Everything You Need to Know About Bitcoin in 11 Questions

Originally published on FourWeekMBA.com

What is a Bitcoin?

According to dbpedia.org:

Bitcoin is a decentralized digital currency based on an open-source, peer-to-peer internet protocol. It was introduced by a pseudonymous developer named Satoshi Nakamoto in 2009. Bitcoins can be exchanged through a computer or smartphone locally or internationally without an intermediate financial institution. In trade, one bitcoin is subdivided into 100 million smaller units called satoshis, defined by eight decimal points.

No doubt Bitcoin has been the thing of 2017. Many call it the second most important technological advancement of the last century after the internet. Many others instead, label it as the next Tulip Bubble, ready to bust anytime soon.

Whether or not Bitcoin will take over the financial world we don’t know. However, Bitcoin made one thing clear; there is an alternative to the traditional financial system we’ve been used to. Besides, Bitcoin raises another critical point. What the heck is money? For centuries we’ve believed that money is something that has a real value. In short, based on the old assumption, money, like gold is worth something besides the value we attribute to them. However, this assumption might turn out to be wrong. In other words, money might be just an accounting method. That is the fascinating thesis of the book, Debt: The First 5,000 Years, which I suggest you read if you want to understand what Bitcoin stands for deeply: 

In this post, I will show you a few questions you might have had ever since you heard about Bitcoin but you never found the time to get them answered.

Who is Satoshi Nakamoto?

Back in 2008 when Satoshi Nakamoto sent the first email to Hal Finney, his identity was private. He was trying to explain how to get Bitcoin up and running. That is the first email ever between Satoshi Nakatomo and Bitcoin first user, Hal Finney:

Normally I would keep the symbols in, but they increased the size of the EXE from 6.5MB to 50MB so I just couldn’t justify not stripping them. I guess I made the wrong decision, at least for this early version. I’m kind of surprised there was a crash, I’ve tested heavily and haven’t had an outright exception for a while. Come to think of it, there isn’t even an exception print at the end of debug.log. I’ve been testing on XP SP2, maybe SP3 is something.

I’ve attached bitcoin.exe with symbols. (gcc symbols for gdb, if you’re using MSVC I can send you an MSVC build with symbols)

Thanks for your help!

The communication among the people part of the Bitcoin community was private, and many of them didn’t meet in person for a few years. Yet none ever met Satoshi Nakamoto. In fact, on April 23rd, 2011, he left anyone baffled with this short and concise message:

I’ve moved on to other things. It’s in good hands with Gavin and everyone.

None heard from him anymore. Until…

In January 2018, thesun.co.uk spread the news that Satoshi Nakamoto is the real name of a Japanese man living in Temple City, California. Of course, that is speculation, and none knows whether he is the same person or it was just a pseudonym used by Bitcoin’s creator.

Did you know Satoshi Nakamoto was nominated for the Nobel Price in economics in 2015?

That’s right; Satoshi Nakamoto might be the first fictional character to go close to win the Nobel Memorial Prize in Economic Sciences. 

The Prize was proposed by Bhagwan Chowdhry as explained in this tweet:

Bitcoin is decentralized, what does it all mean?

That means that none controls, neither guarantees for the system. In a traditional financial order, a central authority, like a bank or a government are necessary to make the system work. Instead, with the Bitcoin, the central authority isn’t needed, because the whole system relies on a technology called Blockchain.

In short, that is a distributed ledger made of millions of computers, each of which plays a role in ensuring that the ledger’s transactions are approved in block (that is why Block-chain). In fact, for each block of operations, a lottery gets to run among a set of machines that have to solve for math problems to approve those transactions. Once the computers in the chain approve the transactions, the block gets recorded in the Blockchain forever. To pass a block of transactions the majority principles applies. If 50% + 1 of computers approve a transaction, while the remaining do not, the majority wins.

What is the Blockchain foundation? That is a function, called SHA256.

What is SHA256?

SHA256 is a particular type of algorithm, a Cryptographic Hash Algorithm. In short, you input value and the algorithm spits out a 256-bit code, which can’t be reversed. Therefore, you cannot get the initial input. In this way, none knows whom this code belongs to. That is how privacy is insured.

For instance, let’s say I input into SHA256 “Gennaro” and I get back the following code:

5b77b0b0984e51447faac5ab0dd46491501d73a8e985d12f2a7159ef3bddd854

Thi code cannot be decrypted back to find out my name. In short, it works only in one-way!

Is Bitcoin really redistributing wealth?

As anything that starts with a visionary attempt to change the world might become just another way to create a cluster of wealth, that might be true for Bitcoin as well. It is true that a few new millionaires came up from Bitcoin. However, of the current, almost two hundred billion dollars market cap of Bitcoin, 40% of that wealth is in the hands of 1000 people.

As reported on Bloomberg:

About 40 percent of bitcoin is held by perhaps 1,000 users; at current prices, each may want to sell about half of his or her holdings, says Aaron Brown, former managing director and head of financial markets research at AQR Capital Management. (Brown is a contributor to the Bloomberg Prophets online column.) What’s more, the whales can coordinate their moves or preview them to a select few. Many of the large owners have known one another for years and stuck by bitcoin through the early days when it was derided, and they can potentially band together to tank or prop up the market.

Therefore, rather than creating distributed wealth for millions of people, the Bitcoin so far has created a new financial elite.

What is the Market Cap of Bitcoin?

As of today (January 20th, 2018), the Market Cap for Bitcoin is two hundred billion dollars. The price of Bitcoin is quite volatile. Just in the last few months, it swung back and forth. That is why the Market Cap can change quite fast as well.

How much can a Bitcoin be Worth?

Wences Casares, CEO of bitcoin wallet Xapo and member of PayPal’s board of directors, was one of the first Silicon Valley investors to believe in the potential of Bitcoin. As reported by the book, Digital Gold, Bitcoin could be worth as much as a half million dollars. This computation was based on a simple assumption. Given all the value of gold in the world at around 7 trillion dollars. Bitcoin, like gold, needs to be mined. In fact, to create new Bitcoins, computers dedicated to mining, must solve for complex math calculations. The more the mining gets closer to the limit of Bitcoin that can be mined (set at 21 million), the more it gets hard to mine new Bitcoins.

What is going to happen next? In theory, the limit should be kept to guarantee Bitcoin value stays stable. In practice, that limit might be changed as well. Like money back in the 1960s was supposed to be tied to the reserve of gold. On August 15, 1971, President Nixon announced the end of the so-called Gold Standard. The US currency, the dollar, was finally free to be printed, without the need to have a correspondent reserve of gold. The Federal Reserve together with the US government became the guarantors of the system.

Could the same happen to Bitcoin?  

Who controls the mining of Bitcoins?

Mining requires complex math calculations that can only be handled by machines. The more the mining gets closer to the limit of 21 million Bitcoins available on the market the more it gets hard for those devices to mine new Bitcoins. What that means is that those machines now need to be more and more efficient in solving calculations. It also means that they need way more electricity to be run properly.

Not that surprisingly China controls the mining of Bitcoins. In fact, as reported by Quartz, one of the largest Bitcoin mining facilities is in Mongolia. The electricity bill can be as high as $39,000 on a given day. And those facilities compete for a piece of the pie that according to Quartz is about 7 million dollar on any given day!

How long it takes before a new block of Bitcoins is solved?

There is a time limit for each block of coins to be solved, that is ten minutes. Why?

As reported on a bitcoin.stackexchange.com discussion:

Ten minutes was specifically chosen by Satoshi as a tradeoff between first confirmation time and the amount of work wasted due to chain splits. After a block is mined, it takes time for other miners to find out about it, and until then they are actually competing against the new block instead of adding to it. If someone mines another new block based on the old block chain, the network can only accept one of the two, and all the work that went into the other block gets wasted. For example, if it takes miners 1 minute on average to learn about new blocks, and new blocks come every 10 minutes, then the overall network is wasting about 10% of its work. Lengthening the time between blocks reduces this waste.

As a thought experiment, what if the Bitcoin network grew to include Mars? From the farthest points in their orbits, it takes about 20 minutes for a signal to travel from Earth to Mars. With only 10 minutes between new blocks, miners on Mars would always be 2 blocks behind the miners on Earth. It would be almost impossible for them to contribute to the block chain. If we wanted collaborate with those kinds of delays, we would need at least a few hours between new blocks.

In short, to make the Blockchain efficient, ten minutes seemed to be the right timing to allow all the machines in a blockchain align without wasting too much work.

Can you live On Bitcoin for a week?

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