This is the first post in the series where we will be going through the major cryptocurrencies one by one (in order of market cap) to examine the value proposition, structure, and future potential of each. Enjoy!
Because Bitcoin is such an important cryptocurrency, the profile will be broken into two parts. This first part with go over some of the basic history and design features of the cryptocurrency. Part two will dive more deeply into the market dynamics of Bitcoin and seek to explain forces such as where the demand for Bitcoin is coming from, and how it might be used in the future landscape of a cryptocurrencies.
Bitcoin (BTC) was founded in 2009 by Satoshi Nakamoto as a simple application of the so far only theoretical concept of the blockchain as a method of storing decentralized information in a secure way. The rumor goes that the first adopters of Bitcoin established the price by arbitrarily agreeing that one Bitcoin would be worth two Papa John’s pizzas. Since then, it has obviously developed into one of the largest and most important cryptocurrencies in the world.
There are a few key features that are important to understanding Bitcoin:
First, the validity of blocks, and therefore the transactions is ensured via the proof of work method, whereby miners must find valid hash sequences to verify the next block in the chain. The underlying code, written in C++ originally, is designed to allow for the validation of a new block every 10 minutes. The system is different from newer proof of stake designs, which you can read about here.
Second, Bitcoin was initially designed to be a transactional currency, but has had to overcome significant challenges associated with scaling to work towards rendering this a reality. One of the major issues was highlighted several months ago when the price of Bitcoin topped out at just over $20,000 per coin, and the cost per transaction soared well over $50 — not to mention the clearing time. Any framework claiming to be suitable for liquid transactions — as opposed to a store of value — must figure out a way to maintain low transaction fees and rapid verification times, which Bitcoin developers are currently doing via the application of SegWit, and the Lightning Network.
The other problem with Bitcoin becoming adopted as a liquid currency is the deflationary pressure caused by the underlying design. This isn’t necessarily an issue in 2018, but will become more of an issue as the total number of Bitcoin reaches its limit of 21,000,000 coins. Some say that the deflationary pressure poised to wreck Bitcoin’s chances of becoming a transactional currency will be mitigated by the fact that the coin can be divided into tiny fractions and thus won’t be as susceptible to the dynamics of a fixed-supply currency.
In my opinion, I’m not convinced. Bitcoin seems like a better store of value and “gold-standard” cryptocurrency than something that people will use on a daily basis as a means of transaction.
Fundamentally, Bitcoin was designed as an experimental application of blockchain technology; and while it was originally thought that Bitcoin would become a daily medium of digital exchange, the more likely outcome is that Bitcoin will assume a much different role.
To be discussed further in Part 2…