“The future of money is digital, and Bitcoin is its first milestone. To understand this, it is not enough to look only at its prices, but we must understand its technology, social and economic implications, and its potential. Only then will we be able to ride the wave of change and reap its benefits.”
Before explaining what Bitcoin is, it is worth making a premise that may seem obvious to many, but it is fundamental. The value that we attribute to a currency is the result of a convention. Banknotes themselves are just pieces of paper, and if we can use them to obtain goods and services, it is because we all agree on the purchasing power we recognize them. It makes no sense to claim that Bitcoin is just a number inside a computer or a network because the banknote could be, precisely, just paper. For things to change, all it takes is for everyone to decide.
Bitcoin is a digital currency that users keep in virtual wallets called wallets. They can be used to make payments to shops or companies that accept them, transfer money to other users, or simply as a speculative tool.
A Revolutionary Phenomenon
In the last 10 years, a new social movement has given rise to a real digital monetary ecosystem. The revolution lies in the fact that the system can be governed by the network’s users.
A epochal change that occurs for the first time in human history. Possible thanks to Blockchain, the key technology behind most cryptocurrencies. The Blockchain is not only applicable to digital and alternative payment systems but can be exploited in various sectors such as health care, the Internet of Things, and bureaucracy: to certify the exchange of important and sensitive information. According to a recent study by the consulting agency Deloitte, 28% of the largest technology and finance companies have already invested more than five million dollars in blockchain technologies, this in 2018, to switch to over $5 billion in 2020! In addition, many large companies such as IBM, Microsoft, JP Morgan, Santander, have invested in blockchain technologies, creating solutions and using the technology to improve their services and products. In general, investment in Bitcoin’s blockchain development comes from a variety of sources, including investment firms, technology companies, non-profit organizations, and large companies, all interested in exploiting the potential of blockchain technology and Bitcoin. Back to Bitcoin: many experts believe it will be the gold of the future, one of the reasons being its scarcity. It represents one of the first concrete examples of the idea of cryptocurrency, originally described in 1998 by Wei Dai on the Cypherpunks mailing list.
The problem of security.
The idea of cryptocurrency itself is not innovative, as there have been movements since the early days of the internet aimed at creating a virtual currency that aimed for independence and freedom from government control systems.
However, theorists have never been able to solve the problems connected to the intrinsic nature of digital data. As it is digital, it is plagued by numerous phenomena of unauthorized copying. For example, consider the battle between hackers and record companies. Every method used by the latter to prevent the counterfeiting of music tracks was regularly circumvented by pirates, making the technology insecure.
Bitcoin solves this huge problem present since the early days of cypherpunk theories (a cypherpunk is an activist who supports the intensive use of cryptographic tools as part of a path of social and political change, initially communicating through a mailing list in informal groups with the intention of obtaining privacy and computer security for personal accounts through the use of cryptography), called double-spending. This is the ability to spend or create the same token (token or coin) twice. The classical method to overcome the problem is the use of an accredited central authority that manages the system by combating counterfeiting, for example by increasing the difficulty of reproducing banknotes and giving counterfeiters a hard time.
The turning point came in 2008, when the Blockchain technology was implemented for bitcoin transactions. The blockchain is a public ledger where each transaction is verified in a decentralized manner by the network users, called miners, who certify the operations on the currency through a proof-of-work process. The final result can be defined as “digital gold”. Taking the precious metals business as an example, bitcoin becomes one of the first digital currencies that is double-spending-proof, making a credible increase in value possible. The phenomenon is so vast that today it is taught and studied in universities all over the world.
The value of bitcoin.
The value of bitcoin is determined by the market through the well-known economic law of supply and demand. A particularity of bitcoin, which exponentially increases its value, is the limited quantity of coins that can be minted (in slang, mined). The maximum number of coins is 21 million, and at the moment, just over 19 million have been mined. According to some approximate calculations, the maximum cap of 21 million will be reached in 2141. This is because every four years, the number of bitcoins issued is halved (according to the current computing power), as is the amount of currency distributed to those who discover new blocks (through the mining process) to add to the blockchain.
Another characteristic of Bitcoin is that the software necessary for its creation is open source and not proprietary. It has been developed and continues to evolve thanks to a community of volunteers who collaborate together to solve problems and improve the project. The Bitcoin Foundation, established in 2012, is responsible for coordinating software development and is a non-profit organization. In the event that the Bitcoin Foundation were to cease technical development, the work would still be carried out by volunteer developers. Even in the scenario that sees Bitcoin Foundation or another entity attempting to take control of the software for mining (we will see that Bitcoin Foundation has had some mishaps), the enormous dispersed community would refuse to continue developing updates and improvements necessary for the functioning of the system.
In addition to the technology behind bitcoin, even the team behind the cryptocurrency is decentralized, making the mechanism more secure. Fragmentation here represents a point of strength. These characteristics make the Bitcoin system a candidate to be elected as one of the most important inventions of the last 100 years.