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LeoGlossary: Bitcoin

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Symbol: BTC

A decentralized digital currency that operates on the Bitcoin network. This is a system that uses the Proof-of-Work protocol for consensus.

The nodes, which are different computers, compete to solve the 64 hash required to add a block. Those that are able to achieve this end up getting rewarded in the coins allocated for that specific block.

Bitcoin is the most widely recognized of all cryptocurrencies.

Beginnings

Bitcoin was created by Satoshi Nakamoto, an anonymous figure who is still unknown.

Nakamoto introduced the world to Bitcoin by releasing the Bitcoin White Paper on October 31, 2008. It contained an idea for "peer-to-peer electronic cash system". In fact, the paper was called Bitcoin: A Peer-to-Peer Electronic Cash System.

The bitcoin software was implemented as open-source code and released in January 2009. This is when Nakamoto starting mining, creating the genesis block.

Hal Finney was the receiver of the first bitcoin transaction. He reportedly received 10 BTC from Nakamoto on January 12, 2009. Other cypherpunks who were also involved in the early transactions were Wei Dai and Nick Szabo.

It is estimated that Nakamoto mined over 1 million Bitcoin before disappearing. In 2012, he ceded the network alert key and control of the code repository over to Gavin Andresen, who became lead developer of the Bitcoin Foundation. From there, the goal was to decentralize control of the network.

The roots in Bitcoin can be tracked to a couple of cypherpunk projects. David Chaum first introduced the world to eCash, developed by his Digicash company. The aforementioned Szabo brought the world Bit Gold.

Both projects had promise but were doomed to a couple of issues. eCash simply was too soon in terms of processing power. Bit Gold was also on the right track although Szabo admitted he could not solve the double spend problem in a decentralized manner.

10,000 Bitcoin Pizzas

The first attributed commercial transaction of Bitcoin was the purchase of pizza. It is now an infamous story in cryptocurrency circles.

In 2010, programmer Laszlo Hanyecz bought two Papa John's pizzas from Jeremy Sturdivant. The goal was to see if Bitcoin could be used for a real world acquisition.

As the price of Bitcoin increased, so did the cost of the pizzas. By the end of the 2010s, with Bitcoin reaching 5 figures, those two pizzas ended up costing millions of dollars.

Distributed Ledger Technology

Bitcoin is seen as the first distributed ledger technology. The major breakthrough was the solving of the double-spend problem.

All transactions are recorded in blocks. These form the ledger that is built as more are added to the chain. The ledger is validated by computers all over the world that keep the network running. It is decentralized to the degree that no individual or group can reverse the transactions. For this reason, many feel that Bitcoin cannot be shut down.

Each node runs its own copy of the blockchain. Those that add blocks validate transactions, add them to their copy of the ledger, and then broadcast these ledger additions to other nodes. This is all done without any central authority of entity.

Once this is done, the software is able to determine when a particular Bitcoin was spent, which is needed to prevent double-spending. A conventional ledger records the transfers of actual bills or promissory notes that exist apart from it, but the blockchain is the only place that Bitcoins can be said to exist in the form of unspent outputs of transactions.

This presents a radical change to the traditional monetary system. Here, the banks are the ones that handle all the transactions and alter the ledger. They are the gatekeepers of all the global financial activities occurring around the world.

By having a network of uncorrelated node operators from around the world, blockchain offers ledger technology that could shift things away from the legacy server based systems.

Mt Gox

The entire industry was almost derailed by the bankruptcy of a single exchange.

In January 2014, the world's largest Bitcoin exchange, based in Japan, was insolvent. In total, 850,000 Bitcoin went missing. Many believe it was an orchestrated attack with the removal starting as early as 2011.

This was the early days of the industry and it was very fragile. The market price of Bitcoin took a hit yet the mining continued.

China Bans Bitcoin Mining

China always had a rocky relationship with Bitcoin.

In April 2019, the National Development and Reform Commission (NDRC) labeled Bitcoin mining as undesirable thus encouraging local governments to phase it out. At the time, more than half the world's Bitcoin mining power was in China.

Throughout 2020, the government focused upon crypto exchanges only to turn its attention to both in 2021. It was in May that the the State Council call for the restriction of crypto mining and trading. This was preceded by a number of provinces introducing policies that stifled Bitcoin miners.

All mining operations were either shut down or had to relocate to countries that were favorable to cryptocurrency mining. Since half of the hash rate was coming out of China, the network took a hit until operations resumed elsewhere.

This move was compounded by the fact the government also banned cryptocurrency trading within the country. It applied to both fiat-to-crypto and crypto-to-crypto trading.

Legal Tender

In June, 2021, Nayib Bukele, President of El Salvador, announced that it would adopt Bitcoin as legal tender in the country. This is the first country in the world to do so and would give the residents two currencies to use. The US dollar was already legal tender before that.

It became official October 21, 2021.

This move created controversy both within the cryptocurrency community and outside of it.

Advocates for cryptocurrency felt that it was a negative that acceptance was being pushed by government action. Many feel that government intrusion and tyranny are issues that cryptocurrency was designed to solve.

Other cheered the move as a step towards mass adoption.

The traditional financial system was against the move. This was viewed as bringing on too much risk. The country was warned by the likes of the IMF to forgo this idea. Nukele made further waves when he announced the idea of Bitcoin Bonds.

A bill was passed in January 2023, that paved the way for the framework to be established to issue the bonds. The intention is to issue $1 billion worth of bonds, money that will go to pay down sovereign debt, fund "Bitcoin City", and be used to buy more Bitcoin. It will also fund mining infrastructure.

Impact As Money

Bitcoin can be thought of as money that operates outside of any government and the central bank system. The decentralized and global nature of the network make it more akin to the Eurodollar system than one that operates domestically.

The approach is disinflationary money with a halving roughly every four years. This means the rewards per block are reduced by 50%. Here we see the distribution of the coins slowing, until it reaches the hard cap of 21 million. It is expect to reach this in 2140.

Many believe the hard cap will help make Bitcoin a strong store of value. A challenge could arise in the fact that it lacks money elasticity to serve as a primary driver of the global economy.

Bitcoin's smallest unit of account is the Satoshi (Sat), with 100 million equaling one Bitcoin.

Divisive

Bitcoin is very divisive. There are people on both sides of the debate who are equally passionate.

Many of the detractors are part of the established system, such as Jamie Dimon and Warren Buffett. This group tends to be those who have power within some of the largest financial institutions.

There is debate whether Wall Street is really against Bitcoin (and digital assets in general). While they are very quick to spread FUD about it, many of them are laying the foundation for becoming custodians.

Even within the cryptocurrency world, there are those who are not advocates of Bitcoin. They believe the network is not only slow, but limited. Even the addition of the Lightning Network, a layer 2 solution, is not doing much to solve the limitations. It will handle the speed, providing the necessary transaction capability. However, it does not alter the fact that the network can still only send value from one digital wallet to another.

The biggest missing piece is the ability to add smart contracts to the network. Bitcoin does not have this either at the base layer or on layer 2. This is what is setting is apart (and behind in the opinion of many) from blockchains like Ethereum.

Proponents such as Michael Saylor are not swayed. These people are known as Bitcoin Maxis because of their unwavering loyalty to the exclusion of all altcoins.

Maxis believe that Bitcoin will take over the entire financial system, becoming the reserve currency, and replacing the USD as the medium of exchange going forward.

Bitcoin is deemed not to be a security by the Securities and Exchange Commission. Instead, it is treated more like a commodity. This is not the case with altcoins which are deemed as such. This is evidenced by the SEC's action against numerous companies that put out coins and tokens.

The Bitcoin Narrative

The narrative surrounding Bitcoin can be narrowed down to 3 components. This is what the supporters of the digital currency believe to be the future catalyst for the price.

Unfortunately, many of these were dispelled during 2021-2022 when CPI readings jumped off the charts and the USD skyrocketed against other fiat currencies. The price of Bitcoin dropped from a high of around $66,000 into the $15,000 range.

In the present term, Bitcoin failed the test against these metrics. However, that does not mean the future will not tell a different story. Bitcoin bulls certainly fell this will be the case.

Taproot

This was one of the few, but most important, upgrades to the Bitcoin network that took place since Satoshi started mining the coin.

It was approved in June of 2021 with the soft fork taking place on Nov. 14, 2021. The goal was to make transactions more efficient in speed and cost. It also seeks to enhance privacy.

Unlike the fork that resulted in Bitcoin Cash, the Taproot fork was not heavily debated. This upgrade was backward compatible with the older versions of the software meaning there was no need to run two parallel blockchains.

Taproot allows multiple signatures and transactions to be batched together, making verifying transactions on Bitcoin's network faster and more straightforward.

The other major step forward is Taproot opens up the door for smart contract implementation. This could eventually move Bitcoin into decentralized Finance (DeFi).

Smart contract capability was there yet Taproot makes it accessible since it potentially solves the scaling of transactions. This is done by batching transactions, allowing a single signature to be applied. This not only provides for scalability, it enhances privacy since identifying the individual's transaction in a batch is very difficult.

The Ordinal Controversy

In 2023, a controversy arose after the release of the Ordinal protocol which started to place Non-Fungible Token (NFT) on-chain. Basically, images, videos, and HTML could be included in Bitcoin transactions and assigned a satoshi.

This started to push transaction fees higher as activity increased. Supporters of this believe it brings more financial use cases to Bitcoin along with creating demand for block space (thus generating more fees).

The opposing view comes from those who feel NFTs are not core Bitcoin features. To fill blocks up with these is useless in their view. Their focus is upon creating deflationary money free from inflation and government intervention. In other words, they are a distraction and take up valuable digital real estate that hinders the progress of Bitcoin core mission.

NFTS on Bitcoin are digital artifacts called inscrptions. They actually native to Bitcoin although became viable after Taproot was adopted.

As a side note, in February 2023, the Bitcoin Ordinal protocol was forked and integrated with Litecoin.

The Flippening

This is a debate that takes place within the Bitcoin and Ethereum communities. At the core of it is when (if ever) will the market capitalization of Ethereum surpass that of Bitcoin. The point in time that happens is called The Flippening.

These are obviously the two leading blockchains in terms of market cap and publicity. It makes sense that the focus is on both of them as the most valuable.

ASCI Mining

Bitcoin miners are specially made computers. They are designed to serve one purpose: mine Bitcoin. These devices are not used for any other purpose.

An application-specific integrated circuit (ASIC) is a chip that is developed for a specific task. In this case, it is optimized to solve the mining algorithm.

These miners are costs. Since they are made specifically for mining Bitcoin they get the job done faster than less expensive counterparts. Also, over time, they are becoming extremely efficient with increasing hash rates per joule.

Bitcoin originally started using the CPUs of computers. However, in 2013, ASIC took off as it surpassed both CPUs and GPUs due to their reduced electricity consumption and greater computing capacity.

Today Bitcoin mining is done almost exclusively through ASIC miners.


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