Hot Topic – Bitcoin

What is Bitcoin?

Bitcoin ImageThe cryptocurrency Bitcoin will be discussed for this Hot Topic assignment. The purpose of this analysis is to offer an explanation of what Bitcoin is, and what its purpose is to the lay person. This analysis will also show how Bitcoin currently affects the cryptocurrency marketplace. We will examine the basic history of Bitcoin, and how as it has matured moved beyond the intended purpose set by its creator Satoshi Nakamoto.

Bitcoin was chosen as the subject for this analysis, because it currently sits as the top cryptocurrency in the world. It is the most recognized cryptocurrency with its penetration into the mainstream media. Bitcoin also dominates market capitalization on every exchange it is traded. It is also the top cryptocurrency in terms of trade volume. To research Bitcoin’s position in the market, this analysis used the CoinMarketCap website. CoinMarketCap is the default Website for most cryptocurrency traders who are looking for prices, market capitalization statistics, volume statistic, social media mentions, and exchange information. CoinMarketCap aggregates all of that information into listings that are easy to find and digest.

Coinmarketcap.com

At time of writing, the price of 1 Bitcoin was $8,251.79. It’s nearest competitor in terms of price was Bitcoin Cash at $926.72. The price of a single Bitcoin was almost 90% more than a Bitcoin Cash coin. Bitcoin’s 24-hour trading volume was approximately $6.8 billion. That’s almost quadruple that of its nearest competitor (Tether). Bitcoin’s market capitalization was approximately $139 million. Its closest competitor was Ethereum at $52 million. As can be seen, Bitcoin dominates the cryptocurrency marketplace.

Coinmarketcap.com

Market capitalization is an easy marker to determine what the top cryptocurrencies in the market are. It is simply the amount of currency in the market multiplied by the cost of the coin at that moment (coin amount x price). For example, if a made-up coin (we’ll call it X-coin) has 1 million coins in circulation, and the price for the coin is at $2, the market cap for X-coin is $2 million. The intent is to determine what the total value of the currency is in the market. Most traders prefer to valuate a coin using market cap due to total value, but other traders prefer to use how many of a currency are traded in a 24-hour time period. That’s called market volume.

Some traders believe that market volume is a better indicator of the strength of a coin, because market caps can be manipulated. Cryptocurrencies are often subject to “pump and dump” schemes where a “whale” will buy up as much of a coin as they can. Because the whale is buying up a vast amount of coins, this causes the price to artificially rise. When the price is artificially rising, so is the market cap. This can cause more people to buy into the coin, thinking it is more valuable than it is, thus raising the price even further. When the price is high, the whales of the coin will sell at the high price for a lot of money.

Bitcoin & Blockchain History

Bitcoin is considered the grandfather of cryptocurrency. It was created in 2007 after the crash of the housing market in the United States. Many people were concerned after the banks, that were directly responsible for the crash were bailed out by the U.S. federal government. The prevailing excuse was that these banks were, “too big to fail.” This placed a lot of perceived power in the hands of those banks, and it revealed that a major priority of the government was to help those corporations (and not the people affected by them).

Satoshi Nakamoto created Bitcoin with the intent of utilizing a decentralized currency free from centralized corporate and government influence. It’s important to note that no one knows if Nakamoto is one person or many people – much like the argument about William Shakespeare. Using cryptographic algorithms and complex math equations, Nakamoto designed Bitcoin around the idea of a blockchain. That kind of currency would never be too big to fail, and the power of currency would be in the hands (or hard drives) of users (the people) and not big corporations or the government.

In the simplest explanation possible, as Bitcoin transactions are sent and received, pieces of information about the transaction append themselves to other pieces of information of other transactions. This would create a virtual ledger system — or a chain of transaction information. For a transaction to be approved, it had to be verified by co-current users on the system. Each of whom had their own version of the blockchain ledger. Each user would verify the information on the chain each time they connected. The verification process is useful, because if someone were to falsify information, that information would be compared to the blockchain information of other users and rejected. If the transaction was valid, a set amount of verifications would have to happened (usually 10 to 20) before the transaction would be approved and permanently recorded on the blockchain. This system is very secure as long as there are many users using the system that can verify information.

More About Bitcoin

As we’ve already learned, Bitcoin was the first blockchain-based cryptocurrency. In it’s earliest days Bitcoin was intended for use as a currency that could be used to buy and sell goods among consumers and merchants, but in recent years, proponents of Bitcoin have begun to view the coin as a store of value. A store of value is similar to how we view gold, silver, and other precious metals. Although they all have some real-world uses, gold (and the others) is kept by governments and individuals as a commodity to be held onto. They are valuable to hold onto.

Bitcoin is currently the most stable cryptocurrency. Because of the number of users buying, selling, and holding the coin, has made the price of Bitcoin less likely to be influenced by the frequent ups and downs of the cryptocurrency marked. Despite that stability, Bitcoin’s stability still isn’t enough for some investors to feel comfortable. Recently, we’ve seen Bitcoin’s price rise to records highs per coin, only to fall to almost 40 percent a month later. Compared to stock market prices, which usually have slow ups and downs, Bitcoin’s prices appear to be wildly volatile. While this is true on the surface, compared to newer, less established cryptocurrencies, Bitcoin’s prices tend to be a lot more stable.

Perhaps the biggest strength of Bitcoin, and why it continues to hold the largest market cap among currencies, is that its price influences the price of other currencies. While some coins have frequent ups and downs, most rise and fall along with the price of Bitcoin. As we can see from the chart below (look under Price Graph), as Bitcoin’s price rises, so do the prices of other coin. As Bitcoin falls, the price of other coins fall. The reason for this is that the most popular cryptocurrency exchanges don’t deal in fiat currency like the U.S. dollar or the U.K. pound sterling, they all deal in Bitcoin.

BitcoinAffectsPrice

Due to Bitcoin being the most popular cryptocurrency, every exchange has Bitcoin as its main purchase method. If you wanted to purchase a cryptocurrency that is up-and-coming or less popular, like Ripple or Monero, you would have to buy Bitcoin using one of the few exchanges that allow fiat to cryptocurrency exchanging. Coinbase is currently the most popular exchange for that in the United States. You would buy a certain amount of Bitcoin, say $50 worth, transfer that Bitcoin from Coinbase to another exchange, and then buy the currency you want. From there you would transfer the currency you just bought to your wallet of choice (hopefully). It’s a long process. Because Bitcoin is the main method used to purchase other cryptocurrencies, the prices of those other currencies rise and fall along with the price of Bitcoin. As was noted earlier, there are some exceptions, some coins decide to rise and fall due to positive or negative news about the coin, a whale purchasing a lot of the coin, or nefarious types attempting to pump and dump a coin. Mainly though, the rise and fall of Bitcoin price determines the rise and fall in price of other currencies.

Issues & Moving Forward

The fact that Bitcoin controls the rise and fall of the prices of other currencies puts a lot of power in the hands of Bitcoin and its holders. If the main purpose of Bitcoin, as laid out by Satoshi Nakamoto, was to act as a decentralized currency that was independent of banks and large controlling interests, the current state of Bitcoin is troubling. There is an attempt by proponents of other cryptocurrencies to promote something that’s know as “The Flippening.” The Flippening is a desire by those who believe Bitcoin has too much power to have another cryptocurrency take over the top market cap or value spot from Bitcoin. The idea being that when that happens, Bitcoin’s control over the overall market will be lessened. While The Flippening is a novel idea, if it were to happen, it would place more power in the hands of another coin’s holders – and the issue will not have been resolved.

A more equitable distribution of power will only come if exchanges allow all currencies to hold the same trading value as Bitcoin. It is currently possible to buy coins on most exchanges with Bitcoin, Ethereum, Dogecoin, and Litecoin. If exchanges would allow users to buy currencies with lesser-known coins, such as Cordano, Monero, Ripple, NEO, Stellar, DASH, and EOS, it would go a long way in relieving some of the power from Bitcoin, and redistribute it to the others.

As was noted earlier, the more users a blockchain system has, the more secure it is. The same is true with Bitcoin, but when Satoshi Nakamoto created the currency, they could have never imagined that it would become so popular. Because of Bitcoin’s popularity, its blockchain is very secure, but it is suffering from too much information. Each transaction is appended to its blockchain, and as the blockchain grows so do the information requirements. Each entry to a Bitcoin blockchain record is allowed up to 1 megabyte (mb) of information. Right now, the blockchain records almost 800 kilobytes of information for each entry. If the trend continues, Bitcoin’s record size will become too large. The blockchain size, and the sheer amount of transactions, has caused a slowdown of Bitcoin transactions. They take a long time to verify. This has caused potential merchants and buyers of goods and services to use other coins.

There is also some concern about future ownership of Bitcoin. It is well known that as Bitcoin has grown and matured, the methods that are used to mine Bitcoin have become more advanced and time intensive. As Bitcoin’s blockchain becomes larger, it becomes more and more intensive to mine its blocks. When Bitcoin was first being mined, miners would be able to use the CPUs on their computers, it soon became impossible to discover blocks that way, and miners moved to GPU card mining. GPU cards have more number processing capacity. Soon, that method also became obsolete to find Bitcoin blocks, so miners moved to ASIC cards with even more processing power. Now, Bitcoin requires networked ASIC setups that require huge amounts of processing and energy in order to find blocks. Understandably, this has moved the ability for the average person to mine to those who already have the capital and resources to put together mining “rigs” that are capable of doing it. That resource requirement means that those with the most resources are able to mine, and thus have the most power. This is another example of Bitcoin moving beyond the original vision of Satoshi Nakamoto.

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