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Bitcoin: What is it and will it last?

Jaiden Amiri-Owens, Staff Writer

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As of February 1st, bitcoin has hit a low of 9,112 US dollars, after a long downwards plunge with no clear end in sight.  

Bitcoin has long been criticized for its volatility as a currency (meaning that the value changes rapidly and unexpectedly). Bitcoin started 2017 with a value of slightly under $1000 and skyrocketed, almost reaching $20,000 on December 17th, but around December 18th it began a downwards plunge that has continued to this day. It rose slightly in early January, but then continued to go down. Numerous other cryptocurrencies have also seen decreases in recent weeks.

Bitcoin is a decentralized cryptocurrency, which is essentially an online currency. Although it is comparable to, for example, a stock in a company when measuring the value and market, it is basically its own currency.

Bitcoin was originally designed by a person or group of people using the name Satoshi Nakamoto to allow transactions online with no central authority (which is why it is called decentralized), so that trust does not have to be placed in the central authority. The security is instead provided by mathematics. The idea, called the bitcoin protocol, was originally released in 2008 in a paper called “Bitcoin: A Peer-to-Peer Electronic Cash System.”

Bitcoin is not the only cryptocurrency in existence. Several others exist, such as Ethereum, Ripple, and Bitcoin Cash, made by a group that recently split off from Bitcoin.

How Bitcoin Functions

Each person has their own address, like an email address, except it is just a group of letters and numbers. Each address has a certain number of bitcoins associated with it, that can be traded with other addresses. Every transaction made is broadcast across the network, but it is not a valid transaction until it is put on a block. A “block” is essentially a ledger containing transactions on it.

Bitcoin uses a system called a blockchain, where each block has a specific number that is connected to the previous block’s number through a mathematical formula, forming a sort of “chain.”

This formula is hard to solve, so new blocks are created by people using computers that try to generate a valid number, which are used to create new blocks. These people are called miners, and this process is called bitcoin mining.

When a miner discovers a valid block, they get a reward in bitcoins (this reward started at 50 bitcoins, but it halves every 210,000 blocks. It is currently at 12.5 bitcoins). This bitcoin reward is the only way that new bitcoins are introduced into the network.

The miner who finds the block has the choice of what transactions to put on it, although this is done automatically. Each block can only have up to 1 megabyte (MB) of data for transactions on it (each transaction may take up different amounts of data, so the maximum number of transactions varies), but this limit is for the most part artificial.

In fact, some people think that blocks should be able to have more transactions on them, in order to solve some of the problems with unconfirmed transactions taking a long time to go through. However, if blocks are too large, they may slow down the network.

Often, people using bitcoin will include small payments called transaction fees that are given to miners if the miner includes their transaction on the block.

The total number of bitcoins ever to be produced is capped at 21,000,000, but miners may still make profit off of transaction fees once this number is hit. As of now, around 16,819,400 bitcoins are in circulation.

The main quality that gives this system security is that everyone in the network has the full copy of the blockchain and only trusts the longest blockchain available. Of course, this system isn’t impervious to attacks, but as long as over 50% of the miners are using the public, real blockchain, any kind of fake or incorrect chain would be disregarded by everyone else.

It’s also important to understand that one bitcoin isn’t the smallest amount that a transaction can be done with, and many transactions use tiny fractions of bitcoins. In fact, the smallest currency on the network is called a satoshi, named after the original designer(s) of Bitcoin. It is one billionth of a bitcoin.

Why Did Bitcoin Drop?

The reasons for the rapid drop of Bitcoin are largely unknown.

One potential reason is recent regulation on cryptocurrencies in South Korea and talks or regulation in other places, to try and control the effect that Bitcoin has on the general economy. This regulation has may have caused fear in investors, possibly causing them to try and rapidly sell their Bitcoins, therefore making the value drop.

However, this is only one part of the situation. For the most part, the reasons behind Bitcoin’s drop remain unknown. Some believe that Bitcoin has simply come to the end of its lifetime. Some economists predict it will fall to under $1000 this year.

In any case, people around the world are watching the value of Bitcoin closely for any further developments. Perhaps a new cryptocurrency will take Bitcoin’s place, or maybe Bitcoin will recover. Only time can tell.  

 

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Bitcoin: What is it and will it last?