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Understanding Bitcoin
- 2. Table of contents Background The Economics Strengths and Weaknesses Conclusion 2
- 3. Background 3
- 4. The Start Satoshi Nakamoto -Mysterious figure who created Bitcoin and the blockchain in 2008 -To this day… no one knows exactly who Satoshi Nakamoto really is -Released as an open source software project officially in 2009 Cypherpunks -Satoshi Nakamoto first introduced his ideas for Bitcoin on an email listserve group called the Cypherpunks -Community of cryptography enthusiast -Members of the Cypherpunks became early evangelists and core developers of the Bitcoin protocol -As the Bitcoin community grew beyond this group so did the surrounding infrastructure and ecosystem Early Ecosystem -Initial ways to actually use Bitcoin -One of the first Bitcoin applications was a gambling game that used the cryptocurrency -Mt. Gox was the first platform for trading Bitcoin. It’s no longer around because of a massive security scandal in which thousands of bitcoins suddenly disappeared from Mt. Gox 4
- 5. Bitcoin vs bitcoin -Bitcoin (with capital B) refers to the blockchain protocol -bitcoin (with lowercase b) refers to the cryptocurrency itself 5 It’s a bit (pun intended) confusing!
- 6. What is bitcoin? 7 -A decentralized peer-to-peer digital cryptocurrency -Transferable digital value -On the most basic level bitcoin is just computer code -price and value created by supply and demand and other economic forces -Innovation -bitcoin is the first example of a cryptocurrency and Bitcoin is the first blockchain -the blockchain is arguably the bigger innovation between the two as use cases for the blockchain are massive
- 8. How is the supply of bitcoin determined? Understanding the supply of the bitcoin is critical to understand how to invest in it. Computer Algorithm -The amount of bitcoin created is based of the initial algorithm that Satoshi Nakamoto implemented -It can not and will never change 8 Bitcoin Mining -Anyone can contribute computational power to the Bitcoin blockchain -Nodes (computers) compete to create new blocks in the blockchain by solving extremely complex mathematical problems -this takes processing power and consumes electricity -The node that solves the problem creates the next block and is rewarded with bitcoin.. -This is a “Proof-of-Work” protocol -other nodes verify the solution to the problem thus confirming the “work” of the winning node -The first ever Bitcoin block was called the Genesis Block Diminishing Returns -The amount of bitcoin the winning node receives diminishes over time based on the original algorithm -This number halves every four years -The last bitcoin will be mined in 2140 -These mechanics ensure the supply of bitcoin is finite and over time increases the demand for a single coin
- 9. Some Benefits Bye-Bye “Middle Man” -Bitcoin (the blockchain) establishes trust between online parties eliminating the need for a “Middle Man” (banks) to mediate digital payment transactions -This takes away power from big centralized organizations and decentralizes it to everyone using bitcoin -It also vastly increases financial efficiency because money is no longer leaked to banks who charge for processing and transaction fees (because, currently, they can) 9 Empowering the “Unbanked” -Millions of individuals in developing countries lack access to the global banking system -no bank accounts -no credit cards -Bitcoin empowers these individuals to join the global economy -anyone can create a bitcoin digital wallet and immediately begin accepting payment in the form of bitcoin
- 10. Bitcoin is an extremely powerful technology. However, it isn’t bulletproof. 10
- 11. Weaknesses Volatility Risks Bitcoin is still susceptible to rapid price shocks and fluctuations. This is a risk any investor takes and a roadblock for bitcoin to take over fiat currency on a global scale. However, the price of bitcoin should stabilize as consumer facing infrastructure for bitcoin continues to develop. Environmental Costs As previously discussed, each computer (node) on the Bitcoin blockchain requires a large amount of electricity to mine for coins. There are growing concerns over the long term sustainability and efficiency of the amount of energy that Bitcoin consumes. It’s estimated that currently the Bitcoin network consumes $300 million worth of energy each year. 11 Block Generation Speed It takes Bitcoin 10 minutes to generate a new block. Generating new blocks are crucial for storing and verifying transactions and there is concern that 10 minutes is simply too slow to keep up with transactions on a massive scale. Limited Space for Metadata Each transaction stored on the Bitcoin ledger can only contain the digital signature of the sender, the digital signature of the recipient, and the transaction amount. This limits the amount of metadata that can be stored with each entry into the blockchain. Security As was the case with Mt. Gox bitcoins stored in digital wallets can be stolen by cyber hackers. Remember (unlike cash or gold) – at the end of the day bitcoins are just code or pieces of information that can be stolen. However, cyber security flaws already exist within the status quo financial system.
- 12. Get Started Create a digital wallet on an established trading platform and trade USD for BTC: 12 Kraken Mine CoinBase Set up your computer as a node on the network. This is highly unrecommended because it is extremely hard to individually contribute enough computing power generate blocks.
- 13. Fun Fact In 2010 Laszlo Hanyecz (an early member of the Bitcoin community) traded 10,000 bitcoins for 2 large Papa John’s pizzas. That’s worth over $40 million today. Hopefully, those were some really good pizzas. 13