin transactions are verified by miners and recorded in a public distributed ledger called a blockchain. A blockchain is a safe and secure database where information regarding bitcoin transactions is stored. Miners are individuals who use supercomputers to solve complex mathematical problems in order to mine or generate additional bitcoins and as a reward, are awarded a fraction of a bitcoin. Bitcoins are stored in digital wallets that can be accessed electronically.

Bitcoin is an open-source software, meaning that anybody is free to contribute to it and most importantly, since it is decentralized, is free from any regulatory control and power. This is probably its greatest benefit that makes individuals who have invested in bitcoin feel safe that their investment cannot be used or controlled by an institution or regulatory authority, unlike the case with fiat currencies deposited in banks.

Another key feature of bitcoin is its limited supply. There are only 21 million bitcoins that are available to be mined. Take for instance the Federal Reserve in the United States. They have the power to print as much money as they wish. This means that for every additional dollar that is printed, the value of the existing dollar that you hold in your bank account decreases in value. This is something that cannot happen with bitcoin and is one reason why it’s considered extremely valuable.

Last but not the least, another added advantage of bitcoin and the entire blockchain ledger is its transparency. Every bitcoin transaction that takes place is recorded on the blockchain ledger in a cryptographic format, meaning that data is made public but the sender and receiver’s identity in any transaction will always be anonymous, unlike a transaction where banks are involved.

Although individuals argue that though bitcoin has benefits over traditional currencies, there are certain flaws that exist. Experts argue that since bitcoin transactions keep the individual’s identity anonymous, they can engage in criminal activity and buy illegal substances such as drugs on the dark web. In such instances, it is extremely difficult for the government to track the individual’s identity and keep a tab on what bitcoin is being used for, and as a result, individuals take advantage of it.

In addition to the above mentioned point, since bitcoin is unregulated, it is not backed by a central government and hence experts feel that that it is not a legitimate concept, raising concerns of whether it will ever be a mainstream method of payment.

Bitcoin is still a relatively new concept that requires a lot of research and understanding. Knowing what bitcoin is seems relatively simple from the outside, but understanding the mechanism on which it is built and how it operates is something that is very complex and requires further research to be conducted in order to determine its true potential.

By Arhan Parikh (arhan.parikh@xumitcapital.com)