All hell broke loose earlier today when cryptocurrency "Bitcoin" crossed a value of US $10,000. That's one Bitcoin valued over Rs 6 lakh each. Staggering amount of money, isn't it?
In fact, we bet there's a lot about Bitcoins that you may not know. So here¡¯s a quick primer on all things Bitcoin.
Bitcoin is, in essence, a decentralised online payment system that¡¯s grown into a currency in its own right. Initiated in 2009, it¡¯s open source (you can find it here) meaning other developers can tweak and offer modifications to the software, pending approval by lead developer Gavin Andresen. Most importantly though, it¡¯s an anonymous payment system, and one that doesn¡¯t require any fragment of trust from either party involved for it to work. Transactions occur by sending the currency to a specified Bitcoin address.
The main problem with online transactions is that digital records can be manipulated so someone can, with the right kind of interference, possibly spend the same money twice. With systems like PayPal and Paytm, the company acts as a central trusted authority to authenticate each transaction. Bitcoin instead uses something called a blockchain to maintain records. The blockchain is a public ledger of every Bitcoin transaction ever conducted, one that¡¯s distributed to every machine connected to the Bitcoin network. This blockchain will exist forever and is impossible for any one person to edit. Instead, when a transaction takes place, computers on the network automatically check the balances of the Bitcoin addresses involved and edit the ledger.
Every ten minutes, a new ¡®block¡¯ is created as Bitcoins are mined (we¡¯ll get to that in a bit). These ¡®miners¡¯ then confirm all transactions since the last block was added, before adding the new block to the chain and redistributing it. This way, no one can steal Bitcoins, or forge them out of thin air just by changing a few numbers. Instead of one central banker figure, everyone has records, which can then be cross-referenced to identify fraudulent payments. It also means payments are not reversible, like with PayPal, and your accounts can never be frozen.
The question you¡¯re probably asking now, is where do Bitcoins come from? Who issues them? And what gives them their value? Simply put, some users dedicate their computers to verifying transactions on the peer-to-peer Bitcoin network. Remember how we talked about transactions being checked every ten minutes? That¡¯s done by these guys, and they¡¯re called Bitcoin ¡®miners¡¯. In return for donating their processing power so everyone can enjoy using Bitcoins, these miners are given a proportionate amount of the currency as a reward.
I know what you¡¯re thinking. Yes, you could technically donate processing power from your computer at home to earn Bitcoins, but it wouldn¡¯t be advisable. When the crypto currency first came into use, that was very much a possibility, however the rising cost of electricity has made that an unprofitable solution. Nowadays you¡¯d need specialised hardware to run the computations at maximum power efficiency, so you can actually earn more in Bitcoin than you¡¯re spending on your electricity bill. Miners currently receive 12.5 bitcoins for every 10 minutes of processing power. This amount halves every four years, with the next slash set for mid-2020.
The value of Bitcoins is as volatile as any market investment you might make. A few months after the first block in the chain was mined (the Genesis Block), an exchange rate was established that set the value of a Bitcoin at US $1 = 1,309.03 BTC. That rate used an equation including the cost of electricity for a computer mining Bitcoins. The value of Bitcoins has seen quite a few changes over the years, though it¡¯s steadily risen on the larger scale. Earlier today, Bitcoins crossed a value of $10,000 for the first time ever. If you want to purchase a single Bitcoin right now, (at least at the time this is is being written) it¡¯ll cost you Rs 6,43,325. And that number is only going up.
Let¡¯s go back a ways for this question. Bitcoins are based on a scarcity system, according to designs by the original lead programmer, Satoshi Nakamoto. The problem is that Nakamoto was likely a pseudonym, as the mysterious figure has seemingly faded from existence after abdicating in favour of Andresen.?
A successful Bitcoin miner is rewarded newly minted Bitcoins when completing a block, as well as transaction fees. However, that number is halved every four years. This started as 50 Bitcoins in 2008, eventually dropping to 12.5 new Bitcoins awarded for each block in 2016. Eventually, the number of Bitcoins rewarded will go down to zero, and further mining of the blockchain will only net miners transaction fees.?
A new block is created every 10 minutes. That amounts to 210,240 blocks mined in a four year cycle. With that rounded down to 210,000, you add the total depreciating values of the Bitcoins awarded each year (ie 50 + 25 + 12.5 + 6.25 + ....), which leaves you with 100. When you multiply those two values, it gives you 21 million, which is the total value of Bitcoins that will ever be mined. That¡¯s why it¡¯s inadvisable for newcomers to start mining now, unless they plan to do it as a hobby (albeit a loss-making one).
Now you¡¯re armed with everything you need to know about Bitcoins to school that annoying friend who thinks they know everything. And you¡¯re right on the cusp of discovering a world of other crypto currencies in use today too. Just wait till you hear about Ethereum.