After just over 10 years of existence, the first centralised cryptocurrency continues to soar in value. What is it about Bitcoin that makes it so irresistible? And will its success last?
What is Bitcoin?
In 2008, a paper published under the name Satoshi Nakamoto set out a theory that jumpstarted cryptocurrency. It was called Bitcoin: A Peer-to-Peer Electronic Cash System.
The ideas in the paper led to the start of Bitcoin, the world’s first centralised cryptocurrency. Unlike traditional currencies, it has no physical presence and it is heavily encrypted, meaning that fraud and duplication are almost impossible.
When it was first established, a single bitcoin was worth $0.0008. In 2010, it jumped to $0.08. Today, the figure stands at roughly $47,400 – just over £34,000.
Where does it come from?
With paper money, a central government decides when to print and distribute money. With Bitcoin, currency is found through mining. The process gets its name because the cryptocurrency acts like digital gold; only a finite amount of it can ever exist.
Because of this, bitcoins cannot be created, only extracted. And extracting them takes work. Miners use special software to solve mathematical problems and receive bitcoins in exchange. This process provides an incentive for others to mine.
What’s in it for Bitcoin?
Miners do not just generate new bitcoins. As they complete their programmes, they are actually checking the validity of transactions that have taken place around the world in the Bitcoin system. They then receive currency as payment for completing collections of verified transactions known as blocks. Once verified, these are added to a database of information known as the blockchain.
By recording and checking all transactions taking place across the system, miners are helping to make Bitcoin safer. Fraud is almost impossible; cheating, changing or hacking the system is much harder.
Sounds great! Why don’t we all do it?
Mining means you can earn cryptocurrency without having to put down your own money. To get paid, you have to verify 1MB worth of transactions. But that is the easy part. You also have to be the first miner to arrive at the right answer to a numerical problem. For this reason, most miners increase their chances of success by joining together in groups called pools and share their winnings.
As well as this, the problems become automatically more complicated the more miners there are on the system. Miners now need special high-powered computers to run the programmes if they want to succeed.
What happens when they run out?
The exact number of possible bitcoins is 21 million. Around 18.5 million bitcoins have been mined in 10 years – leaving less than three million yet to be introduced into circulation.
But it will take far longer for the rest to emerge. This is because the reward for mining is reduced by half every four years. In 2009, mining one block earnt 50 Bitcoins. Now, it earns 6.25. This will continue to happen until the final bitcoin is mined – calculated to be the year 2140.
Will it really last that long?
Nobody knows. Bitcoin gains value when it receives important investments. The most recent company to support it was Tesla, which bought $1.5bn in the currency at the start of February.
But critics point out Bitcoin’s unsustainability. A recent study found that the electricity poured into mining bitcoins is more than the entire energy output of Argentina, raising serious environmental fears. Earlier this week, one Chinese province banned mining as part of Beijing’s promise to go carbon-neutral by 2060. Some now say that climate concerns could bring an end to the currency long before its 21-millionth coin is mined.
- Would you ever invest in Bitcoin?
- Design your own digital currency. Come up with a name, a logo and an advert that encourages people to trust your currency over Bitcoin.
- Satoshi Nakamoto
- Nobody of the name has ever been discovered. Most people assume it is a pseudonym – a fake name – for a different person or group.
- A network in which each computer can act as a server for others – meaning that there is no central server and making the currency more transparent.
- Any digital currency in which transactions are verified by records maintained using cryptography – rather than a centralised authority like a government.
- A limited amount of something. It is estimated that there are 171,300 tonnes of gold in the world. There are a maximum of 21 million Bitcoins.
- A unique problem with digital currencies is that a coin can be duplicated. Part of a miner’s job is to check that transactions take place using original Bitcoin.
- A system that contains a record of transactions made in bitcoin. It is shared in the peer-to-peer network across multiple computers.
- A megabyte is 1,048,576 bytes of memory.
- To be unsustainable is to be unable to be maintained at the current rate.
- A carbon neutral business or country is one that produces no more carbon than it uses. China is one of dozens of countries to pledge zero carbon in the coming decades.