Into the world of Crypto: The Bitcoin Saga

 

Into the world of Crypto: The Bitcoin Saga

                               

Innovation is the basic driving force behind the development of technology. Who would have thought that from the invention of the Internet in 1997 , technology would be advanced enough to create a virtual currency that could be used in transactions instead of fiat money. The latest financial trend in the current world is ‘cryptocurrency’, most commonly known as ‘Crypto’ . Cryptocurrency is a software made by using mathematics, computer science and as the name states, cryptography. Cryptography is a method of protecting information through the use of codes. Now, unlike the centralized form of money transactions ,where banks and governments are in control, crypto is decentralized. In other words, instead of using an intermediate central authority to conduct transactions, a peer to peer system is used and the transactions are stored in a shared public ledger. This crypto insanity was first started by the creation of  Bitcoin, which is deemed as the first cryptocurrency,  in 2009 by an anonymous entity called Satoshi Nakamoto.

  So if Bitcoin is essentially a software, how do Bitcoin transactions occur ?   Now, unlike normal transactions which are regulated and controlled by governments and banks, Bitcoin transactions are controlled by anyone who has a computer which is connected to the Bitcoin network. When a Bitcoin transaction takes place,  it is recorded on a ledger and distributed among nodes which are computers registered in the bitcoin network. These nodes will then vote to determine whether a transaction is valid or not with their CPU power and when a consensus is reached, the validated transaction which  will be permanently stored in a block .  The Bitcoin ledger accurately states the wallet addresses of the ones who carried out the transaction and the time it took place. After the maximum capacity of a block is reached a new one will be created . Each block consists of a header  containing a hash, which is a cryptographic algorithm  linking  it to its previous  block  known as the parent block.  Thus creating a chain of blocks. This is known as the blockchain technology.

 

 

There are many scalability issues related to Bitcoin.  One of the main ones are its inefficiency in trading and the high energy consumption when generating Bitcoin.   Each block on the blockchain contains only 2759 transactions and it takes 10 minutes to generate a new block. Hence only 4.6 transactions occur per second, unlike banks which conduct thousands of transactions per second. This inefficiency is caused by the  proof of work system Satoshi Nakamoto used to prevent cheating during the vote casting. In this system the computers solve a complex mathematical problem for 10 minutes to cast their vote. The first computer to solve it gets a reward of a few Bitcoins. This is called Bitcoin mining. The more computers on the network, the more difficult the problem will become in order to keep the block generation time at a constant. Nowadays,  Bitcoin farms containing a large number of powerful computers are used for Bitcoin mining, creating the need for a large electricity supply. This in turn has detrimental effects on the environment as  large amounts of energy resources are used to supply electricity for Bitcoin transactions to take place. 

In the beginning of the Bitcoin era , it was marketed to the people as an unregulated, decentralized and an anonymous form of currency.  Even though  Bitcoin is famous for its anonymity,  in reality Bitcoin transactions aren’t completely anonymous, as they can be  traced through the  Bitcoin ledger which is open to the public. Bitcoin wallets which are used in these transactions contain  pairs of public and private keys . While the private key is used to create a digital signature the public key is used to verify the public key without showing the private key. It is important to understand that the wallet addresses displayed on the ledger  are  the shortened and compressed  version of the public key. No personal contact information is used in these transactions.  However Bitcoin cannot be bought from Bitcoin exchange services without a verified ID thus leaving a digital trail. Due to the belief that Bitcoin is absolutely anonymous,  criminals used Bitcoin for illegal trade and money laundering.  

 

 

 

 

The intrinsic value of any form of money depends on the demand for it. The governments declare that money is valuable and we, the people ,agree with it due to the trust we have in the government. So just like  money, Crypto can only be worth something , if the people believe in the currency and invest money into it. If invested wisely profits can be obtained but it has a very high risk and you can lose all your investments within a second. In the recent years a large digital marketing campaign has started in order to popularize the Bitcoin market even more.  Many tech companies have started promoting various alternate coins which are other forms of crypto made using the blockchain technology of Bitcoin. They are being advertised on large social media platforms like YouTube,  Facebook, Instagram, Twitter, Twitch and Tik tok. Celebrities, influencers and gaming streamers are being paid in thousands of dollars just to market these digital currencies. This has built a community of Crypto fanatics who invest millions of dollars in these currencies. This community has slowly evolved into something akin to cult with people spending all their life investments on crypto. Majority of these currencies have turned out to be nothing more than pump and dump scams used to extort money from their followers. The best example for these types of scams is the recently failed ‘Save the kids’ crypto project which is alleged to be a pump and dump scheme  . Although it  was marketed by huge influencers such as the  members of the Faze clan, RiceGum , Sommer Ray the project fell flat the moment it was launched and a large amount of money was laundered from the people who invested in it.

Market manipulation by those who have large amounts of Bitcoin called whales, is an ongoing crisis in the Bitcoin world. They have the ability to cause large price fluctuations with their holdings. In 2019 a paper released by the University of Texas released a research report which stated that the price of Bitcoin is being manipulated by another coin named Tether. Tether is a stable coin, which means that its value is the value of 1 US Dollar and is a huge source for liquidity in the Crypto market . Bitcoin is converted into Tether and then into Dollars because this method is easier than directly converting Bitcoin into Dollars.  Majority   of Bitcoin trading was done in  Tether. The paper showed that the value of Tether is not always the value of the US Dollar , which means that the companies behind Tether created Tether coins seemingly out of nowhere and pushed it out to the market and swapped them with Bitcoin to artificially drive up the market. The companies behind Tether were investigated and fined.

 

The fact that Bitcoin is unregulated  is its greatest advantage and its greatest disadvantage The Bitcoin market is extremely volatile with the prices fluctuating in an unpredictable manner as it plays a game of trust , reputation and popularity with the people. Since this is just the start of the Bitcoin market it is difficult to foresee whether Bitcoin will be the next global currency or whether it will flop .  The current legal systems of the world don’t have the proper legal framework needed to regulate Bitcoin. The possibilities of Bitcoin and the uses of its  blockchain technology  are endless and just like other forms of technology Bitcoin too will evolve . Maybe in the future a new form of cryptocurrency regulated by a centralized authority and the people, will be introduced. 

                                                                                          Written by : Shenali Anthony