Is Bitcoin the web gold? What are cryptocurrencies and should we invest in them?We've all heard of the Bitcoin currency and that its value has dramatically increased recently. Lots of people consider if they want to invest their money in Bitcoins. This has created a huge confusion in the stock markets. What is Bitcoin? What is mining? How do we spend them? Testproductreview.com will answer all your questions below!
To be able to understand Bitcoin and how it works, you should be familiar with the technology behind it. Blockchains are a relatively new technology initially developed specifically for the Bitcoin cryptocurrency, but since then they evolved into something much bigger.
“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
Don & Alex Tapscott, authors Blockchain Revolution (2016)
Wikipedia says that the blockchain is a growing list of records linked securely together. It's also compared to a financial ledger, which holds the transactions between the involved parties, debits, credits, balance etc. This may be a concept difficult to understand for people who are not into finance. To explain what the blockchain is, we will use the Google Docs analogy.
The Google Docs analogy
Google Docs is a collaboration platform we all know and have been using for several years. The essential principle is this: Imagine you have a spreadsheet. This same spreadsheet is used by multiple people besides you. All of you need to make changes and enter information in this spreadsheet. All users can make changes to this spreadsheet at the same time and the spreadsheet updates regularly with the information everyone has entered at the same time. It can be edited continuously and the original spreadsheet available on the network keeps all this information.
You've worked with Google Docs and you know that once a document is created and shared, it is available in any shared user's Drive. It's not centralized, rather it's shared across the network of users selected to access it.
Now this is similar to what the blockchain is. Information on it exists as shared and continuously reconciled database. The blockchain database is not stored on a single location, instead it's public and easily verifiable as there is no single entity that owns it. This makes the blockchain incorruptible - there is no central copy that the hackers can affect.
As explained by a specialist:
This piece written from a blockchain specialist can give more light on the matter using the same analogy above:
“The traditional way of sharing documents with collaboration is to send a Microsoft Word document to another recipient, and ask them to make revisions to it. The problem with that scenario is that you need to wait until receiving a return copy before you can see or make other changes because you are locked out of editing it until the other person is done with it. That’s how databases work today. Two owners can’t be messing with the same record at once.That’s how banks maintain money balances and transfers; they briefly lock access (or decrease the balance) while they make a transfer, then update the other side, then re-open access (or update again).With Google Docs (or Google Sheets), both parties have access to the same document at the same time, and the single version of that document is always visible to both of them. It is like a shared ledger, but it is a shared document. The distributed part comes into play when sharing involves a number of people.
Imagine the number of legal documents that should be used that way. Instead of passing them to each other, losing track of versions, and not being in sync with the other version, why can’t *all* business documents become shared instead of transferred back and forth? So many types of legal contracts would be ideal for that kind of workflow.You don’t need a blockchain to share documents, but the shared documents analogy is a powerful one.”
William Mougayar, Venture advisor, 4x entrepreneur, marketer, strategist and blockchain specialist
Why is blockchain so robust?
By design, blockchain technology is said to be immortal and incorruptible. Is this true or not, only time can tell. What we know from experience so far is that since its invention in 2008, the Bitcoin blockchain has been impacted only by hacker attempts or mismanagement. This means that problems occur due to human error or ill intentions. The design of the blockchain and its underlying concepts have not been proven faulty or caused any disruption for nine years since its existence.
What makes blockchains such a reliable technology? Well, mostly their design. Storing blocks of information identically across networks so that:
- it cannot be controlled by a single entity
- as a result of the above, there is no single point of failure
Lack of a single point of failure is probably the most characteristic trait of the blockchain. By storing the information in the blocks across the network, the blockchain achieves durability and redundancy. The transactions (in case of cryptocurrency) or information stored in the blocks is refreshed every 10 minutes. In these time intervals, the blockchain checks itself and reconciles any new information stored in it. This means that if an outside attempt is made to forcefully amend the data in one of the blocks, the hacker will need impossibly huge computing power to reflect that change across the entire network and cheat the system. Additionally, this achieve transparency, as the data is publicly available.
As we mentioned before, the blockchain is decentralized by definition. This means that anything happening on the blockchain happens simultaneously on the entire network which holds it, similarly to editing the Google Doc we talked about earlier. This has major implications in various industries. It is primarily used with finance at the moment, for example, stock market trades. It can be used for other purposes - land registry is only one idea that could benefit from a technology that is decentralized and public.
This image taken from Blockgeeks is a fine illustration of centralized and decentralized networks
We'll try to explain why the blockchain technology is considered to be the safest way to store information nowadays. Essentially, the primary reason is the decentralization we explained above. The disadvantages of having centralized points of weakness are eliminated here. The other part that makes the blockchains so secure is that they don't rely on the usual username / password type of authentication all people on the internet use today.
Rather than authenticating with usernames and passwords, the blockchains use encryption. The basis is using a combination of a public and private encryption keys. The public key is a long, randomly generated string of numbers that authenticates the person's address on the blockchain. All transactions of bitcoins of that one person across the network are characterized by this key. The private key is similar to a password and it gives the person access to their bitcoins (or other assets on the blockchain). That key however requires printing and keeping it somewhere safe, also referred to as a "paper wallet".
With the blockchain technology, the Internet essentially gets a new layer of functionality. As users can transact with each other directly without a medium, new businesses are making use of that. Many startups on the rise are basing their businesses on blockchains.
“2017 will be a pivotal year for blockchain tech. Many of the startups in the space will either begin generating revenue – via providing products the market demands/values – or vaporize due to running out of cash. In other words, 2017 should be the year where there is more implementation of products utilizing blockchain tech, and less talk about blockchain tech being the magical pixie dust that can just be sprinkled atop everything. Of course, from a customers viewpoint, this will not be obvious as blockchain tech should dominantly be invisible – even as its features and functionality improve peoples’/business’ lives. I personally am familiar with a number of large-scale blockchain tech use cases that are launching soon/2017. This implementation stage, which 2017 should represent, is a crucial step in the larger adoption of blockchain tech, as it will allow skeptics to see the functionality, rather than just hear of its promise.”
– George Howard, Associate Professor Brown University, Berklee College of Music and Founder of George Howard Strategic
You can see some of the applications of blockchain technology below:
You're now familiar to some extent with the technology that created the Bitcoin. Or, would I rather say, the technology that the Bitcoin needed to be created. We can now ask ourselves - what is Bitcoin? Why is it so popular? How do we use it?
Actually, Bitcoin was invented as somewhat of a by-product. The unknown inventor, who is famous with the pseudonim Satoshi Nakamoto, wanted to intend a peer-to-peer electronic cash system, something like the peer-to-peer programs (torrent clients) we use to share files directly to one another without a medium. This is how he announced his discovery:
Announcing the first release of Bitcoin, a new electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s completely decentralized with no server or central authority.
Satoshi Nakamoto, 09 January 2009, announcing Bitcoin on SourceForge.
What is Bitcoin?
We have to get in some technical detail in order to explain how Bitcoin works. Remember that Satoshi first intended to make a peer-to-peer cash system, so to have that, you need a payment network with accounts, balances, transactions. Usually, a central server or a central party is needed which keeps record of the spendings and makes sure that no entity spends the same amount twice (double spending). When you think of Bitcoin and blockchains, you already know that there's no such central server here. How do we keep track of things then?
Well, since there is no central entity whose function is to keep track of the transactions, it's natural that every participant in the transaction will have to have access and to all transactions so they can monitor if someone double-spends. This means that all participants will have to be in absolute consensus that all transactions are valid. If only one disagrees, the system fails. Satoshi found a way to achieve such a type of consensus with no central authority. This is actually the biggest discovery here.
If you want to understand what Bitcoins are, we need to take a step back and define what currency is. In general terms, currency is a limited amount of entries (funds) on a database (someone's account) that can only change under specific conditions (spending money, gaining money, transfers etc).
With Bitcoins, we have a network of peers. All peers have access to complete history of all transactions of all time and the balance of every account. The cryptokeys we talked about above come in play here. A transaction is a file that says "John gives Jemma X bitcoins" and is signed by John's private key. This is distributed around the network and everyone knows that this transaction has happened.
After the transaction happens, the network is immediately informed of it but the transaction is not yet confirmed. This is the crucial part because until it's confirmed, the transaction can be forged. When it's confirmed, it's forever, it cannot be forged or reversed.
Only miners can confirm transactions. This is essentially their job in the cryprtocurrency network. A miner has to note the transaction as valid and when that happens, all nodes in the blockchain add this to their database. After they do that, miners are also rewarded with Bitcoins.
What do miners do?
Everyone can be a miner, but they have to comply with certain conditions. They invest computer work to qualify for miners. More accurately, candidate-miners have to find the hash that connects a new block on the chain with the predecessor. The hash in simple terms is the relation that connects one arbitrary entity with a fixed entity. So, in simple terms, to become miners, people have to find what is the relation (transaction) between one block of the chain and the next one. This is done using SHA-2 cryptoalgorithm.
Remember that the blockchains use encryption and all transactions across the network are characterized by the public cryptokeys? Good. That means that in order to find the hash, miners have to solve a cryptological problem.
If they can find the solution to this cryptographic puzzle, the miners can build blocks and add them to the blockchain. They get rewarded for that with their own Bitcoins. This is the only valid way to create Bitcoins.
This block-building also requires solving crypto-puzzles and is the only valid way to create Bitcoins. The complexity of the puzzles requires an investment in the specific hardware. The computational time required for mining limits the amount of Bitcoins that can be generated by a miner for a given amount of time so there's no miner in the world that can instantly generate and infinite number of Bitcoins and make themselves rich in this way.
To summarize what I said above, Bitcoins are called CRYPTOcurrencies because the consensus-keeping process is secured by strong cryptography. Cryptocurrencies are built on cryptography. They are not secured by people or by trust, but by math.
What do you need to mine Bitcoins?
How to easily mine Bitcoins? Beginners in the cryptocurrency field often think that Bitcoin mining is the easy and fast way to generate Bitcoins and get rich. I mean, we already have computers, right, so why not use them? Unfortunately, it's not as easy as it sounds. Mining is a heavy operation and requires the respective hardware that can handle the task. Moreover, before even considering mining as your new job, keep in mind that more and more miners are currently competing for the fewer and fewer available blocks. That means that the competition is so high that there are miners who spend months mining without ever making profit.
In recent years when the Bitcoin was first released, people initially used the computers' CPU (processor) power for the task of mining bitcoins and later started using the GPU (graphic card) power for the same as it proved much more productive. Nowadays there are ASIC (application-specific integrated circuits) machines designed and sold specifically for the task of mining. To date, ASIC hardware is the most productive way to mine bitcoins. You can check the comparison table here which shows the mining speed of a specific ASIC machine.
Depending on the hash power (the main characteristic of the miner machines) the price of a machine can vary between $150 - $3000 for the most expensive and most powerful machine on the market, the Antminer S9. If you consider buying an Antminer though (there are cheaper versions as well), keep in mind that you can't just plug it in and start work. You need to get a CPU for it, prepare for adequate cooling and be prepared for the electricity bill.
You also need to prepare the Bitcoin mining software after you've purchased your hardware, open a Bitcoin wallet and join a mining pool if you want to share your efforts and profit with other miners. Joining a pool is recommended as nowadays it's hard to break even if you don't have help
How do you get Bitcoins?
People who are familiar with the Bitcoin cryptocurrency and its popularity mostly want to know how to obtain Bitcoins. The most used ways are:
- Get paid in Bitcoins for services or goods you provide
- Purchase Bitcoins at an exchange
- Earn Bitcoins through mining
Transactions involving bitcoins are characterized by the following:
- Secure - cryptography keys secure the funds so they're impossible to break into.
- Permission-less - you don't need anyone's permission to open an account, you only need the software.
- Pseudonymous - you are only identified by your address (public key) where the transactions occur. No connection to a real-world entity.
- Irreversible - once the block is created, there's no going back. If you send your money to a scammer, no one can help you.
- Fast - the transactions are announced instantly over the network and confirmed by miners in a few minutes.
Additionally, bitcoins are a controlled supply, meaning there is no such thing as an infinite supply of bitcoins. They are a finite number and will stop being mined after it's reached. Also, Bitcoins cannot represent dept. They are only present, cannot be borrowed, only gained.
Use of Bitcoin
Cryptocurrencies are digital gold. Sound money that is secure from political influence. Money that promises to preserve and increase its value over time. Cryptocurrencies are also a fast and comfortable means of payment with a worldwide scope, and they are private and anonymous enough to serve as a means of payment for black markets and any other outlawed economic activity. Their supposed usage should be payment only, but unfortunately, their trading and speculation use is larger by far.
“In 2 years from now, I believe cryptocurrencies will be gaining legitimacy as a protocol for business transactions, micropayments, and overtakingWestern Union as the preferred remittance tool. Regarding business transactions – you’ll see two paths: There will be financial businesses which use it for it’s no fee, nearly-instant ability to move any amount of money around, and there will be those that utilize it for its blockchain technology. Blockchain technology provides the largest benefit with trustless auditing, single source of truth, smart contracts, and color coins.”
– Cody Littlewood, and I’m the founder and CEO of Codelitt
Words of conclusionYou are now much more informed of the world of Bitcoin, cryptocurrencies, blockchains and mining. Are you cinsidering investing in Bitcoin on the stock market? The price skyrocketed in recent days and at the time of writing this article, 1 Bitcoin is worth more than $6000. Or maybe you're considering buying the hardware and becoming a miner? For now, hardware prices are still somewhat affordable, but the initial investment and uncertainty of profit could draw you back. What are your thoughts and impressions with this new world of currency? Share your thoughts below!
Thanks for visiting Test and Review blog, I hope you liked my article about cryptocurrency and blockchains.