Delve into the current state of the world’s premier cryptocurrency, as we come off the back of Bitcoin’s explosive launch into the mainstream following it’s all-time high of almost $20,000.
Bitcoin is digital gold.
Bitcoin is going to the moon.
Bitcoin will always keep increasing in value.
Bitcoin is inherently valueless.
Bitcoin is just a technological Ponzi scheme.
Bitcoin is killing people in a fairly direct way.
Money and technology have each had starring roles in the story of human civilization.
Individually, both hold a special allure to us.
The adoption of the use of currency has propelled our collective ability to trade, and for better or worse, the accumulation of currency acts a primary measuring stick of status in society.
Our long-standing love affair with technology, research and scientific exploration, seems as much an inherent part of who we are as organisms, as it is a conscious choice that we have made as a species to continually learn more.
During the past decade, it’s been the inter-twining amalgamation of money and technology that has begun to reshape global commerce at a level of profundity not seen in recent history.
What’s more, this new technology has now given rise to it’s own sub-culture, rapidly-growing community and to a new and esoteric financial asset class.
All the while, few other technologies have been as simultaneously despised and loved as Bitcoin has.
Not often have such visceral sentiments towards something as mundane as, what is essentially a system of accounting, been so widely expressed throughout the mainstream media and beyond.
It’s likely that until a year or two ago you’d never heard of Bitcoin, and the chances of you knowing about it prior to it’s first major price rise to $234 in 2013 are slim-to-none.
Although growth in the use of Bitcoin has continued to increase at a fairly constant rate since it’s inception in 2009, global public awareness of cryptocurrency, and particularly Bitcoin, has increased dramatically after a deluge of media attention throughout the tail-end of 2017.
Following the amount of fame and infamy that Bitcoin has seen in recent years, it’s no surprise that over 80% of Americans and 90% of Koreans are now aware of it, and that just over 14% of Japanese millennials have invested in some form of cryptocurrency previously.
We’re going to take a deeper look into what Bitcoin is and how it works, but before we dive head first into the realm of cash 2.0, I want to reassure you of something.
So much of what is written about Bitcoin is motivated by, at best, a serious lack of understanding, and at worst, misinformation which is used to manipulate price, sentiment and markets.
This guide has no biases, ulterior motives or desire to either pump, crash or influence the price of Bitcoin. We have no affiliations with one camp, or the other… or the other.
Throughout this write-up, we’ll simply break down the story of the world’s number one virtual currency, how crypto is bought and traded, and what we should expect to see on the horizon in 2020.
Feel free to jump ahead if you already understand the fundamentals of Bitcoin and blockchain.
What is Bitcoin?
Depending on which part of the room you ask this question, your may be told that Bitcoin is a complete scam with no underlying value which, ultimately, is destined to implode in on itself.
Others within earshot may claim with equal fervour that the technology behind Bitcoin, Blockchain, is a near-miraculous wonder tech, poised to lead to disruption in almost every industry you can name.
In the next section we will try to pull apart the question of Bitcoin’s legitimacy and what could make this collection of 1’s and 0’s worth hundreds of billions of dollars. For now at least, let’s just start with the basics.
Bitcoin is an electronic store of value and medium for trade, that uses a combination of algorithms and other code to replace the need for a trusted central bank, and allows for quasi-anonymous direct transfers of value between peers, without middlemen.
In essence, the role of a middleman moves from being carried out by a person or designated institution to a collectively-shared, mathematically-secured bundle of software.
Bitcoin is also not a cryptocurrency. Bitcoin split into two different cryptocurrencies: Bitcoin Core and Bitcoin Cash. However, being that Bitcoin Core was the precursor to the second, the term ‘Bitcoin’ generally applies to the original incarnation.
To add an additional level of complexity, Bitcoin Cash itself also underwent another separation in November 2018, which further split it into two other off-shoots: Bitcoin Cash Satoshi’s Vision, or BCHSV, and Bitcoin Cash ABC, BCHABC.
This isn’t to mention other crypto assets which borrow the same name, like
, with most of these also being offshoots of the original Bitcoin.
I know.. It’s a clearly a pretty popular name for a cryptocurrency.
In this article we’ll just focus on the original version of Bitcoin to keep things (somewhat) simple, along with a look into the dynamics of Bitcoin Cash towards the end.
In the beginning, there was .. DigiCash
Bitcoin (aka Bitcoin Core) was launched in 2008, when a now infamously-anonymous computer scientist (or group of computer scientists) operating under the pseudonym of Satoshi Nakamoto penned and published a scientific paper called Bitcoin: A Peer-To-Peer Electronic Cash System.
The problem of how to securely and reliably store and transfer value digitally had been studied and had attempts made against it since a research paper from David Chaum in 1983 introduced the idea of digital cash.
Chaum’s interest in discovering a means of making payments while maintaining privacy lead to him launching the world’s first digital currency in 1990, called DigiCash.
This early work attracted the attention of others within cryptography, computer science and the cypherpunk movement, and led to further manifestations of digital money, most notably as E-gold in 1996, Webmoney in 1998 and Liberty Reserve in 2006.
Each digital currency, including Bitcoin, has a few things in common.
- The need to allow users to transfer value between each other freely, within a reasonably short amount of time
- The ability for any user to know that when they are being paid, the digital currency being given to them is legitimate and reliably reusable for future payments
- To provide a system where users know that the value of the currency they hold won’t be diluted by the mass-creation of more currency by centralized controlling parties
- For most digital currencies, there has been a strong desire to monopolise on the physical separation of interacting via the internet to allow for anonymity when making payments
So why are we talking about Bitcoin today instead of DigiCash or Liberty Reserve, and why is Bitcoin worth thousands of dollars per coin, whereas almost all that came before it ultimately went to zero?
What is it about Bitcoin that gives it value?
Intrinsic value, also known within economics and stock analysis as ‘fundamental value’, is used to assess the true underlying value of an asset.
What it really encompasses are any factors that create inherent value, such as the cost of labour in products, and capital held by a corporation, which may or may not be fully-reflected in the price of the asset. It is the things about an asset which increase its value by their very nature.
The opposite of value which is intrinsic is perceived value. The perceived value of a rare baseball card or a bar of gold are significantly higher than the combination of the cost of the materials and labour needed to produce them.
One criticism of Bitcoin, used to attempt to label it as nothing more than a highly successful Ponzi scheme, is that there is no intrinsic value to cryptocurrencies.
Well, that’s true. Bitcoin has no intrinsic value. In exactly the same way though, fiat currencies like USD also have no intrinsic value.
As with Bitcoin, the only reason that people widely-use them is a combination of their utility (or things they allow people to achieve) and their collectively-agreed use as a medium for exchange.
The utility of fiat currency can’t be denied. Governments and central banks have worked to create and manage a universal system of agreed value being placed within inherently valueless paper, plastic and numbers displayed in digital bank accounts.
That system facilitates seamless trade both inter-personally and internationally, and allows individuals and legal entities to store value over periods of time reliably.
So taking all of this into account, what is it about Bitcoin which has led to it being considered a medium of exchange? What has led to over 30 million Bitcoin wallets being created, a market cap of hundreds of billions of dollars, and more and more businesses globally adopting and accepting Bitcoin every day?
Blockchain makes the crypto world go round
Blockchain is the tech behind almost all cryptocurrencies, and was created and released by Satoshi Nakamoto in the 2008 Bitcoin paper.
When you boil it down to it’s core components, blockchain is really a solution to a group of problems.
These problems all relate to the creation and use of digital money in a way that ensures strangers don’t have to trust each other, everyone agrees on who owns what, and that the risk of people gaming the system is reduced to a satisfactory level.
Now Nakamoto built upon some of the solutions used in the previous digital cash attempts we mentioned above. But in one way or another previous attempts failed because something was lacking.
The true value behind Bitcoin is the ingenious combination of the solutions used to solve these problems, which have come to form a reliable and effective ecosystem of exchange.
So what are the cluster of problems solved by blockchain which have ensured the adoption and growth of Bitcoin?
Q1: How do we know that a
Bitcoin payment is valid?
Bitcoin payment is valid?
Physical anti-counterfeiting measures, like holograms, can be used effectively to validate the authenticity of physical money. But what about when the currency needing to be protected is nothing more than digital information?
Digital signatures are a core component of blockchain technology, but are also widely used in software distribution, contract management and securing email.
Their importance in the way in which blockchain is able to function is so profound that the Bitcoin whitepaper describes an electronic coin as ‘a chain of digital signatures’.
At the point that the user receives some Bitcoin, a record is created in the blockchain showing a digitally-signed transaction to a wallet in which they have control over.
A digital signature is a mathematical mechanism which is used to ‘sign’ information, and to prove that the sender is the owner of a private digital key related to the wallet, without actually having to publicly disclose that key.
Within the Bitcoin ecosystem, only the owner of the private key that has been used to digitally-sign a transaction has the right to send payments from the account connected to that private key.
The validity of digitally-signed Bitcoin transactions can be reverse-checked by the payee and by the Bitcoin system itself to confirm its validity.
Q2: How does a user know that the person paying them isn’t trying to double-spend that Bitcoin?
When Bitcoin transactions are made, they are first sent to a list of payments which are yet to be accepted by miners and added to the blockchain, called the ‘mempool’.
The Bitcoin system doesn’t consider amounts of Bitcoin as objects, like how we think of a coin or note.
Instead, if a wallet has receive a validated payment into it, without having payments out of the wallet that account for the total amount of all inputs, that wallet is considered to be in credit of Bitcoin.
So by initiating a transaction, first the system confirms that you have an excess of previous inputs to your wallet, and then if that’s the case creates a transaction and sends it to the mempool.
But what about if your account has a balance 0.1 Bitcoin, and you initiate two payments of 0.1 BTC at the same time to two separate payees?
The Bitcoin system tackles double-payment by allowing multiple versions of the blockchain to exist on separate nodes when conflicting transactions exist.
As each path is simply a chain of completed blocks by miners, both versions are maintained until a longer chain is created by the addition of new blocks.
At this point, the longest chain is seen by all nodes as being the accepted version, and transactions in disputed blocks in the shorter chain are sent back to the mempool for reassignment to future blocks.
By using this system, only one of the fraudulent double-payments can ever be accepted into the blockchain and the network remains protected.
Q3: How can everyone collectively agree on what the history of all Bitcoin transactions is?
Bitcoin mining is the ‘consensus mechanism’ used within the system to act as a previously-agreed method in which all nodes that create and store the blockchain can agree on which blocks are valid and which aren’t.
In a centralised system, such as with central banks, the bank maintains a ledger of transactions and bank balances which it decides internally as requests from clients are made and accepted by the bank.
Cryptocurrencies were created to provide a decentralized alternative to existing financial systems, and without a trusted central party to decide which transactions have been processed, there needs to be another way that all nodes can reliably reach a consensus.
Mining is a process whereby nodes may run Bitcoin software which enters them in a competition with other nodes to solve cryptographic puzzles.
The node will hash the data within the block with an incrementing number called a nonce in order to try to achieve a result which is a number within a certain range.
Each mining cycle is artificially-designed to take roughly 10 minutes, and once a miner finds a solution to current block, transactions which they have selected are added to the next block in the series and they are rewarded with an amount of Bitcoin for doing so.
The winner and their newest addition to the blockchain is broadcasts to all other nodes in the network, and the next phase of mining begins.
This acts as a mathematically-reliable method of allowing all miners the chance to contribute to the blockchain and acts as an innovative mechanism for achieving node consensus.
Q4: Why can’t attackers just change a block to include fake transactions to their wallet?
Another very important technical mechanism used in Bitcoin is the cryptographic hash of each block being an input into the next.
Not only did this tool of cryptography ultimately shape the name of cryptocurrency, but also this is the way in which the links of a blockchain are created.
Hashing is the use of a specified encryption function to reduce a block of data to an alphanumeric character string of a set size. In much the same way as digital signatures being a one-way process, hashing cannot be reversed to use the function to gain the original data.
It is used as a way to check that once a block is created and agreed upon by the network, that none of the information inside that block can be tampered with or corrupted without nodes being aware of it.
Once a block has been hashed and that hashed is known throughout the network, even the change of a single character within that block would result in a new hash that will significantly different to the authentic hash.
By including a hash of the previous block as an input into the next block in the chain, the following blocks hash is also then dependant on the previous hash remaining authentic.
By this system, a cryptographically-secured chain of timestamped information is created as the basis of the blockchain.
Q5: What happens if two miners mine the same block at the same time?
‘Orphaned blocks’ are the result of a two miners successfully mining a block at similar times. This occurs because the process of accepting a new block is not instantaneous, and in a peer-to-peer network like Bitcoin, there are delays in communication caused by latency.
By employing the same rule used to combat double-spending, multiple extensions of the blockchain which are created near-simultaneous mining eventually converge back into a single chain once a longer chain has been identified.
For all intents and purposes, an orphaned block is legitimately mined and equal to its non-orphaned counterpart, apart from it being contained within a chain that happened to be mined slower than the alternative.
Is There Anyone that Controls Bitcoin, and if so, Who?
Yes and no.
As mentioned in the previous section, Bitcoin is decentralized, which means that it is virtually impossible for anyone to be able to ‘shut down’ the Bitcoin blockchain.
Likewise, the Bitcoin source code and the blockchain itself are both publicly visible to anyone that would like to analyse them, without which, Bitcoin could never have built the trust it’s taken to become what it is today.
If the creator(s) of Bitcoin, or anyone else with access to it’s source code, could create extra coins and give them to themselves, it would eradicate the collective value of Bitcoin over night in spectacular fashion.
But that’s not the case at all.
Bitcoin is not only resilient to attacks from outsiders, it was designed from the beginning to be launched and then impossible for even Satoshi to control and manipulate.
This is achieved by a combination of the public transparency of Bitcoin’s software and the use of Proof-of-Work mining, or PoW, as it’s consensus mechanism and as the only way for new Bitcoins to be created.
So who can and does control Bitcoin?
The Bitcoin Core Developers
Like any large software project, Bitcoin requires a number of professional developers to work full-time on maintaining, improving and managing the code which is shared amongst nodes in the network.
The original Bitcoin codebase was written by its anonymous creator(s), and was released in early 2009, roughly 3 months after the Bitcoin whitepaper was published. Satoshi worked on the development of Bitcoin’s code until the end of 2010, with the existing community of developers taking over following this.
The Bitcoin Core project is open-source, and today is not a single group of developers working in a team, but more of a fluid collective of open-source developers that welcome anyone to contribute.
Recent major releases have been a combination of the works of over 100 different contributors, with a fairly large number of different groups working on individual upgrades concurrently.
A large majority of those developing the Bitcoin codebase are volunteers, however there are also a number of different companies involved in sponsoring contributors to the project.
The Bitcoin Foundation
The Bitcoin Foundation is a non-profit based in the US, which was founded in 2012.
According to their website, the foundation “coordinates the efforts of the members of the Bitcoin community, helping to create awareness of the benefits of bitcoin, how to use it and its related technology requirements, for technologists, regulators, the media and everyone else globally”.
Their function in the Bitcoin ecosystem is as a group involved in the dissemination of information, management of public awareness and opinion, and organisation of conferences, workshops, fundraising and the developer relations of Bitcoin as a whole.
High-profile current and past directors of the foundation include Gavin Anderson, Roger Ver, Charlie Shrem, Brock Pierce, Bobby Lee and Vinny Lingham.
Miners are technological opportunists, and are also the predominant party responsible for securing the Bitcoin network.
Bitcoin mining began as a hobby for those involved in computer science and cryptography, and that were lucky enough to have come into contact with the virtual currency shortly after it’s creation.
With the use of a standard desktop computer containing nothing more than a CPU, early miners were able to download the Bitcoin blockchain and client, and mine hundreds of coins over the course of a few days.
The computing power required to competitively mine Bitcoin has progressively increased through a number of major phases.
Once the collective compute power of the entire network increased to a certain level, it became ineffective to run mining operation using CPU, and GPU’s were required.
Following this, GPU’s were overtaken by ASIC chips in 2013 as the minimum viable processing technology required to be able to successfully mine a Bitcoin block.
Then the final phase was the requirement for miners to either be within a group of miners sharing their hashing power called a ‘mining pool’, or in control of large independent mining operation called a ‘mining farm’, in order to be able to compete.
Because of their role in ensuring that the Bitcoin transfers are processed and the blockchain is continually updated, miners collectively act as the engine which runs the network.
‘Whale’ is the colloquial term used to describe anyone that owns a large amount of a certain cryptocurrency.
Bitcoin Whales generally control upwards of tens of millions of dollars of Bitcoin, and may be individuals, but are more frequently institutional investment groups like hedge funds.
Now while Bitcoin Whales don’t control Bitcoin in the sense that they can change the way it’s code works, whales do have the power to manipulate the way that Bitcoin markets function, by being able to buy or sell enough Bitcoin on their own to significantly change its price.
Whales have been rumoured to employ a range of strategies such as wash-trading, pump and dumps and dark pool trading, as well as working with other whales in order to generate astronomical short-term profits from their activities.
While crypto whales are most commonly associated with having and gaining wealth, there have been some notable examples of them losing big on multi-million-dollar trades.
Buying, Storing, Trading and Investing in Bitcoin
So as a handful of people either work on managing and lobbying for Bitcoin, or profiting from enormous trades in the virtual currency, what are the fundamental ways in which the other 99.9% of Bitcoin users interact with it on a daily basis?
As the size of the cryptocurrency industry grows, new options for how to buy and sell Bitcoin are being created. Today, there are essentially 4 ways to make a purchase:
- Cryptocurrency brokers
- Cryptocurrency exchanges
- OTC (over-the-counter) Purchases
Brokers buy, hold and sell amounts of cryptocurrency in order to make a profit. When you purchase Bitcoin from a broker, you are trading fiat or another cryptocurrency directly with them for their Bitcoin.
Exchanges are online platforms which facilitate the trade of cryptocurrency between different third-parties. Generally, exchanges do not hold cryptocurrency for sale to users, but instead create an interface which users can sign up to and trade amongst themselves with.
LocalBitcoin was created in 2012 to provide a directory of other people that live locally to you, who buy and sell Bitcoin.
A wide range of different methods of payment including via bank deposit, Paypal transfer and gift cards are available, and vendors have their transaction history prominently displayed to aid buyers with selection.
Users are even able to meet in-person to make payment and complete Bitcoin transactions, however because of the convenience and security of fully-separated purchases it is much less common to physically meet with someone.
Whereas purchasing Bitcoin via a broker or exchange is almost guaranteed to be permanently recorded, and purchasing using LocalBitcoin can be conducted somewhat more privately still, OTC Bitcoin trading is 100% off-the-radar, and generally involves much larger transactions.
When trades of millions of dollars of cryptocurrency are being made, it might be advantageous for the parties involved to move the price significantly, as was mentioned when we discussed ‘whales’.
Often however, there is either not the liquidity available to achieve the desired price, or it is desirable to make the trade externally of the public domain all together, and this is when the OTC cryptocurrency market will typically be accessed.
Bitcoin, as well as all other cryptocurrency, is predominately stored in one of 3 different ways:
- Using hardware wallets
- Using standalone software wallets
- Within an account wallet on a cryptocurrency exchange
Hardware wallets are devices which can be used to securely store amounts of cryptocurrency, and which can be disconnected physically from the internet, and are a commercially-available form of cold storage for cryptocurrency.
More accurately than saying that they ‘store amounts of cryptocurrency’ is that they store the cryptographic private key which is used to access an amount of cryptocurrency registered on the blockchain for a corresponding public address.
Standalone software wallets:
As the name suggests, software wallets are places to store cryptocurrency which are purely software-based. Software wallets are generally free, very easy to setup, and the most cost-effective way to manage the cryptocurrency which you own.
There are added security advantages to using hardware wallets which mitigate against a range of different potential vulnerabilities to hackers, however using a hardware wallet doesn’t guarantee protection and even they have been found to contain potential vulnerabilities.
Software wallets are generally very secure, as long as you manage your private keys properly, and will typically suffice if you are not dealing in large quantities of digital currency.
Exchange account wallets:
Often the most convenient method of storing cryptocurrency, but also by far the least secure.
When the aim of purchasing Bitcoin is to ultimately sell it for a profit at some point, logging in to a single site and instantly processing a sale is marginally more straight forward than initiating a transfer from a hardware or software wallet to the exchange first.
However the benefits of storing cryptocurrency on exchanges long-term is heavily outweighed by the additional insecurity you are inviting by leaving the control of private keys to a third party.
When we look at the $8.5 million 2011 and $460 million 2014 hacks of the once world’s largest exchange, Mt.Gox, 19,000 BTC hack on Bitstamp in 2015, the $72 million Bitfinex hack in August 2016, and a spate of exchange hacks worth hundreds of millions of dollars since then, it’s clear that there are substantial risks involved with using exchange wallets as the main method of cryptocurrency storage.
For most Bitcoin enthusiasts, this is what it’s all about.
Unlike trading traditional assets such as equities and derivatives, trading cryptocurrency has been virtually unregulated since it was first listed on an exchange called ‘BitcoinMarket.com’ in March 2010.
In-line with the growth of the industry, the amount of legislative and self-imposed regulation such as identification mechanisms like KYC (‘know-your-customer’) have increased over time, however.
With this trend, the amount of places for users to trade cryptocurrency, along with the size and technological sophistication of those places, have also increased over time.
There are currently over 200 different cryptocurrency exchanges available to traders, and a wide range of different experts in the field providing advice to their audiences such as Eric Choe, Aluna Lee, Tuur Demeester, Crypto Yoda, Crypto Daily and Tulips de’ Medici.
Trading Bitcoin, or any other cryptocurrency, operates with very similar methodologies to trading traditional assets, like stocks. Cryptocurrencies are distinctly more volatile than stocks, however, which typically provides a high level of risk, as well as potential profitability, from trading them.
Today there are a range of ways to trade Bitcoin that include:
- Buying and trading Bitcoin itself
- Trading Bitcoin CFD derivatives (Contract for Difference)
- Buying a publicly listed Bitcoin security
- Bitcoin Arbitrage Trading
- Algorithmic Bitcoin Bot Trading
Experienced traders from other commodity markets should consider that the supply-side of Bitcoin mining has much less of an impact on the price of the digital currency than would be seen with supply-side of traditional assets.
This is because, outside of pre-known artificial reductions in the size of block rewards called ‘halvenings’, the rate of supply is held at a constant for the most part, and therefore this should already be factored into the price.
Investing in Bitcoin
As with other assets, investing in the world of cryptocurrency is about placing longer-term trades with the intention of gradually building wealth through compounding profit via re-investment.
Whereas a typical Bitcoin trading strategy may comprise of multiple trades per day lasting for durations of only a few minutes or hours each, investing in Bitcoin most commonly consists of a strategy of purchasing and holding for weeks, months or years before selling.
It’s absolutely no secret that the yield from investing in Bitcoin has typically been astronomically-higher than returns from traditional investments. The average return from the S&P 500 is roughly 10%, with that of the stock market as a whole being about 7%. The average return on buy-and-hold real estate investment is measured at around 9%, including both annual rental income and any price appreciation throughout the year.
By comparison, ROI from investing in Bitcoin throughout 2011, 2012, 2013 and 2017 were 1564%, 170%, 5487% and 1267% respectively.
Alas, this doesn’t mean by any stretch of the imagination that Bitcoin is a sure bet. The most recent example of the ‘flip-side of the Bit-coin’ is 2018’s brutal bear market, which saw prices retract over 80% from highs of close to $20,000 in late 2017 down to under $4,000 at the end of 2018.
Investing in any asset rests upon risk versus reward, and as the risk of investing in an obscure and widely-unknown digital currency has been mitigated over time by the growth of the network, its community and its infrastructure, those investing in Bitcoin have gradually become progressively more mainstream and progressively more sophisticated.
As the market has developed over the past 10 years and attracted a wave of entrepreneurs, developers and investors, the number of cryptocurrencies available to invest in have risen to over 2,000, with a large proportion arising as a result of the facilitation of token creation by Ethereum and subsequent ICO boom throughout 2017.
What has become more prevalent in the last few years has been a trend towards improving upon existing cryptocurrencies by ‘hard forking’ them. The Bitcoin hard fork into Bitcoin Core and Bitcoin Cash has been the largest and most significant to date.
As well as creating widespread fear of a market crash as a result of the fork, a schism within the ranks of Bitcoin’s playmakers was publicly exposed for the first time.
Core vs. Cash – What’s the difference?
Prior to the Bitcoin’s August 2017 hard fork, it was a single cryptocurrency, simply known as ‘Bitcoin’.
But leading up that event, a division within the group of the people with the most control over the future of Bitcoin had been growing.
Eventually it all came to a head, with both parties forming separate camps based around their proposed solution to a problem which had the potential to bring the world’s biggest cryptocurrency to a grinding halt.
The divisive question that split Bitcoin’s power brokers in two:
What is the best way to redesign the way the Bitcoin blockchain stored data in order to allow it to process more transactions and scale effectively?
To fork, or not to fork
To developers, a ‘fork‘ is a modified version of an original codebase which may be used to test changes and revert to the original if required.
Within the lexicon of cryptocurrency, a hard fork is when an upgrade or upgrades are made to a blockchain system that lead to such dramatic changes to the original that it creates a separate path for the blockchain to take.
This in turn leads to the creation of a modified version of the previous cryptocurrency as it’s own completely new cryptocurrency, where both now co-exist together.
In contrast, a soft fork is when an upgrade or upgrades are made to a blockchain system which does not lead to a new path in the chain being created, and so effectively the upgrades only lead to changes on the original cryptocurrency.
1MB, 2MB, 3MB, 4
The creator of Bitcoin designed each block to have a data size limit of 1MB.
This was originally intended to be a temporary measure to protect against the ability for users to maliciously spam the network with arbitrarily large blocks, which could quickly make downloading the blockchain unpractical for nodes.
For the majority of Bitcoin’s early life this allowed the network to function as was intended, however as the number of Bitcoin users increased, the number of transactions completed and stored in each block increased to level that threatened to reach the 1MB limit.
As transactions began to fill, both the cost of sending a payment in Bitcoin and the time transfers took to process inflated.
The pool of unconfirmed transactions grew, often leading to a transaction taking several hours or even days, and gradually began to reduce the effectiveness of Bitcoin to act as a medium for trade in a world with many faster and cheaper options available.
Two alternate solutions to deal with problems of growing demand the were proposed:
- That by increasing the size of each block to more than 1MB, more transaction data could be stored.
- That by implementing a protocol upgrade called Segwit with a part of each transaction data, known as ‘witness’ information, being stored outside of the base transaction block, transaction data sized would be reduced and more could be stored.
On August 1st 2017, Bitcoin proceeded to undergo a hard-fork which created a new offshoot called Bitcoin Cash. The tenets of the new project were to implement a technical structuring of Bitcoin’s original codebase which would allow for the currency to be used as more of a medium of exchange.
They posited that by allowing there to be an increase in the size of each block, that Bitcoin could be used as an eventual replacement to fiat currency as it was originally intended.
In contrast, the backers of the original Bitcoin chain and software devised Segwit as a solution that they believed was a better solution to the problem of scaling.
Leading up to the Bitcoin Cash hard-fork, there was a strong sense of anxiety within the market as to whether the splitting of the world’s largest cryptocurrency would lead to significant drops in price. Ultimately the hard-fork instead gave rise to two versions of Bitcoin which co-existed together, with both camps finding levels of support within the investment, development and mining communities.
Throughout 2018’s long bear market, a second rift within the Bitcoin community had also been forming.
Much in the same way that Bitcoin Core was divided in two, it’s young progeny, Bitcoin Cash, followed suit in late 2018 with a technical disagreement proceeding to split the ranks of the fledgling currency’s power brokers.
As Easy as ABC
On 15th of November 2018, Bitcoin Cash underwent its own hard-fork which birthed two new versions of that currency.
From pre-hard-fork prices of around $425 for the un-split Bitcoin Cash, Bitcoin Cash SV and Bitcoin Cash ABC were released to the market at lower opening rates of $96.50 and $289 respectively.
What’s more, saying that this hard-fork didn’t go as smooth as the 2017 hard-fork is a serious understatement. This time the cryptocurrency market was collectively rocked by the largest sell-offs of 2018 following the split.
So what was the divisive issue within Bitcoin Cash prior to the hard-fork, and who ended up supporting each of those two new currencies?
Bitcoin Cash Satoshi’s Vision
BCHSV posited that increasing the block size to up to 128MB it would allow Bitcoin miners to choose to mine much larger blocks, subsequently increasing to total amount of transactions which could be processed per second on average.
Supporters of BCHSV are led by self-proclaimed (and widely-refuted) ‘Satoshi Nakamoto’, Craig Wright, as well as online gambling entrepreneur, Calvin Ayre. They are joined by institutional miner, CoinGeek (of which Ayre is also the founder), as well as long-term Bitcoin hub, Bitcoin.org, and blockchain research and development company, nChain.
Bitcoin Cash ABC
The ABC stands for ‘Adjustable Blocksize Cap’ and is widely regarded as a continuation of the original Bitcoin Cash protocol. Proponents of BCHABC rallied behind maintaining the pre-existing BCH block size of 32MB, and to introduce new functionality that would allow the blockchain to access external data.
Supporters of BCHABC are led by Bitcoin.com founder and prominent Bitcoin Cash supporter during the first Bitcoin hard-fork, Roger Ver, as well as the co-founder of mining hardware giant Bitmain, Jihan Wu, and security-guru, John McAfee. Other major players within the industry including the Bitcoin Foundation, Antpool and BTC.com are also actively involved in supporting BCHABC.
War.. What is it good for?
A week long war was fought between the two offshoots of Bitcoin Cash in order to gain a superior level of hashrate over the other and claim the Bitcoin Cash name for their enterprise.
With a significant redistribution of hashing power from both Jihan Wu’s Bitmain mining group and Roger Ver’s Bitcoin.com pool to the BCHABC network, Bitcoin Cash’s total hash rate rose from 9.54% to 15.43% while BTC’s hard rate fell by 7% over the same period.
What quickly became apparent was that BTCABC was winning the hash war over BCHSV, with media reports of this throughout the week only compounding the hashing power being directed towards the ABC network.
Ultimately BSV supporter, Coingeek, conceded through an announcement that they support a full split of BSV away from BCH, launching a separate currency in it’s own right, but losing the right to use the Bitcoin Cash brand to the BCHABC group. Following this exchanges collectively began referring to BCHABC as BCH, while BCHSV was realigned with the shortened ticker, BSV, in all exchange listings.
Where is Bitcoin at today, and where will it be tomorrow?
What began as a dream in the minds of a handful of cryptographers and economic anarchists decades ago, has mutated through every iteration it experienced, manifesting eventually as the cryptocurrencies being used by millions of people globally today.
Bitcoin was born from a small group of programmers and theorists interested in exploring the implications of a fully-functional decentralized digital currency.
The years since then have seen the construction of the foundations of a new financial industry, with developments over the past few years in particular also leading a dramatic transition towards mainstream exposure and adoption.
Now we’re witnessing the beginnings of the collective realisation of something greater than a tool used by the dark net, technological fad or get rich quick scheme.
Undoubtably the last few years have been part of an important step for the maturation of Bitcoin, cryptocurrencies and concept of virtual money at large.
But what was it that made this period in the lifecycle of Bitcoin so pivotal?
Welcome to the big show.
Throughout a majority of its life, Bitcoin has been the black sheep of the financial industry and society as a whole.
The earliest media coverage of this new digital money was almost exclusively focused on its use in the facilitation of trade on the dark net. Little was understood past it being the currency of drug dealers and hitmen, and in all fairness, at a time when the cryptocurrencies you could trade were either Bitcoin, or Bitcoin.. this really was the major use-case of the day.
Over the past few years, the financial industry’s perception of the investment potential of cryptocurrency has also shifted dramatically. Much of the responsibility for the staggering growth of the value of Bitcoin during that period has been as a result of a flood of investment from mainstream markets and institutional investors via new crypto-based financial products and the OTC market.
To put the gravity of this adoption into perspective, at the time that prominent US crypto-giant Coinbase first launched their exchange operation in January 2015, the total marketcap of all cryptocurrency was sitting at around $5 billion USD. According to the World Bank, the total value of all stocks traded in the US during 2015 was $41 Trillion.
What is significant about the last few years is that cryptocurrency has been progressively lurching from the shadows into the world of the mainstream.
Milestone events have begun to reform the perceptions of cryptocurrency in recent years, with developments like Goldman Sachs announcing their move into Bitcoin trading, membership of the Ethereum Enterprise Alliance swelling to include the likes of JP Morgan, ING, Microsoft and Santander, a move towards more informed and less sensationalist media coverage, and over 30% of millennials preferring the idea of investing in Bitcoin than stocks.
But what’s on the horizon for Bitcoin in 2020, and how will this year be different from those previously?
What can we expect from Bitcoin in 2020?
For the last few years the banking industry has been one of the first to widely move towards the adoption of blockchain tech. This makes sense.
The opportunities being presented by the assimilation of digital assets into institutional portfolios have gradually transitioned further away from risk and closer to reward. OTC markets have absorbed some of the institutional demand for entry into Bitcoin positions, but once regulated and secured avenues for investors arise the effect is likely to be substantial to say the least.
The launch of the Bakkt in January brings a new dimension to cryptocurrency markets, and signals the beginnings of a long-awaited bridge to allow institutional investors to enter digital currency markets.
With the coincidence of the world’s first Bitcoin ETF being launched in Switzerland in November 2018, and rumours of plans for the the first US Bitcoin ETF to be on the cards for late 2020, a strong push is underway to connect traditional finance and nascent digital assets.
While other major blockchain projects such as QTum, Steem, and Ethereum have technical milestones dotted throughout 2020, Bitcoin’s own scalability solution, the Lightning Network, has progressively increased in size throughout 2018 and is touted to have the potential to drive a new wave of adoption throughout 2020.
As with any point in the lifecycle of digital currency, attempting to accurately predict the future tends generally to be a chump’s game.
What is resoundingly clear, though, is that 2020 marks the beginnings of a new phase for Bitcoin, one that heralds a deeper maturation of the industry, and one that presents investors and the cryptocurrency community at-large with a range of new challenges and opportunities.
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