When Bitcoin launched almost 10 years ago, it was nothing more than a nerdy curiosity, and no one was paying much attention to it.
“It might make sense just to get some Bitcoin in case it catches on. If enough people think the same way, that becomes a self-fulling prophecy” - humbly suggested Bitcoin creator (creators?) Satoshi Nakamoto in 2009.
Loads of people are beating themselves up now for not listening to Satoshi’s advice. In the last 10 years, Bitcoin’s price has gone from $0 to almost $8,000. This means that if you had invested $1000 in Bitcoin in July 2010 you would have been worth over $35 million in July 2017. Ouch.
But is it too late to invest in Bitcoin now? Some say yes, but we don’t think so. In fact, we think it’s about time you stop ignoring Bitcoin and blockchain!
What is blockchain?
The blockchain is the revolutionary technology behind Bitcoin that allows people to conduct monetary transactions without a third party.
So how does blockchain work? The technical details are quite dense. However, even non-technical people can grasp the main principle.
I’ll use Mahit Mamoria’s examples that he used in his excellent article “WTF Is The Blockchain?”
Imagine that there is a group of 10 people who want to be able to send each other money without relying on the banks. But how can they ensure the trustworthiness of these transactions?
Image credit: Mohit Mamoria
Imagine that everyone has an empty folder with blank sheets of paper in it as well as a pen in their hands.
When someone makes the transaction, they announce it to the entire network, and everyone in that network makes a note of that transaction. So, for example, if #2 sends $10 to #9, everyone checks if #2 has enough money for that, and if she does, they mark the transaction in their folders. This continues until everyone runs out of space on their current page (these pages are called blocks).
This is where things get a little bit complicated. Before they can put away the current page, it has to be sealed with a unique key that everyone agrees on, in order to ensure the page’s validity and immutability. This sealing of the page is what is actually called mining, but for the sake of simplicity, let’s continue calling it sealing.
Now imagine a magic machine. You can feed it one thing, and it will spit out another thing. For example, if you feed it number 4, it will spit out the letter dcbea. Interestingly enough, it’s impossible to tell what number machine was fed simply by looking at the output, but with the same input you will always get the same output, meaning that feeding it the number 4 will always lead to letters dcbea. This magic machine is called the hash function.
Now what if I ask you to figure out a number that you can feed to a machine and get a number whose three first digits are zeroes?
Image credit: Mohit Mamoria
There’s a method to find the right number. You simply keep feeding numbers to the machine until you get the desired output. You should achieve success in a few thousands of attempts if you’re lucky.
Now imagine that you get two boxes. One contains the number 20893. And now your task is to figure out what number, when added to 20893, will lead to the output number with three leading zeroes.
Eventually, you will stumble upon a number, say 21191, which when added to 20893 and fed to the machine will result in an output that satisfies these requirements.
This number, 21191, now becomes the seal for the number 20893. This sealing number is called ‘Proof of Work’
Now, to seal the page with the network transactions, we need a number that you could add to the transactions on the page, put through the machine, and get a number that meets the task requirements (keep in mind that this three zeroes thing is just an example, the real sealing requirements are much more complicated than that).
Image credit: Mohit Mamoria
When people on the network run out of space on the page, they start to calculate the sealing number for that page, and the first person to figure it out announces to everyone else, who then check it. When the sealing number is verified, everyone puts it on their page and puts their page away. That means that the page is now sealed and it’s impossible to make changes to it because any changes in it would mess up the sealing number.
Meanwhile, the person who worked out the sealing number first is rewarded with bitcoins, which provides everyone in the network with an incentive to keep spending resources such as electricity on calculating sealing numbers.
What all this results in is a network in which people can send money directly to each other without having to trust third parties or worry about fraud.
This is a very short and a very basic explanation of the blockchain. We recommend you read Mahit Mamorias article “WTF Is The Blockchain?” if you want to learn more. It can make your head spin the first time you read it, but it’s the best explanation for non-technical people that we have ever seen.
Blockchain technology has been growing at an unbelievable rate over the past several years. In fact, MarketsandMarkets estimates the global Blockchain market to grow from USD 210.2 million in 2016 to USD 2,312.5 million by 2021, at a Compound Annual Growth Rate (CAGR) of 61.5%. This means that blockchain could transform many industries, most notably the financial sector. A revolution might be under way!
3 reasons why Bitcoin matters
Okay, so now you more or less understand how blockchain works, but what’s the big deal with Bitcoin?
Here are three reasons why Bitcoin is such a game-changer:
- Privacy. Do you know how many third parties are involved even in simplest financial transactions? In their book Cryptocurrency: How Bitcoin And Digital Money Are Challenging Global Economic Order the authors Paul Vigna and Michael J. Casey note that when you buy a coffee from Starbucks, no less than 7 third parties are involved in processing the transaction. That’s really creepy when you think about it. However, with Bitcoin, it would only be you and Starbucks, no middle men. Your private information would be safe.
- Investment vehicle. Bitcoin is a deflationary currency because it is limited. While with fiat money (“normal” currencies like dollars or euros) government can simply print out more money whenever it decides to do so, with Bitcoin there will only ever be 21,000,000 coins that will be mined over the course of 130 years. No more Bitcoin after that. This means that Bitcoin might become the digital equivalent of gold in terms of being a solid investment vehicle and a safe place to store value. Some people, like PayPal director Wences Casares, even predict that Bitcoin’s price will eventually go over $1 million dollars.
- The currency of the future. There are more and more stores that accept Bitcoin as a currency and more and more people willing to use it as a currency. On top of that blockchain-based companies are popping up all over the place.
As you can see, there are good reasons to participate in blockchain revolution and invest in Bitcoin. However, some people are concerned that it is all a bubble. Is it?
Is Bitcoin a bubble?
Bitcoin has experienced an exponential growth since its inception in 2008 and now has reached an all-time high of over $8000 per coin. Bitcoin enthusiasts are certain that it will “go to the moon”. But can a growth like that continue?
Bitcoin is an extremely volatile currency. Only a few weeks ago it fell from $7458 to $5857 to then bounce back to $8000+. Many people are worried that this volatility is indicative of a bubble and that once it pops it will take everyone down with it.
There’s also competition. The main competitor of Bitcoin is Ethereum, a cryptocurrency that is now used in ICOs. We are also going to use Ethereum in our ICO in December, where for 1 ether you will be able to get 1,000 of our tokens called FITs. At the moment, Ethereum is far behind Bitcoin in terms of price and market cap (currently it’s only worth $358 per ether), but with the success of ICOs that might change in the future.
At this point in time, it’s impossible to say if Bitcoin is a bubble, but it’s clear that you should not invest any money in it that you can’t afford to lose.
No one knows what the future holds for Bitcoin. It might “go to the moon” as aficionados hope it will. Or it might crash and burn as skeptics insist. Only time will tell.
However, one thing is clear: you can’t afford to ignore Bitcoin anymore!