Warren Buffett He said you should never invest in a business you don't understand. Of course, Bitcoin is not a business, and we all know that Buffett is not its biggest fan. But the core of his message still applies to cryptocurrency investing. So if you are considering buying the largest digital asset in the world, today we bring you a lesson for your cryptocurrency training about the king of the cryptocurrency ecosystem.
The story of the origin of Bitcoin.
In the subprime crisis of 2008, distrust in the financial system spread throughout the world. But this distrust was established much earlier in a specific group of cypherpunks, defenders of cryptography and privacy-enhancing technologies as a path to social and political change. On October 31 of that year, this group of computer programmers received an email that would change the course of financial history. Its sender was Satoshi Nakomoto. To this day, we do not know Satoshi's true identity, but we do know what he (or they) wrote in that first message:
"I have been working on a new electronic money system that is fully peer-to-peer, without trusted third parties." Satoshi Nakamoto, 2008.
Satoshi wrote the nine-page Bitcoin whitepaper to email and sent it. We could interpret this document as the first lesson for the world on cryptocurrency training. From that moment on, the Bitcoin network spread like wildfire.
Content of Satoshi Nakamoto's original email presenting the Bitcoin whitepaper.
Why Bitcoin is so important.
Digital payments are nothing new. Online banking, PayPal and international transfers were already common before the creation of Bitcoin. But with the Bitcoin network, we can do something radically different. This network allows us to send, receive and store assets securely without using a financial institution. This means that you do not need to trust third parties to act on our behalf. Instead, we can be our own bank, keeping funds under our complete control.
How a transaction works on the Bitcoin blockchain. Source: Euromoney.
It also has other advantages. Whether small or high value, international transactions can be slow and expensive when passing through the global banking system. But with Bitcoin, the speed and fees of a transaction do not depend on the amount we send or the distance to which we do it. Transactions take about an hour to complete and typically cost between $1 and $5 in fees. Unlike banks and other financial institutions, Bitcoin remains open on weekends and holidays. In fact, it has been open consistently since the first bitcoin transaction in January 2009.
How Bitcoin Transactions Work.
As with credit cards and other forms of digital payments, with Bitcoin there is no real money moving from point A to point B. In your case, the blockchain is updated after each block of transactions to show the balance of crypto assets in wallets. And although wallet addresses are hidden to protect user privacy, Bitcoin is a great ally against money laundering. This is because the blockchain records every single transaction, for all eternity.
Operation of the P2P system of the Bitcoin network. Source: GBHackers.
Carrying out transactions with bitcoins (the digital currency, with a lowercase "b") is as simple as sending a message on WhatsApp. We can send and receive bitcoins using a cryptocurrency exchange (which does involve third parties) or directly through our bitcoin wallet (which does not). To send bitcoin from point A to point B, we just have to paste the recipient's bitcoin wallet address into the address bar, enter the amount of bitcoin (BTC) and press the send button.
How miners make Bitcoin secure.⛏️
Our transaction is now grouped into a block of about 2.000 more transactions. That block is locked by an extremely complex cryptographic calculation, which can only be solved with powerful computers. Miners compete to solve that calculation with the consensus mechanism called “proof of work” (PoW). The first miner to prove to the network that they have solved the calculation (it takes an average of 10 minutes to solve) gets the reward in newly created bitcoins. The miner will also take care of the fees for each transaction within the block. By doing so, the miner “confirms” the block of transactions on the network for the first time. At that point, a thief would need more than half the computing power of the entire Bitcoin network to go back up the blockchain and reverse the transaction. That would be known as a "51% attack«. And while they are theoretically possible, they have never happened on the Bitcoin network, and are very unlikely to happen in the future.
Explanation of how a 51% attack works. Source: Axia Global Trading.
For one thing, it would be incredibly expensive to have that much computing power, so it would make no sense to alter a transaction. And on the other hand, Bitcoin developers would notice the intrusion and immediately remove the fraudulent transaction from the network. The attacker would be left with billions of dollars in hacking costs without any results. But this is what really makes Bitcoin more secure. While the confirmation of the first block secures the transaction, each subsequent block adds another layer of protection. Block by block, the transaction stays deeper in the blockchain, making it harder to corrupt. And when five more blocks have been added, about an hour later, the transaction becomes mathematically impossible to reverse. It remains locked in the blockchain forever and can never be undone, and the recipient's bitcoin is impossible to steal through a network attack. This information about how transactions work in the Bitcoin network is essential for your training in cryptocurrencies, in order to understand how transactions are carried out and through what means.
Validation of transaction blocks of the Bitcoin network. Source: Yevgeniy Brikman.
Bitcoin is slow compared to other cryptocurrencies, but there is a reason.
Bitcoin can only process up to seven transactions per second. It's a very mediocre pace compared to Visa, Paypal and other cryptocurrencies, but it's for good reason. Bitcoin blocks can only store one megabyte of data, which limits the number of transactions in each one. And that small block size makes Bitcoin more secure.
Historical rate of transactions per second of the Bitcoin network. Source: Blockchain.com.
This is because Bitcoin transaction fees rise when there is more demand for block space. If the blocks were larger, they would not be as full, so the transaction fees would be lower. While that may seem good to us, miners' rewards would go down, giving them less incentive to mine bitcoin. The Bitcoin hash rate is the amount of computing power dedicated to mining bitcoins. If this decreases because fewer miners mine, an attacker needs less computing power to take over the network through a 51% attack. In other words, higher transaction fees (caused by smaller block sizes) make Bitcoin more secure. Understanding this data is very useful for us to continue enriching our training in cryptocurrencies, understanding how the network works and how validators are rewarded.
Bitcoin hash rate history. Source: Blockchain.com.
What are the Bitcoin network fees?
Depending on the volume of bitcoin transactions at any given time, as well as the current price of bitcoin in dollars, transaction fees typically range between $1 and $5. But in times of extreme trading demand (such as near the peak of the 2021 bull run) those rates have been as high as $60.
Bitcoin transaction fees in dollars. Source: Blockchain.com.
For safely storing and transferring large amounts of money, it works wonders. On the other hand, buying breakfast in the morning is not exactly the best asset for this because of the commissions that the transaction entails. We are going to put an example. Think about the time and cost it would take to send $50 million through the international banking system, or to transport a ton of gold across the sea. These two situations can take more than an hour, and will cost us much more than a commission on the Bitcoin network. Not to mention the costs that may arise from trying to store the gold safely before shipping it.
How the Lightning Network works. Source: Bitpay.
Just because the Bitcoin network is slow and expensive now, doesn't mean it always will be. Increasingly, bitcoiners are using the Lightning Network (a second layer of the main network) to allow fast and cheap transactions. Take note because this data is very useful for your training in cryptocurrencies so that you understand why the commissions have different values depending on the blockchain that we are going to use in the future.
Why Bitcoin is considered digital gold.
Like gold, bitcoin has a finite supply. But unlike gold, we can mathematically predict how many bitcoins will be “mined” each year. In the first four years of the Bitcoin network's existence, miners received 50 bitcoins every time they solved a block of transactions. Then, in 2012, the block reward was halved, to 25 bitcoins per validated block.
Bitcoin has a deflationary issuance system. Source: Bitcoin.com.
The reward has been halved every four years since then, and will continue to halve at that rate until the year 2140. At that point, bitcoin will reach its maximum supply of 21 million coins, and miners will stop receiving new bitcoins per mining. Of course, they will continue mining to earn transaction fees, as long as these are not too low.
Bitcoin's deflationary system makes it scarce, which gives it the quality of a store of value. Source: CoinDesk.
At this point, about 90% of all bitcoin has already been mined. We cannot say the same for fiat currencies like the dollar, which are being printed at an exponential rate as we have seen these last two years. With the failures of the financial system, you can see why Bitcoin is built to be a long-term wealth security and hedge against inflation. And although the price of bitcoin is volatile by definition, we believe it will stabilize as it gains more weight within financial markets.
We hope that this training in cryptocurrencies has been of great help to you to fully understand how the pioneer of cryptocurrencies works efficiently and safely and the benefits that blockchain technology brings us.