Bitcoin is a form of electronic money (this is only a visual representation).
Although we are all used to the idea of digital currency – using and receiving money that is not physically in front of us – cryptocurrencies, such as Bitcoin, remain a mystery. bitcoin mining? How can we use the money in the future? And can we rely on cryptocurrencies at all? In this quiz we ask Dr. William John Knottenbelt, Director of the Imperial Colleges Center for Cryptocurrency Research and Engineering, for helping us better understand this type of mysterious currency.
Bitcoin is a form of electronic money. That means he has no physical shape. Instead, e-money devices are exchanged over a computer network that has some unique features: There is no central control point (there are no “banks”).
There is no central transaction warehouse (a central database that contains a record of all executed transactions).
Instead, it operates on a global network with thousands and thousands of nodes – a machine in a network such as a computer or other device – that processes and stores transactions together.
With thousands of nodes, it is difficult to have a common record of all transactions, but a technology called blockchain makes this possible. Blockchain is a common record of transactions. It prevents anyone from “double-consuming” bitcoins and makes it extremely difficult to change historical transactions. It is very difficult, if not impossible, to stop it or disturb it.
Note: A machine that participates in the global network by running bitcoin software.
Blockchain: A database of financial transactions that is constantly growing as new transactions or “blocks” are added to it, forming a continuous and public chain of data.
Cryptocurrency: Digital and decentralized currency that uses cryptography for security.
Cryptography: The science of encoding and decoding messages and data securely. For example, by encryption.
2. Where does it come from?
Bitcoin was first published as an idea in an electronic mailing list for computer scientists studying secure communications (or cryptographers) in 2008.
The author goes by the mysterious pseudonym Satoshi Nakamoto, but no person (or group of people) has so far been finally identified as Satoshi.
3. Is it still used and where can it be used?
Bitcoin is still in use and is traded very actively on cryptocurrency exchanges, which allow users to exchange “regular” money such as pounds for bitcoin.
To use bitcoins, the first step is to create a wallet (which can be online, a mobile application or, for added security, a hardware device). This protects the secrets used to allow the movement of bitcoins under your control.
Your wallet will control multiple “addresses” which, like bank account numbers, can be used to receive bitcoins. It will also check the secret password needed to authenticate the sending of bitcoins (technically known as the private key). If you lose your private key or it gets stolen, you actually lose control of your bitcoins, just as someone discovers your PIN.
4. Why would anyone want bitcoins instead of “normal” money?
The “normal” silver we use today is actually quite unusual in the history of silver, in the sense that it in itself is no longer valuable (like gold coins).
If you read the promise on a £ 10 note, it says (in very small print):
“I promise to pay the bearer, upon request, the sum of ten pounds.”
(Next time you find a ten pound note in old jeans, take a look).
It is not too big a promise if you think that all the guarantee authority (like the Bank of England) has to do is print another piece of paper to fulfill that promise.
When money is created, they erode the value of existing money in circulation. People do not necessarily notice this erosion because the nominal amount of their money remains the same; however, they note that their weekly groceries, restaurant meals and movies cost more and more money.
Bitcoin is different.
The supply of bitcoins is carefully controlled and limited, and no one can create or issue multiple bitcoins at will. There will never be more than 21 million bitcoins, and each bitcoin is in itself divisible into 100 million units called satoshis. This helps prevent the kind of value erosion that affects “normal” currency (a phenomenon that people in Zimbabwe and Venezuela know all too well).
5. Can bitcoin make you a millionaire?
Bitcoin is a high-risk, speculative and volatile asset. Like many high-risk investments, it goes through boom and bust cycles, and depending on when you buy it (or acquire it), it can make you a millionaire or ruin you.
In its early days, bitcoin traded at $ 1 per share. bitcoin; it peaked at around $ 20,000 in 2017 before falling to around $ 3,000 and then stabilizing at around $ 8,000.
Like a stock or a house, bitcoins are worth no more or less than what other people are willing to pay for them.
6. What is bitcoin mining?
Bitcoin mining is the process of adding new groups of transactions (called blocks) to the shared transaction record (called blockchain).
A major global competition is constantly taking place – called the mining race – to win the right to add a new block to the blockchain.
To enter this competition, users must purchase specialized mining hardware that consumes a lot of electricity; the hardware itself is likely to become obsolete quickly due to the constant invention of more efficient hardware – so it’s not a profitable business for most people.
People who engage in this activity are called bitcoin miners. They participate in this competition for two types of rewards:
- the block reward (currently 12.5 BTC) issued to the publisher of each block
- transaction fees – fractions of bitcoins that encourage miners to include transactions in published blocks.
To make matters worse (from the miner’s perspective), the “difficulty” of competition increases as the number of miners involved increases, to avoid issuing new bitcoins too quickly. The block reward is also halved every four years, making them much more expensive to produce.
7. Can you trust cryptocurrencies?
As in any rapidly evolving space where new technologies are spreading, there are high-quality, low-quality cryptocurrencies.
Faced with often shrewd marketing operations, many ordinary people have a hard time distinguishing between cryptocurrencies that have real potential and show real points of technical novelty, from those that are just clones of other currencies or even worse, real scams.
Sometimes schemes like One Coin pretended to be cryptocurrencies, but then it turned out to be nothing more than well-organized pyramid scams, backed by a centralized database.
8. Could cryptocurrencies become more popular than physical currency in the future?
It is theoretically possible, but it will probably take many years and many technical, economic, regulatory and legal problems before it becomes a reality.
For example, the Bitcoin blockchain can currently support far fewer transactions than traditional centralized payment networks such as Visa or Mastercard.
One category of cryptocurrencies that is proving to be very popular and perhaps more likely to become more popular than physical currency is “stable currencies”, i.e. cryptocurrencies whose value is linked to “normal” currencies such as the US dollar, euro and pound, so unlike bitcoin, a unit may not be worth £ 26,000 a year and £ 6,000 two years later.