Bitcoin set the pace for the furtherance of the cryptocurrency industry. Satoshi Nakamoto is behind this intriguing concept where people can transact digital money using peer-to-peer transactions.
The cryptocurrency industry was a significant breakthrough in finance, with a market capitalization transcending $1 trillion. “Cryptocurrency” is a communal term for all digital assets. These assets place reliance on cryptography to secure and verify transactions.
Bitcoin possesses inherent capabilities to disrupt the financial industry. The Bitcoin blockchain fosters transparency, decentralization, and autonomy in transactions.
In this blog post, we analyze Bitcoin, its operational mechanism, blockchain technology, and application scenarios in the real world.
The Basics Of Bitcoin
Bitcoin was created in 2008 by a pseudonymous creator, Satoshi Nakamoto. Satoshi published the Bitcoin whitepaper that explained how this digital currency will work. Since Bitcoin was the first cryptocurrency, it has remained the largest and most popular.
Bitcoin utilizes a peer-to-peer network to fulfill transactions. Peer-to-peer transactions require individuals and entities to exchange Bitcoin without a third party.
Bitcoin is not reliant on a go-between party like a central bank, government, or institution. Instead, anyone globally can transact Bitcoin outside the confines of the traditional finance system.
Bitcoin utilizes distributed ledger technology (DLT), alias blockchain. This innovative technology gives Bitcoin an immutable and transparent characteristic.
New transactions are confirmed and added to the Bitcoin public ledger in real time. Bits of code known as “blocks” jot down the Bitcoin transaction data.
How Bitcoin Works
We should look into the mining process and wallet to understand how Bitcoin works.
Bitcoin Mining
Bitcoin relies on a consensus known as proof-of-work (PoW), where network contributors are known as “miners.” Miners receive newly-mined Bitcoin whenever they add new blocks to the network.
Bitcoin has a capped total supply of 21 million coins. Once miners mine all these coins, the network will stop minting new ones.
The Bitcoin network goes through a halving process that reduces the amount of Bitcoin miners receive over time. Lowering the Bitcoin supply will support the price of BTC based on the forces of supply and demand.
The most recent halving process happened on April 20, 2024. After this event, half of the miner rewards were slashed from 6.25 BTC to 3.125 BTC. The next event will occur after four years or after the Bitcoin network processes another 210,000 blocks.
Bitcoin price gains have historically followed the halving event. As demand grows against a reducing supply, investor sentiment turns bullish, with BTC recording fresh all-time highs shortly after.
Bitcoin wallets
The Bitcoin wallet secures cryptographic keys, a special type of password. These keys prove the ownership of a given amount of Bitcoin on the blockchain. It would be best if you kept your private keys safe. You should also note down your keyphrase (password) in a place where you can retrieve it quickly to avoid losing your Bitcoin.
Executing Bitcoin transactions involves two types of keys: a private key and a public key. The keys contain random alphanumeric characters to encrypt and decrypt transactions on the network.
The public-key cryptography (PKC) conserves the authenticity of the Bitcoin blockchain through unassailable transactions. PKC also grants exclusivity to those with the correct number of keys, granting ingress to specific coins.
How to Acquire and Store Bitcoin
If you want to acquire Bitcoin, you can do so through a cryptocurrency exchange. With these platforms, users can hold, buy and sell Bitcoin.
Cryptocurrency exchanges have a similar operational mechanism to that of traditional brokerage platforms. Regulators mandate these platforms to verify user identities and deposit fiat that is later traded for Bitcoin or other cryptocurrencies.
Selecting a cryptocurrency exchange depends on security, a friendly user interface, and market influence.
How to Buy Bitcoin on a Cryptocurrency Exchange
If you want to buy Bitcoin through a cryptocurrency exchange, the first thing to do is to create an account. The account creation process is easy for most exchanges, as you only need an email address and phone number.
However, to transact on an exchange, you must submit documents verifying your identity, such as a government-issued ID, driver’s license, passport, etc. You will also be prompted to create a strong password for your account. Some exchanges allow you to secure your account using biometrics for enhanced security.
Once you open an account, the next step is to fund the account. You can do that using your credit card. Link your credit card to your account and deposit the money you want to use to buy Bitcoin.
After depositing funds, go to the trading page on your exchange account or search “Bitcoin” on the exchange’s search bar, and you will get an option to buy. Create a buy order, and once it is fulfilled, you will see the Bitcoin you purchased in your account.
How to Store Bitcoin
You can store Bitcoin in a cryptocurrency wallet, either a hot or cold wallet. In the case of a hot wallet, the exchange or cloud provider will store your Bitcoin online for easy retrieval.
Cold wallets come in handy for long-term secure storage. You can also choose a hardware wallet if you are not planning to sell your Bitcoin in the near term. The most popular hardware wallets are Ledger and Trezor.
Once you store your Bitcoin in a wallet, preserve the integrity of your password. You should Complete regular upgrades to patch any bugs. You should also adopt safe internet practices to avoid your Bitcoin falling into the wrong hands. Hackers are always looking for loopholes to access Bitcoin, either through phishing campaigns or malware.
The Role Of Bitcoin In The Financial Landscape
Bitcoin has a scarce supply, as only 21 million coins can ever exist. Its capped supply and increasing demand make it “digital gold.”
Bitcoin proponents claim it is a better alternative to fiat currency, which often depreciates. Bitcoin’s demand will grow with time as supply remains constant, which poises it as a store of value and a hedge against inflation.
Bitcoin transactions do not need a central authority. This feature makes Bitcoin ideal for cross-border transactions. It also makes the coin accessible to unbanked populations who do own bank accounts.
Besides being used as a currency, Bitcoin is quickly gaining usage as an investment product. The asset can be traded in the same way as other traditional financial assets, including stocks.
While Bitcoin can be used as a source of investment, it often ranks as a high-risk asset. The price can change quickly, making it more volatile than other investment products like stocks.
Moreover, Bitcoin’s use case as an investment remains highly unregulated. Countries such as China have banned Bitcoin because of its speculative nature. Recently, reports circulated on the possibility of Russia also banning Bitcoin.
Despite these bouts of lack of confidence in Bitcoin’ its use case as an investment class has continued to grow. Its ability to deliver quick returns within a short period has also made it a popular asset class for investors with a high-risk appetite.
The Integration of Bitcoin into Traditional Finance
Bitcoin has slowly been finding its way into the traditional finance industry for over a decade. For instance, BlackRock, the world’s largest asset manager with more than $10 trillion in assets under management, is paving the way for BTC’s relevance in the traditional financial system.
In January 2024, BlackRock launched spot Bitcoin exchange-traded funds (ETFs) that have amassed billions of dollars in inflows since their launch. Data from its website shows that the giant asset manager holds more than 274,000 BTC, which is worth over $17 billion.
The other major Wall Street players offering Bitcoin products to their clients include Fidelity.
The launch of spot Bitcoin ETFs after approval by the US Securities and Exchange Commission (SEC) marked a significant endorsement for Bitcoin. It also marked a shift in the regulatory framework as the asset was previously associated with criminal activities.
The Challenges And Criticisms Facing Bitcoin
One of the main challenges facing Bitcoin is price volatility. Bitcoin is still budding and has yet to achieve much utility. Therefore, the price can be unsteady.
Key developments in the broader cryptocurrency market drive Bitcoin’s price. One such case happened in April 2021 when Bitcoin rallied past $60K as adoption soared. Two months after reaching record highs, Bitcoin dived under $35K after China imposed a regulatory crackdown on cryptocurrencies.
Another example of Bitcoin’s price volatility is between November 7 and 8, 2022, after FTX paused withdrawals and filed for bankruptcy protection. Bitcoin nosedived by more than 20% in less than 24 hours.
Because of this volatile price action, it becomes increasingly difficult for traditional financial institutions to offer Bitcoin as a safe investment choice. Bitcoin is also categorized as a high-risk investment because of its performance.
Wall Street is starting to recognize Bitcoin, with regulators setting up a solid legal framework for crypto assets. Governments are also laying the foundation for regulating cryptocurrencies.
The other major challenge facing Bitcoin is its continued association with criminal activities. Given the decentralized nature of cryptocurrencies and the lack of a third party to settle transactions, Bitcoin and other cryptocurrencies have been linked to fraud.
The CEO of JPMorgan, Jamie Dimon, believes that Bitcoin’s continued use in illegal activities makes it a fraud and a Ponzi scheme. Nevertheless, he acknowledges the potential of blockchain technology and its impact on finance.
Impact of Bitcoin on Society
Bitcoin is challenging the traditional ethos of finance. It gives people sway in their financial lives through autonomy and decentralization. Bitcoin is also more unassailable than fiat because of blockchain technology.
Bitcoin has played a significant role in helping the unbanked become part of the financial system by enabling cross-border payments. With Bitcoin, people do not need to have a bank account. Instead, they can own a crypto wallet and start transacting in Bitcoin.
Traditional banking systems are making progress with digitization. However, they still lag behind Bitcoin. Bitcoin’s superiority over fiat is evident because of improved efficiency and cross-border transactions.
Blockchain technology also powers smart contracts and decentralized applications. It is behind innovative solutions like decentralized finance (DeFi), non-fungible tokens (NFTs), and Web3 games.
With the increased adoption of blockchain technology across multiple industries and the steady integration of Bitcoin into traditional finance, it is easy to see that digital currencies will share the future of finance.
Looking Ahead: Future Prospects
The Bitcoin blockchain continues to provide utility to users, with the recent launch of Bitcoin Ordinals marking a significant use case for the network. Bitcoin Ordinals are a form of NFT created on Bitcoin using the smallest unit of Bitcoin known as satoshis.
Bitcoin underwent its most recent halving event in 2024, slashing miner rewards by half. The event reduced the number of new Bitcoin entering the supply, which might mean significant price gains.
Bitcoin as an alternative investment is also becoming mainstream, with countries allowing institutions to extend Bitcoin products, such as exchange-traded funds (ETFs), to customers.
Final Thoughts
Bitcoin is the first and largest cryptocurrency in terms of market capitalization. Its decentralized nature and underlying technology’s potential are disrupting the traditional financial landscape.
Bitcoin’s significance in the modern-day world is currently limited to its status as a digital currency. However, its use case is evolving, with the coin now being an investment product that has attracted the attention of Wall Street.
Given the gains Bitcoin has posted in just 14 years, it is interesting to see what the future holds for this groundbreaking digital currency as legal and regulatory frameworks change to accommodate it.
