Bitcoin

chart-11
Bitcoin Percentage Increase Compared to the Average (Bit20 ETF) Starting in 2017

Bitcoin was the first cryptocurrency created and is often referred to as “digital gold.”[1] Although there are numerous advantages to being the first in its field, newcomers have built alternative cryptocurrencies (altcoins) by making various changes to the Bitcoin protocol.

Pros: First cryptocurrency to enter the market; largest market cap and highest transaction volume; fully decentralized; strong development team in Bitcoin Core with over 500 contributors; limited supply; considered a store of value and can be exchanged for altcoins; bitcoin is an acceptable form of payment at many retailers and has been considered a legally-recognized currency in some countries

Cons: Slow transaction times (has reached ~1-3 hours); high transaction fees (has reached ~$20-30 per transaction); vulnerable to a 51% attack if a mining pool or anyone else controls over 50% of the mining power

Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

Bitcoin uses a proof-of-work (POW) system to validate transactions. This requires validators known as miners to solve a cryptographic riddle which is difficult to compute but easy for others to verify.[2] This process may require a lot of trial and error before a valid proof of work is generated. The miner who generates the proof of work adds the next block to the chain and receives a block reward as well as a transaction fee. Solving the cryptographic riddle requires a significant amount of computing power, and miners typically purchase expensive hardware that is operating 24/7 to generate adequate returns. [3]  Therefore, mining requires a large amount of computing resources and electricity. Additionally, a POW system is vulnerable to a 51% attack, where a single miner or mining pool (made up of several miners working together who split the rewards) has more than half of the mining power of the network. As a result, the miner can refuse to validate transactions and can double-spend bitcoins.[4] However, the likelihood of a 51% attack is low, because this would devalue the currency that the miners are working to obtain.

Leadership/Community Participation

Unfortunately, the creator of Bitcoin is unknown and simply goes by the pseudonym, Satoshi Nakomoto. The Bitcoin Core development team is led by Wladimir van der Laan and includes over 500 members who are actively improving the functionality of the network.[5] Software updates are added on Github on a regular basis.

Transaction Volume and Market Capitalization

Being the industry leader, Bitcoin has the largest market cap (~$180B) and transaction volume (~$13B in transactions per day). Nonetheless, being the leader in transaction volume has led to long confirmation times and large fees. Lightning Labs[6] is currently working on a Lightning Network to address its scalability problem by processing millions of transactions per second off-blockchain which will also reduce fees considerably. Unfortunately, the Lightning Network is still in the development phase and it is unclear when it will be added to Bitcoin Core.

Industry Participation

Bitcoin has gained acceptance at many retailers, such as Expedia, Microsoft, Overstock.com, and even Subway in select locations.[7] Additionally, Bitcoin can be purchased through several exchanges, such as Coinbase, Bitstamp, Bitfinex, and many others. Moreover, Bitcoin futures trading is also available on major financial exchanges including CBOE and the Chicago Mercantile Exchange. Still, Bitcoin has not yet received widespread acceptance and is limited in where it may be used.

Security

The immutable, decentralized network has been considered more secure than traditional banking systems, where account information for a large number of users is stored at a centralized location.[8] In a traditional banking system, if a hacker gains access to the server where this information is stored, the hacker can obtain information from thousands of users at once. By contrast, in Bitcoin’s decentralized protocol, a hacker can only gain access to individual wallets and cannot breach the security of multiple users at the same time.[9] Bitcoin also does not require users to trust those who maintain the network, because every transaction is published on its public blockchain. On the other hand, as mentioned above, Bitcoin is vulnerable to a 51% attack even though the likelihood of that is low.

 Usability

Bitcoin has several uses as a store of value (digital gold), a means for transacting in alternative cryptocurrencies, and a form of payment. Even though some countries have accepted Bitcoin as legal tender, most all have not, and some have gone so far as to make it illegal to transact in Bitcoin.[10] Furthermore, several retailers are hesitant to accept Bitcoin and it is only accepted as a form of payment at a small subset of stores. Additionally, the large transaction fees seem to be scaring users away from making small payments with Bitcoin, and many prefer to hodl (i.e., hold) while transacting in other forms of cryptocurrency.

Technical Features

As the first in its field, Bitcoin shares similar technical features with many of the altcoins: decentralization, immutability, and transactions validated by miners in a POW system broadcasted to the network on a public blockchain. Unknown to many, Bitcoin also has the ability to execute smart contracts, although in a limited form. Further developments may include the addition of the Lightning Network to increase transaction speed and reduce fees, and an improved developer environment for writing smart contracts.

Growth/Legal Risks

As the coin with the largest market cap, many are concerned that Bitcoin does not have much room to grow. Nevertheless, Bitcoin is estimated to have a user base on the order of 1-10 million.[11] If Bitcoin does become digital gold and/or a global currency, the user base can grow to the hundreds of millions or even a billion. Additionally, there is a limited supply of 21 million bitcoins. As of January 2018, about 16.8 million bitcoins have been mined[12] and the value of Bitcoin should increase as the number of bitcoins left to mine decreases. Although Bitcoin has been outlawed in some countries, the more prevalent it becomes the more likely those countries are to remove such bans.

Estimated Time of Arrival

Unlike many altcoins, Bitcoin has arrived and has been widely used for the last few years. While other players in this space created tokens before fully developing their respective platforms, Bitcoin is currently functional.

ETA: Now 

Conclusion

Even though Bitcoin may no longer be the hidden gem it once was, the future is still bright for the industry leader in cryptocurrency. With a growing user base and the development of the Lightning Network, Bitcoin remains a good value.

[1] https://www.cnbc.com/2017/11/29/bitcoin-could-easily-reach-the-100000-range-strategist-tom-lee.html

[2] https://en.wikipedia.org/wiki/Proof-of-work_system

[3] https://www.bitcoinmining.com/what-is-the-bitcoin-block-reward/

[4] https://learncryptography.com/cryptocurrency/51-attack

[5] https://en.bitcoin.it/wiki/Wladimir_van_der_Laan

[6] https://lightning.engineering

[7] http://www.businessinsider.com/bitcoin-price-8-surprising-places-where-you-can-use-2017-10

[8] https://bitcoin.org/bitcoin.pdf

[9] https://bitcoin.org/bitcoin.pdf

[10] https://en.wikipedia.org/wiki/Legality_of_bitcoin_by_country_or_territory

[11] https://steemit.com/bitcoin/@jimmco/how-many-people-touched-bitcoin-up-to-2017-and-what-is-current-adoption

[12] https://blockchain.info/charts/total-bitcoins

7 thoughts on “Bitcoin

  1. You give Bitcoin too little credit. Bitcoin is the gold standard for cryptocurrency and the alt coins will only go as far as Bitcoin goes.

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    • Too little credit? Bitcoin has no intrinsic value and is inherently worthless. I’ll be laughing when the government cracks down on these scams and you guys wasted all of this time on Bitcoin and the other cryptocurrencies.

      Like

  2. This really helped me understand Bitcoin in simple terms. I’m trying to learn about this, but there aren’t many places that explain it in a simple, more comprehensible way. Thank you for sharing and I can’t wait to read about the next few altcoins!

    Liked by 1 person

  3. You couldn’t even be bothered to check if your article was up to date about fees? Fees haven’t been high since the beginning of February. Your information about fees and confirmation times was out of date 22 days before you posted it.

    Like

    • I said that Bitcoin “has reached” fees that high. You’re right that the fees are outdated and maybe this is unclear, but I was trying to say that one issue with the network is that it can have very high fees when flooded with transactions. Things have changed for now but it could go back up if there are other huge spikes in volume.

      Like

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