Bitcoin: the internet’s enigmatic alternative to conventional currencies

More and more articles are written every day about the risks of Bitcoin and the imminent crash of the obvious bubble, but people are still buying in by the billions, as other individuals cash out for hundreds of millions. Is it too late, or is Bitcoin just getting started? A good understanding of what cryptocurrencies are can inform and empower anyone to choose for themselves whether or not to get involved, whether it’s too late, or if it’s just not going to last.

Only a couple of weeks ago, I read an article online that was explaining how the recent rise in value of a single Bitcoin up to $10,000 lacked substance, and a pullback was inevitable. A pullback involves the price of a stock or currency decreasing from a peak, signalling a pause in upward momentum. This happens as a huge surge in new buyers of Bitcoin artificially inflates its value, and instead only represents a surge in popularity, and not necessarily an increase in the coins intended usage. The article concluded that a pullback to well below the $10k mark was inevitable, and a rise of another thousand up to $11k was very unlikely.

After I closed the article, I checked on the price to see which way it had shifted after hitting the long awaited $10k mark, only to see that it was already sailing past $11,500, just a couple of hours after the article was published. In the days since then, the ups and very few downs of Bitcoin have been a rollercoaster ride that’s brought thousands of new cryptocurrency pioneers, interested technology fans, hopeful investors and even a few optimistic technophobes into the fold. The price has soared to $20,000 per Bitcoin, dipped back down to $15k and risen again. The volatility increases as the price continues its explosive upward overall trend.

You’ve probably heard a lot of different ideas about Bitcoin, cryptocurrencies, or blockchain by now and if you’re like most, you likely have no idea what the big deal is, or why it’s suddenly worth so much?

Who runs Bitcoin?

One of the most important differentiating factors regarding cryptocurrencies is decentralisation, meaning that there is no central authority issuing and controlling supply. The code behind Bitcoin is available in full on Github and is contributed to by over 480 different people, and anyone can go and make a change (which may not get approved by the community) that will end up in the main code used by everyone trading in Bitcoin worldwide. The technological direction and what updates are introduced is driven completely by the wide community of developers, miners, users, traders and investors. In time, other factors may begin to have some influence on Bitcoin. Factors such as government policies, technological advancements or the even the mass adoption of the currency by users could alter the requirements and direction significantly as obstacles are introduced. But one of the defining principles remains the decentralisation of control and non-reliance upon national and private banking institutions. There is no need to trust in a bank or another individual where cryptocurrencies are concerned. With a basic understanding of how to use Bitcoin, the cold, mathematical, rule-based structure that governs the system completely removes any requirement to trust people.

The original creator

There is of course an original creator of Bitcoin technology; Satoshi Nakamoto. Satoshi’s identity, or possibly the group identifying as the individual has never been revealed publicly, and only speculation exists. These range from old forum profiles suggesting a Japanese man in his 40’s, to someone of British origin (due to some of the colloquialisms in his initial code comments), to a North American, based on analysis of the times of day that that code was most frequently committed. The smallest possible denomination of Bitcoin is 0.00000001 (a one millionth) was named a Satoshi in honour of the technologies founder.

The original whitepaper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ was published in October of 2008 with the first Bitcoin software being released the following January. The following year, Nakamoto handed control over the Bitcoin sites, core code all responsibility over to the community of developers who had been contributing up to that point, and ceased all involvement. Nakamoto’s own initial Bitcoin addresses show him as owning roughly one million coins, all unspent so far, totalling over fifteen billion dollars in today’s market and making him (presuming it is one person) among the top 100 richest people in the world and well on track to become the worlds first trillionaire.

What actually is a Bitcoin?

A cryptocurrency like a Bitcoin does not actually exist anywhere in any form, physically or even electronically. There is no single item or piece of code that directly denotes the presence of a Bitcoin, there is only a list of locations (addresses) and amounts. If you own a Bitcoin, then all that means is that at the time which you came to own it, an entry was added to the blockchain that said, “send a value of 1 Bitcoin to this address”. Your ownership of your coins is not reliant upon your name, your date of birth or even your ID, but by your ability to access the private contents of a unique Bitcoin address.

Wallets and addresses

To begin sending or receiving cryptocurrencies, a digital wallet is required. A wallet will hold and create address, which are strings of between 26 and 36 alphanumeric characters. Each new address is completely unique and is the identifier recorded in the blockchain that determines the location of all coins in existence. Even when coins are newly created, there will still be an address to which they are immediately assigned, usually owned by the person doing the mining on their computer. When a new address is generated within a wallet, private and public keys are created. The public key is used to generate the actual characters of the address using a hashing algorithm. The public address will allow other people to find and send coins to that address, not unlike bank account information that would be given out for others to transfer money to. The difference is that anyone can look up a public address and determine the amount of Bitcoin at that address, as the complete history of all transactions is in the blockchain and visible to anyone. Addresses are randomly generated, but the amount of possible different addresses renders the likelihood of a duplicate address almost statistically impossible.

There are 1461501637330902918203684832716283019655932542976 possible different Bitcoin addresses.

Because of the way wallets work, it is possible to purchase hardware wallets, which are similar to USB drives with specific security code and protection measures in place. This adds a security risk by moving access to Bitcoin to a physical device, but reduces the risk of using an exchange that can be hacked or a computer that can break down.

Transaction signing and verification

The private key of each address, which is stored in the wallet data file, is used to digitally sign any requests made to transfer coins. Any computer within the network running the right code can receive a request that has been digitally signed by a private key and use the public address to verify that the transaction is legitimate. Complex mathematical algorithms (specifically the elliptic curve digital signature algorithm) are used to digitally sign transactions, making forgery virtually impossible. Digital signatures act as a way to verify that transactions coming from a public address were signed by a private key, without actually having to see the private key.

When an amount of Bitcoin is sent from one person to another (one address to another), the wallet used to initially send the transaction will validate the request. Validation involves the request passing all of the basic rules, such as correct formatting and available balance. Available balance at an address is found only by looking at entries into the blockchain that record coins arriving at or leaving that address. Records of coins arriving at an address is known as the inputs and records of coins leaving are known as outputs. The total history of inputs and outputs dictate an effective balance, not unlike a conventional bank account.

Because every node on the network has a complete independently verifiable record of all transactions, before confirming that an amount of Bitcoin can be sent from an address, all transactions of coin into that address can be checked to ensure that they have not been sent elsewhere previously. Every single computer on the network that this transaction passes through carries out its own, completely independent verification checks in this manner. However, checking through over 20 million previous transactions (to date) can be very time consuming, so there is also a special index of input transactions that have not been used as outputs in other transactions, and are therefore still currently at a particular address.

Once the transaction has been verified, it is signed with the wallets private key and broadcasted by the sender to all the local nodes, which perform their own validation checks. If the validation checks are not passed, then that node will drop the transaction, and it will not propagate further through the network. If the checks are passed, the node will pass the transaction around to other nodes it is connected to for them to validate too. In this way, non-valid transactions are very quickly rooted out and do not spread very far within the network.

Node corruption

If one node is corrupted, running out of date code or set up to act maliciously, then there would still be sufficient enough other legitimate nodes to effectively ignore its output and continue the transactions propagation around the network. If a lot of nodes produce an inconsistent or corrupted transaction, then that transaction will quickly be abandoned as it will not propagate through the network and will not be permanently committed to the blockchain. This is the real power of a completely distributed network.

Solving hashes and confirming blocks

Solving the mathematical problem is not a case of figuring something out and performing calculations, it is more a case of random dice rolling, trying to slowly and somewhat randomly find a valid solution. It’s relatively easy to create a SHA256 encrypted string, so how is this related to solving blocks in Bitcoin mining? Well, there are extra requirements to make things more difficult. The mining machine takes the text from the block and adds a random 4byte string of characters to the end before hashing it. This 4byte string of characters is known as a nonce (number used once). Changing a single character in the nonce, or any part of the text that is to be hashed will produce a completely different output string. At this point, the hashed output cannot be predicted due to the complexity of the SHA256 algorithm. If the resulting text starts with a certain number (x) of zeros, then it is considered solved and the nonce is known as a “golden nonce”. The chances of finding a golden nonce are extremely unlikely and completely unpredictable. This adds a degree of randomness and complexity.

The value of x is updated every 2016 blocks (roughly every two weeks) depending on how quickly blocks are being solved. The aim is to keep the time it takes for all mining nodes worldwide to find a solution at around ten minutes. If blocks are being solved faster than one every ten minutes, extra zeros (n) will be added to x (x+n), meaning that it’s even more unlikely that a random nonce will produce a SHA output containing that many zeros. If blocks are taking too long to be resolved, the number of zeros required at the beginning will be decreased (x–n). The defining feature of some other coins, specifically Litecoin is that the time to solve (tts) is kept at around 2.5 minutes, significantly increasing the speed at which transactions are processed. Although that sounds immediately advantageous, were Litecoin operating at the scale that Bitcoin is, a profusion of issues may arise around the network’s capacity to keep up with blockchain updates.

Once a block is solved, the mining node begins sending it around to connected nodes. Because hashing is a quick process to do once, all other nodes can quickly verify that the blocks text content along with the nonce on the end resolves via SHA256 to a value with a sufficient number of leading zeros. Nonces can never be re-used because the text that precedes the nonce is still a part of the text to be hashed, so is different for every block, meaning that a nonce will never work for multiple blocks. Solving blocks like this removes the problem of ordering that would arise from a transaction only history. Because only one block will be added at a time, no two transactions attempting to use the same available Bitcoin at an address will ever join the blockchain (unless there is sufficient coin there for both transactions).

If two blocks are solved at very similar times, and both begin propagating through the network, then nodes will remain divided in two until the next block is solved. The side that solves the next block first will have their chain become the accepted master by all others. The transactions from previously “solved” blocks on the losing side will return to the pool to be regrouped into blocks and re-solved. Although a valid transaction that is sent out into the network is pretty permeant and irreversible, it is not uncommon to wait the up to ten minutes for the next block to be solved so that the transaction can be confirmed. For much larger transactions, some services advise waiting around an hour for as many as 6 confirmations, as the older a transaction becomes, the more secure it is as far more blocks would have to be orphaned and rewritten.

Find X such that f(block+X) < t(cryptographic hash)

Incentives

The lucky computer or cluster of computers that come up with the solution first will earn themselves an amount of Bitcoin as a reward for being first. This is the incentive that people have to “mine” Bitcoin and spend money to run mining nodes. The actual “mining” is just the possible reward available. Part of the reason that this works is the fact that it is so unlikely that a computer will resolve a block, that all computers in the world that are attempting to will only solve one every ten minutes or so. Statistically, it would take an individual home computer years of constant running to have a reasonable chance of being the first to make a resolution.

To incentivise individuals to contribute to some degree, miners pool their resources into groups that are all working together to check as many nonces as possible. If the pool solves a block, the reward is distributed to all those in the pool based upon how much they each contributed (how many nonces each computer tried). So someone running one computer would expect to receive half as much in reward as someone running two of the same computers, in the same mining pool, if that pool solved a block.

The Bitcoin block mining reward halves every 210,000 blocks. This is to maintain a controlled supply as the limited supply of Bitcoin becomes more and more mined. There are 132,574 out of the 210,00 blocks left currently until the reward halves again from 12.5 to 6.25 coins, which is expected to happen in June 2020. There will only ever be 21 million Bitcoin, with just over 16.7 million (79.61%) mined and in circulation currently. As well as the rewards for solving a block, or being part of a pool that solves a block, Bitcoin transactions can include optional small fees that are paid to miners when blocks containing those transactions are solved by that miner/mining pool. This adds further incentive and means that incentive remains once all Bitcoin have been mined. The increase in worth has outpaced the decrease in reward amount over time, but when this slows, it is expected that small transaction fees will become more commonplace.

Time until the next coin reward drop from 12.5 to 6.25 BTC

Lost coins

Bitcoin is sometimes referred to as a deflationary currency, which can mean several things. A typical deflationary currency is so because the general price level is falling due to an increase in productivity. This is not exactly the case for Bitcoin, but it is similar in that the demand for Bitcoin is going up, giving effectively the same result. This is a deflationary pattern instead of an inflationary one because it is the value of goods with respect to the coin that are going down, not the value of the coins themselves, which continue to increase. The second definition of deflationary is regarding a shrinking supply in the currency. This is a long-term concern for some, as although currently far more coins are mined daily (over 1800 a day) than are lost (impossible to know), there will always be ways to lose coins forever, whereas the current plans dictate that Bitcoin can and will eventually be “mined out”. Coins can be lost when they are sent to incorrect, unowned addresses that will never realistically be recovered.

They can also be lost as people lose where they have address keys written down, be that on hard drives that suffer failures, documents that get deleted or one of a myriad of possible computer problems that prevent the recovery of address details. Investments also have the potential to contribute to a deflationary spiral that could theoretically eventually crash entire coin currencies because people over-invest and hold coins without using them, making the currency less and less practical for the intended use. All the while the currency’s value would be increasing up until a crashing point where all value is lost.

Smart contracts and solving

Some transactions that are confirmed and added to the blockchain require further conditions in order for users to be able to retrieve coins. While most transactions and can only be retrieved by the owner of a particular public key (the person receiving the coins), this is not limited to a single receiving user, and fully solving a transaction to retrieve the coins can be programmed to require multiple particular signatures to resolve and claim, or require certain conditions to be met. This can be useful for escrow arrangements. It is also possible to code specific conditions that must be met to solve the transaction and receive the coins within. This includes the possibility for no conditions at all, as was the case with the first ever Bitcoin transaction for 50 coins, which was available to be solved by anyone. Conditions like this are a prime example of a great use-case for Blockchain technology, as definable, computable criteria must be met in order for funds to be released. This is a contact that can never cause legal issues, as once agreed upon, the releasing of funds is both completely automated within the system and absolutely unstoppable, as there is no central authority in the network to do so.

Creating smart contracts without advanced knowledge of doing so can be very risky, as the code must be flawless to avoid error. Sending Bitcoin to an address with even one incorrect character will result in it being irretrievably lost forever. Freedom from centralised banks has its advantages, but does not afford some of the user error comforts that some have grown to rely on. Bitcoin fully supports smart contracts, but another cryptocurrency was created with just this application in mind from the start. Ethereum is the cryptocurrency with the second largest market cap behind Bitcoin, and is incredibly popular due to its brilliant technical design.

Source: https://fortune.com/2017/11/25/lost-bitcoins/

The generations of blockchain

The development and application of blockchain technology has evolved since the initial 2008 Nakamoto paper that first outlined blockchain, Bitcoin and the potential for the technology. Like most forms of technology before it, from the internet, BlueRay, VHS and cassettes, to cars, planes and nuclear power, adoption can be slow and mired with doubt, especially in the instances where there are many different applications of similar technology all competing. It takes one form of a technology to rise above the rest into mainstream adoption to truly secure its place as a piece of mainstream staple technology. Within blockchain, while Bitcoin undoubtedly currently rules omnipotently from on high, it is not widely adopted, nor do the majority of the adoptees use it for its intended currency purpose. It is difficult to fully back one choice in a field that has so many evolving solutions and platforms from one year to another. With time, an application of blockchain that solves real problems, is easily accessible to the public and provides a necessary level of stability will emerge or evolve. This could be today, tomorrow, in two years or in ten.

The first generation

The original intended application of blockchain was as a replacement currency that would replace conventional currencies with a decentralised, incomparable store of wealth system. The decentralisation aspect allows different parties to be able to send money to one another across the world without intervention from or reliance upon any third party, such as a bank or a payment provider. The many applications of Bitcoin, its anonymity and its guaranteed scarcity gives it its value and its uniqueness, however cryptocurrency as an application of blockchain is now known as an example of only the first generation the technology.

The second generation

The success of blockchain as cryptocurrencies implored those were keen to explore further applications of the technology to do so. The next application that gained significant popularity through its useful application cases was the administration of property and assets. Ethereum is the best example of an application of asset management, providing a platform for any users to use blockchain as a way to build further secure systems for asset management. Ethereum and other second generation blockchain technologies empowered users to issue shares using blockchain, create their own token based asset ownership systems, assign voting rights to owners of shares and create smart contracts that must satisfy certain conditions in order for funds to be released.

The possible applications of second generation blockchain technologies far exceed the first, due to how a system like the Ethereum virtual machine is Turing complete. The term Turing complete is used to describe technologies or languages in which any reasonable logic based can be programmed and states can be stored. This is what enables users to create all the conditional logic based application management, sharing and voting applications using the Ethereum VM. This is not referring to the code that the Ethereum platform itself is built in, but how Ethereum can become the coding platform to build and code with. One of the other most possible utilisations would be to use second generation blockchain to modernise voting systems that have not changed drastically as technology has evolved in most democratic countries, due to the fear of hacking and abuse.

The third generation

The third generation of blockchain, which is the cutting edge at the moment, pertains to agreements being registered and enforced on the blockchain. Digital contracts built like this ensure that all participants keep to their side of the agreements, and that actions based on those agreements are actioned in a timely and correct order. The application of third generation technologies is another huge increase on the second generation, as it is on the first, changing more fundamental aspects of blockchain and building further on original ideas. Contracts within the third generation are not simply two users agreeing payments in exchange for services, but fully automated, machine to machine micro-payments. This involves a very futuristic sounding connection between all devices, both personal and public / private businesses, all linking with one another and making payments where necessary. This could range from your car knowing the cost of parking where you park it and relevant fees being paid automatically to paying in small amounts based on the amount of an activity participated in.

The machine economy

The machine economy, or machine to machine payments, is the most powerful modern utilisation of blockchain tech and is already creeping into some of the leading tech companies of today. This is particularly evident when looking at two different aspects of Amazon’s business, one hugely successful, one only beginning to emerge. Amazon Web Services (AWS) is a massively popular web server hosting platform that powers some of the biggest online technologies and websites in the world, including Unilever, General Electric and Netflix. AWS is popular because like Amazon’s e-commerce site, all solutions are offered under one umbrella, and Amazon keeps adding more and more. Typically, for a complex website, a great many different services would be pooled from different providers and services to create a complex site with all of the necessary functionality. However Amazon succeeded with AWS in no small part because they offered all, or an increasing number of these services in one place.

Another key aspect of AWS’ rise in popularity comes from the resource driven payment models. Since the dawn of the web, hosting your own server involved selecting from a set of tiered packages that offered a key set of features, space and memory. If your site grew too large, you had to upgrade to the next tier and if you overestimated your sites popularity, you were left overpaying for a server tier that you did not require. While AWS still has a tiered structure (although it has 20+ base tiers!), the exact costs within these tiers is subject to usage. This means that setting up a site on AWS offers several financial and technological efficiencies, not overspending when a site isn’t busy, but scaling up server resources and increasing spending only during peak times or seasons. This model, based on usage, scalability and all services united under one umbrella is central to the idea of the machine economy. It would be quite a technological and societal leap for all of the services that people use, be that online subscriptions, travel costs or online purchases to all be connected in this way and subject to pricing based on actual usage, with payments exiting and entering accounts regularly in micro-amounts.

The other example involving Amazon that involves somewhat less tried and tested technology was demonstrated in a promotional video in late 2016. This technology involved buying items in a typical grocery shop, without the need to queue, use a checkout or pay in any active way. The technologies used in this example shop are based on machine learning, computer vision algorithms and artificial intelligence. These combined allow sensors within the shop to track individual users and be aware of items that are picked up, put back, and taken out of the store. When items are taken out of the store, they are paid for automatically via the users Amazon account. At the moment this idea is centred around a single store, belonging to a single company, but it gives a good example of a possible application of the machine to machine economy in practice.

Future challenges and risks for crypto and Bitcoin

All cryptocurrencies have their unique advantages, and all have their challenges to overcome. Bitcoin being the first cryptocurrency platform has benefits and disadvantages. Plenty of similar cryptocurrencies have been created over the past few years that solve significant gaps in Bitcoins application of the blockchain technology, but each is not without its own shortcomings. The main disadvantage for Bitcoin is that it was the first, so is subject to a lot of scrutiny and competition from newer projects. However it does have the advantage of having by far the largest market cap, current worth and user adoption, meaning that there are a lot of developers working to push Bitcoin forward and improve upon its weak areas.

One of the main shortcomings of Bitcoin as it exists at the moment is the block size limit. The size of a block that is added to the chain can only be a maximum of 1 megabyte (1MB) in size at the moment. This limits the rate at which simple transactions can be made to the equivalent maximum of between 7 and 10 transactions a second, with any complex transactions or smart contracts taking up more space. Around 2000 transactions in total will fit inside a 1MB block, limiting Bitcoins current daily transaction cap to around 360,000 transactions a day. To scale that up to something like VISA’s average transaction rate of 2000 a second (millions a day), clearly some improvements still need to be made.

Source: Dan Gribben, https://www.dangribben.com

Legality

Bitcoins involvement in anonymous illegal activities has been a topic of discussion, especially in the early days when websites like the Silk Road were still running. The Silk Road operated as an online marketplace for illegal drug buying and selling, counterfeit items, weapons and even contract based criminal activities and used Bitcoin as a primary payment method, giving users the complete anonymity their purchases relied upon. However blockchain technology does not provide an infallible platform upon which criminals can flourish. The same traps, investigatory methods and police / FBI practices that take down criminals still allow people to slip up, get arrested and get punished. People are still human beyond their Bitcoin transactions. They still spend huge amounts of time online and sites on the web track every movement and site visited more and more every day. It was a typical mix of slip-ups, arrogance and ignorance that lead to the FBI arrest of the Silk Road founder Ross William Ulbricht in a public library on a Tuesday afternoon. Like the fight against online piracy, the fight against illegal commerce online is won by going after the business and services that run, instead of spending far more time and money attempting to track down and target individual users or by outright banning the associated technology platforms.

Governments

It would not be a stretch to say that recently there has been a surge in support for alternative political norms, most evidently with movements in the USA and in the UK. Some of the ideals behind these movements tie in quite closely with the core ideas behind Bitcoin and cryptocurrencies. The notion of an apodictic alternative currency is quite a libertarian concept that aligns quite well the popular apathetic stance concerning traditional, large-scale banking institutions. Cryptocurrencies begin to offer those who may hold a comparable opinion an avenue to discover possible alternatives to conventional financial structure. A designed, decentralised payment system that does not rely on any bank, government of governing body of any kid is an affront to these systems of power, who are already in some cases seeking to control and subvert them as best as possible. Not to don a tinfoil hat, but when banking experts and leaders (who make billions off of the system that is in place) condemn something like Bitcoin as a scam or a bubble, is it not in their own interest to do so? All of these ideas help to fuel Bitcoins rise in popularity and in price, as people are shown a practical and effective method to disrupt and to create change. Which make the rise of cryptocurrencies tantamount to some of the other largest, most successful grassroots campaigns in recent history.

There are precursor projects to decentralised blockchain technology that promote anonymity and attempt to take power back into the hands of a mass of users so large, that is effectively incorruptible by any one individual. The Tor project is possibly the best application of such an ethos in a technology. Governments, regulators and ISP’s increasingly go through great lengths to censor content and dictate what users should have access to online. Projects like Tor demonstrate that although governments have methods to enforce rules on existing technology, no monopoly can be kept on technology as long as there are those that are willing to build solutions. The Tor project is a web browser tunnel network that circumvents all ISP based restrictions and provides complete anonymity to anyone browsing online, requiring only a regular internet connection. Cryptocurrencies operate in the same vein, born of a Libertarian style dissatisfaction in current methods or levels of censorship and subject to the same misuses for illegal purposes. But like Tor, cryptocurrencies are not something that any government can ever have absolute power over, as via decentralisation, the power is very literally put in the hands of the people.

Technology

The tech behind all cryptocurrencies is still very new, and changing very frequently. Community driven development involves voting and discussions, sometimes even with unresolvable disagreements arising. When a clear change in protocol is required and made that effects block structure or parameters for accepted transactions / blocks, that is called a hardfork. When such a change is made, previously invalid blocks and transactions are made valid, which forces all users to upgrade. When differences in technical direction arise, sometimes development splits into another chain, and another coin that must have a slightly different name is created. Theoretically both coins can exist together and progress, but eventually one always appears as a winner, usually because it has a better solution to a common problem. The most recent fork of Bitcoin is a currency that is now known as BCash, or “Bitcoin Cash”. The key reason for this fork argued by proponents was the increase in a 1 megabyte block size to 8 megabytes, reducing or removing the backlog of transactions by allowing for more transactions to be confirmed per block.

While this seems like a simple solution, it is now widely viewed as a poorly thought out temporary fix that creates more problems than it solves. Eventually 8MB will not be sufficient, and another fork will be required, meaning more changes and more inconsistency. BCash also throws out some of the most recent agreed upon changes to Bitcoin that improve transaction size efficiency, which is an actual attempt at a long-term solution to the block size problem. With a greater block size, more computing power is required to run a mining machine. This prices out some of the smaller miners which begins to decentralise BCash and put the power and control in the hands of larger organisations who simply manipulate price for profit. There have already been several controversies and accusations concerning BCash regarding insider trading and orchestrated attempts by large China based groups to control the currency. The vast majority of the current mining nodes are on the same Chinese network, and the currency is somewhat controlled and influenced by an early Bitcoin investor called Roger Ver.

Hard forks

Although Bitcoin Cash is slowly dying out now, it does not mean that Bitcoin and other currencies will fork again, and more successful versions could actually emerge. This is not a huge risk for cryptocurrencies in general, as evolution and improvement is beneficial for everyone, but anyone looking at something like Bitcoin purely as an investment must be well informed about all of these factors. Arguably, other coins already pose more of a thread to Bitcoin than any fork. The technical brilliance of coins like Ethereum or Ripple have so much potential that is being realised as more and more applications are building up around them. Ether powers almost all ICO’s and blockchain related fund-raising applications in existence, making Ethereum a prime candidate to overtake Bitcoin should it falter in any serious manner. RippleNet is a huge network that connects banks, providers, users, exchanges and corporations that allows the sending of funds globally. The speed and scalability of Ripple make it incredibly powerful as it looks to make the world a smaller place and remove the archaic methods involved in sending money to those in other countries.

Adoption

“Bitcoin is a scam, a Ponzi scheme designed to cheat people out of money”. Most people know someone whom has voiced this opinion at some point. While everyone is able to have an opinion regarding the future and sensibility regarding Bitcoin and cryptocurrency, it remains factually and intellectually dishonest and either deceitful or ignorant to describe Bitcoin as a scam. Most people who do so simply do not understand the technology. Many people have witnessed real online financial scams, especially in the early days of the internet, so can be overly sceptical when something like Bitcoin rises in value as quickly as it has done. The other opinion that a lot of people are quick to offer is the idea that Bitcoin is currently in a “bubble”. A bubble in a financial sense refers to a situation in which the price of an asset far exceeds its fundamental value, with prices changing and forming based on mere speculation regarding value and profit. Bubbles involve adoption of a technology or service, slow price growth in the early phases followed by a boom which continues rapidly upwards up to a point where smart investors cash out, and everyone else begins to panic and attempt to abandon their investments as quickly as they can too. Definitely very comparable to Bitcoins history over the past few years.

“Bitcoin is in a bubble, and it has to burst soon”

Nevertheless, this is not a model for predicting bubbles, but more a retrospective of what happens when bubbles burst. There are far more examples of technologies following this process and the price stabilising or even reducing a little before stabilising without the characteristic and dramatic ‘pop’ of a bubble. Bitcoin is also slightly different from all previous examples of Bubbles, as it is itself a currency and not a commodity or service. Its rise has been driven by users and technologists, not just by speculating traders. To claim that Bitcoin is in a bubble and will burst is to guess. Until the measurable success or failure of adoption of something like Bitcoin by the mainstream public is possible, there is really no way to tell. The US bursting of the housing bubble of 2008 – 2009 caused the worlds twelve largest financial institutions to lose half of their value overnight, demonstrating how bubbles cannot be accurately predicted.

Bitcoin is still not comparable to other large, disruptive or typical financial services or commodities. It’s easy to see Bitcoins rapid growth, but to suggest that it has exceeded its real value (aka in a bubble) does not seem obvious when compared. Source: https://blog.evercoin.com

Mainstream user adoption is increasing from around 0.1%, with countries like Japan and South Korea leading the way, but it still very difficult for the majority of people to understand and appreciate. Most people will have one gripe or another regarding a bank, a banking caused financial crisis, government bailouts or positions when it comes to large financial institutions, but lack the ability, time or knowledge as to what they can really do about it. Who can get by without a bank account? Even if the increasingly untrusted banking monopolies were gone tomorrow, how would people get by? Changing perception around these things takes a lot of time and trust building on the side of users, small business owners and large international merchants. And it could easily be argued that no cryptocurrency has yet demonstrated itself to be worthy of having such an argument made for it.

Bitcoin is also unforgiving. There is no branch to visit or someone on the end of the phone (not to say that customer facing services will not develop around cryptocurrencies). If a cryptocurrency transfer is messed up by a user in some way, there’s no error message, retrieval of funds or bank to fall back on (yet), the mistake is the users to own. Freedom from banking institutions also comes with its degree of responsibility and difficulty. For a generation growing up online, the answers are there, but for a lot of people the trust in something they see as a scam or a bubble just doesn’t exist yet.

True success for Bitcoin involves far more people owning and spending coins, of which there is a limited supply. 21 million coins seems like a lot initially, but as mainstream adoption grows, scarcity and fear of missing out drive up demand and prices. While there are still some users who hold vast amounts of Bitcoin, the distribution of wealth is improving as more and more people become involved and purchase coins.

https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html

Hacking

From time to time there are dramatic news reports of how hackers have stolen millions in Bitcoin. Usually a Bitcoin exchange site where people can buy and store Bitcoin, or a mining pools site are the targets of these attacks. However, every time that this happens, it’s never actually anything to do with blockchain technology that has been “hacked”. It’s a website, a database or a user who was the victim of hacking, not unlike any website suffering data breaches. Almost every big website has been the victim of to some degree, and has to actively prevent against attacks on a daily basis. Some sites are useful for buying Bitcoin for conventional currency or taking advantage of other cryptocurrency related services, but as a general rule, cryptocurrencies like Bitcoin should not be kept in these exchanges for the long term.

Trusting a website to store private keys in a database that is accessible by a website will always leave those keys susceptible to anyone who manages to launch a successful attack. Storing currency in this way removes the decentralisation and security advantages that are inherent in the technology. Private keys should be kept on machines, written down or on one of several available hardware cryptocurrency wallets, such as the Ledger Nano S or the Trezor Wallet. These hardware wallets do have recovery methods inbuilt, but employ modern, high security measures to prevent unauthorised access and retrieval. The only other real security risk when it comes to cryptocurrency, or any new technology, is the potential for new users to be the victims of scams. Scam or social engineering based attacks are designed to either take money in exchange for either fake or wrong amounts of Bitcoin, or to scam new users into revealing private keys, allowing attackers to steal their coins.

The futures market

In the past and coming few days, numerous companies have begun allowing Bitcoin futures trading. A futures contract is a method traditionally used between two parties to add stability to a potentially volatile market or supply chain of goods. This is done with the help of a third party investor who has a contract with both the supplier and buyer. If the cost of producing a commodity goes up, increasing the price, the buyer will (as per the contract) continue to be able to buy the commodity from the supplier at the agreed upon price. The same is true should the cost of producing a commodity go down. In that situation, a buyer will continue to buy the commodity at the agreed upon price. Any discrepancies in the costs to the buyer or the seller resulting from external market or industry factors are offset by the investor.

This is translated into modern futures betting by trading contracts to buy and sell a commodity, stock or currency at a specific price and time in the future. Parties will issue, buy or sell futures contracts based on where they believe the price of the item will be at the end of the contract, and whether they can profit. A profit is made by owning a contract to buy a commodity at the end of the contract for a price below what it is currently worth, allowing the immediate sale to reward a profit. Futures contracts are issued by large exchanges or financial companies who have the capacity and expertise to set these up and distribute them. The value of futures contracts changes based on many factors that influence the apparent likelihood that contracts will be profitable or not. The initial value of a Bitcoin future, aka the expected price of a Bitcoin at the time that the futures contract expires (in this case March 2018) is the average of all those who bet on the price of a Bitcoin going down, and those who bet on the price going up. For those who think Bitcoin will exceed that value, ownership of a futures contract would be seen as profitable. However not unlike the price of Bitcoin or of a stock, the price of a contract can change, as confidence is gained or lost regarding whether Bitcoin will hit the initial specified price come the settlement date. This can lead to particularly dramatic increases or decreases in prices of futures as the contracts near completion.

The first few hours of futures trading

The two main companies offering Bitcoin futures are, unsurprisingly, the worlds largest and second largest futures groups; respectively the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME). Deregulated futures trading for Bitcoin has existed for a long time, but it takes exchanges like these to bring a level of trust that allows for institutional investors who have previously avoided cryptocurrencies to get involved. The offerings of the CBOE and CME differ in slight ways regarding the amount of coins that make up a contract (1 or 5), the tick value (which is the minimum change in price to constitute non negligible movement) and the circuit breaker conditions. Circuit breakers are automatic measures that cease trading for futures for the day if the price of the futures increases or decreases by more than a set percentage of the days starting value (usually around 20%). This adds a buffer to the wildly volatile highs and lows that are synonymous with cryptocurrencies.

Some of the other largest futures brokers like JPMorgan and Citigroup remain hesitant to begin offering Bitcoin futures options to customers yet, while Goldman Sachs is offering them to some customers under specific conditions. Either way, futures markets being offered by more and more respected exchanges is a big deal for cryptocurrencies as it opens the door to wider participation from other Wall Street firms. While initial futures launches tend to increase Bitcoin price, it is expected that a booming futures market will help to stabilise some of the volatility and reduce the high and low swings from being quite so wild. Criticism and hesitation from some is based around the idea that the Bitcoin market is too unstable and not yet mature enough to be properly and effectively traded as futures.

Short and long positions

Two essential terms when it comes to stocks or futures trading are long and short, which denote a position relative to a stock. A long position is any typical, traditional investment into a stock (or a cryptocurrency) based on the belief that the cost of that stock will increase, allowing for sale at a later date for higher than it was purchased for, and a profit. Not unlike an antique or piece of art that appreciates in value as time goes on. A short position is a little more complicated, but is based on the presumption that a stock will decrease in price over time. To short a stock, an investor borrows however many units they wish from a broker who owns the stock, and then proceeds to immediately sell it at the current value and keep the amount it sold for. Then, should the investor be correct and the price goes down, they re-purchase the amount of stock that they borrowed from their broker at the lower price and return it. The difference in the sale and purchase price nets the investor a profit, inversely to how a long position profits. If the investor is wrong, then they face paying an increased price for the stock that they owe back to the broker. There was some worry about big investors shorting Bitcoin as the futures markets opened, as sometimes a big enough short can actually impact prices and help to fulfil its own prediction, as others holding the same stock or currency get spooked by the confidence of others in the stocks impending doom and panic sell.