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No prior knowledge required! Bitcoin was first described in a 9-page research paper posted online in under the pseudonym Satoshi Nakamoto. The paper, titled Bitcoin: A peer-to-peer electronic cash system , covers a broad variety of topics, such as financial economics transaction costs, trusted third-parties, money supply , network engineering distributed decision making, data routing, cyberattacks , and cryptography , a branch of mathematics interested in establishing secure communications to facilitate peer-to-peer, open, and borderless transactions between users.
Click on it to download the full paper. How many people do you know who have expertise in financial economics and network engineering and cryptography? And this is the primary reason why, until today, bitcoin has remained difficult to understand for most of us. If you want to learn more about particular aspects of bitcoin, you can click the hyperlinks throughout the text and consult the supplementary materials listed at the end of each section.
This is of course optional. You can get a solid overview of bitcoin in one hour without doing any of this. The bitcoin paper essentially describes a software system enabling people to conduct secure peer-to-peer online transactions without relying on banks or payment companies. Satoshi Nakamoto whose real identity is still unknown has then progressively withdrawn from the project, and since , it is an international team of developers who regularly upgrade the bitcoin software used by all the stakeholders in the ecosystem.
Bitcoin fundamentally transformed the way value can be stored and exchanged. With early VC investments comparable to that of the Internet, hundreds of millions of dollars have continued to be invested in start-up firms that build their products or services on bitcoin.
Bitcoin and its underlying blockchain technology have also become a focal point for the financial technology FinTech industry, which broadly entices financial institutions, governments , and central banks across the world.
While bitcoin is the first decentralized cryptocurrency ever implemented , several aspects of the bitcoin project have their roots in research conducted in the ss. Several companies attempted to create e-currency systems in the s—none of them in a decentralized way—and all of them failed.
This is one of those rare moments in history where a social scientist actually makes an accurate prediction about some significant aspect of the future! Bitcoin is to blockchain, what email is to the Internet.
To date, the most basic and prominent application of bitcoin has been its use as a secure decentralized payment system. The following video explains how this works:. The By removing the need for a trusted third-party, bitcoin makes it possible to send international payments without relying on banks e. HSBC , credit card companies e. Visa , or payment processing firms e. To understand how, we need to get a good grasp of the bitcoin technology. It is that time in the bitcoin crash course when we need to take a look at the basic features of bitcoin technology, and based on that outline potential applications beyond payments:.
We now begin to understand how bitcoin works under the hood, and how its features offer a distinctive take on the notions of trust and ownership , with potentially far-reaching implications. Bitcoin essentially relies on five interrelated technological building blocks:.
Miners group transactions into blocks added to the blockchain. It will still shed additional light on how bitcoin really works, so try to watch it till the end! So far, this bitcoin crash course has shed light on two crucial aspects of bitcoin. First, bitcoin is a network of computers that relies on cryptography, a peer-to-peer protocol, and a scripting language to maintain a shared, transparent, permissionless, append-only, decentralized ledger of transactions.
Second, bitcoin allows for transacting digital assets possibly tied to real-world assets without trusted third-parties. Not every feature of bitcoin represents an innovation though.
Cryptography, peer-to-peer networking, or digital signatures existed long before bitcoin. Bitcoin offers a practical solution to this theoretical problem.
Click on the image to download the full paper establishing the Fischer-Lynch-Paterson impossibility theorem. To bypass this theoretical problem, bitcoin does two things. These are the costs of achieving distributed consensus in a network with no central authority, and wherein some users are dishonest.
Put differently, since bitcoin works without having to trust every user in the network, bitcoin is said to enable trustless transactions. In fact, computer design is premised on the ability to easily copy and transfer digital files.
But things that can be copied without constraints are, by definition, not rare, and this affects their value—usually negatively. One of the primary reasons why bitcoin has value is because it is scarce, and that scarcity is protected by design. Besides, the bitcoin blockchain enables tracking who owns what at any point in time.
The music industry lost billions in revenues when music files became easily replicable in the digital world that is, when they ceased to be scarce. Imagine what a technology like bitcoin could have changed in this context! Bitcoin is not a corporation. It does not have shareholders, managers, or even employees. The bitcoin ecosystem is best described as a community. Bitcoin users are individuals who use bitcoin to make payments or simply hold bitcoin as a speculative store of value , hoping to make a profit.
There are many discussions about whether speculators are a good or bad thing for the community as a whole, but they are beyond the scope of this bitcoin crash course. Eight years down the road, we have seen ups and downs in the journey of bitcoin adoption. The general trend appears to be optimistic, considering the time it takes for a revolutionary technology relying on network effects to reach the critical mass for everyday adoption.
This is to say, the general public will have to feel comfortable using bitcoin for daily transactions like how we use cash issued by the central banks today. Governments have been investigating different possibilities, and overall, more and more governments are taking a positive stance on bitcoin e. As with any cutting-edge innovations, it takes the flexibility for emerging use cases to take shape and be clearly seen. Interestingly, the video also shows that, while it is possible to use bitcoin without involving any third party, in practice, many users do rely on third-party service providers to buy, sell, store, or exchange bitcoin.
Bitcoin has created an industry encompassing subsectors such as wallet provides, exchanges, payments and mining. An important source of funding has been from the venture capital firms.
Since , many have noticed that the bulk of VC investment has shifted from pure-play bitcoin startups to blockchain technology startups—that is, startups not necessarily relying on the bitcoin currency, but instead on potential applications of the underlying blockchain technology. There are many different types of third-party providers in the ecosystem.
They are typically private, for-profit firms funded by VCs. Cryptocurrencies such as Ethereum which focuses on the ability to support smart contracts, and Monero which features better privacy provide novel solutions to address the old intermediary problems.
Bitcoin mining is a computing power intensive process that is more effectively performed by specialist equipment. In addition, miners pool their computing power together to increase the probabilities of winning the rewards. Mining companies thus were established to fulfill these two categories of demand: Cloud mining has also emerged as another option, whereby anyone can pay for the service provider to mine and earn rewards. There are two general concerns the community has about mining pools.
Today, most bitcoin are mined in China check this for more on how a mining facility looks like. The most recent halving event took place in July , by which the reward went down from 25 to The problem is, mining is costly in hardware, electricity, and rent and thus only profitable when the bitcoin price is high enough to cover these costs. This is the operational risk miners will have to take. What do they do exactly and how can one join the team?
Listen to a core developer talk about his job:. Now, you may be wondering… How many core developers are there?
Less than fifty developers in the world are in charge of major developments. Disagreements can emerge in the bitcoin community. The most imminent one is the scalability issue. As the bitcoin transaction volume increases, the 1MB block size limit has created a bottleneck for the bitcoin payment processing speed.
Over the past two years, the bitcoin community has had heated debates on how to scale the bitcoin network going forward In July , the bitcoin scalability debate settled on the SegWit2x proposal, which increase the block size to 2 MB by separating signature data from bitcoin transactions and by creating a second layer of solutions.
Merchants have several incentives to start accepting bitcoin. First, the bitcoin user demographics are quite attractive —they tend to be tech-savvy people in the higher income brackets. Second, settling bitcoin payments at the point of sale is mobile-friendly, transaction fees are between 1 and 2. Third, settlement takes seconds including internationally when using the services of a bitcoin payment processor, which is faster than credit card payments.
As long as bitcoin payments remain private, no specific regulation applies in most countries. However, tax offices have provided guidelines on how to declare capital gains realized in bitcoin. But as soon as third-party businesses are involved which is most of the time , bitcoin is actually heavily regulated and a number of enforcement agencies are involved. Some would argue that bitcoin regulation in the U. National regulators have been experimenting in their approach to bitcoin.
In , Japan further approved the acceptance of bitcoin in retail as a legal currency, and eliminated consumption tax on bitcoin transactions. The Japanese government is officially supporting the use bitcoin as a payment. Due to these policy changes, trading is expected to soar even further from the current status. Overall, regulators are showing more flexibilities in this regard. Bitcoin regulation in selected jurisdictions. Bitcoin has started strong from the beginning of A few milestones for bitcoin have been reached so far.
For instance, bitcoin is now larger than quite a few fiat currencies in market cap e. Bitcoin has also grown significantly in investor as cryptocurrencies gain wider awareness and acceptance. We have also seen lowered volatility in bitcoin price in early