Bitcoin: crypto, blockchain & the altcoins

Fun Facts

• Bitcoin (BTC) was invented in 2009 by the mysterious ‘Satoshi Nakamoto’

• BTC is the world’s best performing asset class over the past 10 years

• Bitcoin makes up 55% of a cryptocurrency market worth £208 billion

BLOCKCHAIN 101

Blockchain technology is a relatively new method of keeping records and exchanging data in an open, decentralised and allegedly incorruptible manner. Described officially as a type of ‘distributed database’, it is used to maintain a continuously growing list of records called ‘blocks’ (more on these later).

Blockchain technology is growing in popularity as more and more companies and individuals begin to recognise its potential for ‘cutting out the middleman’ within a variety of industries and sectors. It’s essentially an open ledger which records the transference of goods, services and of course currency. The advantage blockchain technology has over more traditional forms of ledgers and other methods of record keeping is that it is completely transparent and, for all intents and purposes, pretty much autonomous, once its been set up.

All parties contributing to the blockchain retain an up-to-date, synchronised version of the database (hence the name, distributed database), eliminating the possibility of backhand deals or any other shady goings on of that nature.

Transactions

Continuing with the analogy of blockchain as physical ledger, a new block is a bit like a new page being added to the record or ledger…

Each new transaction must be approved by usually five or six (unless otherwise specified for added security) ‘nodes’ (other participants or traders on the blockchain) to guarantee authenticity and to guard against duplicate transactions and fraud; this process occurs automatically. The blockchain is simply a continuous chronological record of every transaction that has ever been successfully executed. It is constantly growing as ‘completed’ blocks, containing all the most recent transactions, are added to it with a new corresponding set of recordings.

Buyers Buy Bitcoins on the Blockchain

Those who’ve heard of ‘the blockchain’* (as it is commonly referred to as), or blockchain technology, likely associate it with Bitcoin, the popular ‘cryptocurrency’ used by millions the world over to buy goods and services on the net or alternatively, given Bitcoin’s renowned bullishness, simply kept as an asset or investment vehicle (more on this later).

*Quick aside: people talk about ‘the blockchain’, though in reality there are actually a bunch of different blockchains (the big ones tend to have their own, i.e., Bitcoin, Ethereum etc. but they will host a wide range of other lesser-known cryptocurrencies).

New blocks must be discovered or ‘mined’ (to use the technical term) to facilitate this process of updating the record or ledger. This involves many nodes (people who want to earn Bitcoin) using their computers (often vast setups of many linked computers – see image below) to solve complex algorithms – hence the ‘crypto’ in cryptocurrency.

In the case of Bitcoin, miners are rewarded with bitcoins (or, more likely, fractions of bitcoins) which is of course what compels people to build and maintain these rather spectacular structures. As you may have guessed, the more computers somebody has running these algorithms simultaneously, the more chance they have of earning that precious Bitcoin – it’s a bit like buying multiple tickets for the lottery to increase your chance of winning.

Limiting the Supply

The number of Bitcoins generated per block discovered started at 50 back in 2009 when the system was first invented but has halved every 210,000 blocks (roughly every four years) since then. The system was designed this way to guard against super inflation which would occur if too many coins appeared too quickly as more began mining. It is predicted that all Bitcoins, of which a little under 20% remain, will have been mined by the year 2140! Crazy.

The only notable difference between Bitcoin and these finite, physical resources is that Bitcoins have no practical use – they can’t be burned for fuel or sold as jewellery, and yet they retain their value so long as people continue to ascribe a value to them… bit of a head-scratcher that, admittedly.

Unharnessed potential

The truth is blockchain technology has countless uses, theoretically and in practice, aside from to cater for Bitcoin or any of the other many altcoins (e.g. Ethereum, Litecoin and Ripple) on the cryptocurrency market.

Not to take away from the impact blockchain technology has made and continues to make in the financial sector – indeed, many of us will be familiar with those the media has dubbed the ‘bitcoin millionaires’, i.e., those who invested in Bitcoin early and, years later, found themselves in possession of untold riches – but the real revolutionary power of blockchain technology is arguably yet to be seen.

For many industries and sectors, it is some of blockchain technology’s other capabilities which are truly exciting and potentially innovative.

Promises, Promises

Carrying out trades on the blockchain demands a certain amount of trust. The first time you enter a destination bitcoin (or any other coin for that matter) address into a dialogue box on the web and hit send you’ll likely be twiddling your thumbs and biting your nails as your anticipation morphs into apprehension.

However, it would be wise to consider the fact that well over a hundred million traders trust the blockchain to authenticate, safeguard and deliver their precious cryptocurrencies everyday with very few reporting discrepancies or loss of coins. On the rare occasions when discrepancies do occur, it is seldom the fault of the underlying technology but instead is usually down to either a problem with the exchange website being used or, nine times out of ten, a user error.

User errors most commonly occur when people send the wrong coin to the wrong address, i.e., if you try to send Bitcoin to an Ethereum address your coins will get ‘lost on the blockchain’ – a chilling prospect indeed! So always be careful when confirming transactions; losing coins on the blockchain is a feeling akin to putting a pair of jeans in the wash only to realise there was a crisp twenty-pound note in the pocket.