BITCOIN - THE FUTURE OF GLOBAL CURRENCY?

May 5, 2021
9 min read
Credits:moneycontrol

Terms like Cryptocurrency, Bitcoin, and Blockchain Technology are widely used daily and are quite intimidating in this digital era!

Since its inception, Bitcoin's success has skyrocketed, and more people are  investing in cryptocurrencies.

But have you ever wondered what cryptocurrency and Bitcoin are? And why so many people are obsessed with it, and what does the future hold for Bitcoin?

Then continue reading to quench your thirst for knowledge!

Cryptocurrency is a digital  currency that is decentralized, transparent, and encrypted using cryptography.

Cryptography is the method of encrypting the data or message in a manner that it can only be read by the user who has access to a unique key required for decrypting the message.

There are over 4000 cryptocurrencies globally.

Some of the popular ones are:
 Bitcoin
 Ethereum
 Binance Coin
 XRP
 Tether
 Dogecoin

Here are some of the reasons why cryptocurrency is so popular:

 It is a decentralized currency that means banks or central authorities neither issue it nor are any intermediaries involved in the transactions.
 Verification of transactions is made easy with the help of hashing algorithms – this also aids in creation of a secure network.
 The supply of few cryptocurrencies (ex: Bitcoin, Litecoin, DASH etc.) is limited,
making it rare and ensuring that its value remains stable for years to come.

What Is Bitcoin?

Bitcoin is the first cryptocurrency developed in the year 2008-09 by a person or group of persons under the name “Satoshi Nakamoto”. The person's true identity has remained unknown until now.

It is a decentralized and transparent digital currency that can be transferred from one individual to another through the peer-to-peer network without intermediaries such as banks or administrators.

Since there is no intermediary involved, the transactions are verified by network nodes using cryptography, and the transaction data is stored in a huge database utilizing a technology called the blockchain.

Bitcoin's circulation varies from that of traditional fiat currencies. Each block that is added to the blockchain network adds a total of 6.25 Bitcoins per circulation.
There are exactly 21 million Bitcoins in the world, with over 18 million of them already in use right now.

Blockchain - The Technology Behind Bitcoin

Credits:ipleaders

Blockchain is a huge database that is public (or private), secured, and decentralized. It is the same technology used by Bitcoin and other cryptocurrencies for storing the transaction details.

In a blockchain, a group of transaction details or ledgers are bundled into a block. These blocks are linked to the previous block using a virtual chain (technically linked list); hence the technology is termed blockchain.

Below are the four main components of a blockchain ecosystem:

 Peer-to-Peer Network
 Cryptography
 Consensus Algorithms
 Virtual Machines

Peer-to-Peer Network:
It is crucial to have a peer-to-peer network (also called a node application) consisting of different nodes or computers linked to each other so that information (ledger or TX message in case of bitcoin) can be shared remotely.

Credits: Wikipedia

Cryptography:
In order to preserve the confidentiality, authenticity, integrity, and non-repudiation of the data in the blockchain, cryptography is used.

Cryptography is the method of encrypting a message (in ciphertext) such that message can only be read by the authorized person with a unique key. This prevents any malicious activity in a blockchain ecosystem. As the network contains details of each transaction, it is crucial to protect the data.

Credits: YouTube

Consensus Algorithm:
Consensus algorithms are required for unanimously agreeing on when, how, and by whom will a new block be added into the blockchain.

There are various consensus algorithms. The most commonly used consensus mechanism is Proof-of-Work (PoW).

In a blockchain network that uses the PoW algorithm, if a miner wants to add a new block to the existing blockchain, he/she has to solve a complex mathematical puzzle that requires a lot of computational power. Once the puzzle is solved, a new block is added to the blockchain network, and the miner receives a block reward. Bitcoin uses the PoW mechanism.

Virtual Machines:
A virtual machine is a logical component of a node application that every user of the blockchain ecosystem runs.

The fundamental idea behind a virtual machine is to combine the hardware of a single computer (the CPU, memory, disk drives, network interface, etc.) and making it run on different computers irrespective of its operating systems (Windows, Linux, MacOS, etc.)

One such virtual machine is Ethereum Virtual Machine (EVM). EVM is a blockchain-based software platform that allows a developer to develop decentralized applications (dApps).

Ethereum Node framework contains an EVM that understands a variety of instructions and allows the smart contract to be managed. EVM also plays a critical role in ensuring blockchain security by preventing Denial of Service attacks, which are a growing problem in the crypto industry.

How Does Bitcoin’s Transactions Work?

There are three steps involved in bitcoin transactions:
 Signing
 Broadcasting
 Validation

Signing:
When a sender clicks the send button to send bitcoins, the wallet generates a transaction message (also called TX message). A TX message contains basic details of the sender, receiver, and the amount being sent. After generating the TX message, it generates a unique digital signature of the sender by mixing it with a private key (password for your bitcoins).
These digital signatures are unique for each transaction, ensuring the transaction's
security.

Broadcasting:
In this step, the TX message is sent to various devices (also called nodes) that hold a copy of the transaction details. These devices check if the transactions are legitimate and whether the user has enough funds in his account to complete the transaction. Once all nodes in the network verify the transactions, they are stored in Memory Pool (Mempool). Mempool stores the details of transactions that are verified but not yet completed.

Validation:
This is the stage where transactions get confirmed. Bitcoin mining is a crucial step for confirming the transactions. Miners group the TX messages residing in the Mempool into a single block of transaction.

Miners then compete to solve complex mathematical calculations (POW -consensus algorithm) to add a new block to the blockchain.
Computational power is required to solve complex mathematical equations. Once the miner wins the competition his/her block of transactions is added into the blockchain, thus changing the transaction status to confirmed/completed. According to a report, a new block is added to the network every 10 minutes.

Credits: medium


Pros and Cons of Using Bitcoin:

There has been an exponential rise in the popularity of Bitcoin among investors and tech-enthusiasts in recent times. However, there are mixed reactions related to the usage of bitcoin. Bitcoin has it’s shares of positives and negatives.

Let’s discuss some of them as you read along.

Pros:
 One of the major benefits of using bitcoin (or any other cryptocurrency) is that it is decentralized. It helps maintain the currency, monopoly free such that no central authority or organization can control the value and the flow, unlike the regular fiat currencies.

 It isn’t easy to decode the blockchain ledger, which ensures high security and privacy than any other electronic transaction. It has also been reported that the whole Bitcoin network has not been hacked since 2008-09.

 Bitcoin transactions charge very low transaction fees to the users. It is improbable for a bitcoin transaction to charge more than 1% as a transaction fee compared to other digital payments that charge around 1% to 2% on average.

 In this digital age, most users have access to mobile phones, laptops, and the internet, making Bitcoin transactions highly accessible.

 If a server goes down, standard payment methods like credit and debit cards can take several days to process, whereas bitcoin servers barely go down, providing hassle-free transactions.

Cons:
 It is observed that bitcoins are used for illegal transactions such as buying drugs and weapons on the dark web. The bitcoin (or cryptocurrency) transactions are highly secured; it will be nearly impossible for the central governments to track down such users by their wallet addresses alone.

 Bitcoins are not recognized as a legitimate exchange by many companies. Only a few online merchants are accepting them as payment.

 Bitcoin is very volatile in nature due to which the value of bitcoin is not fixed, and hence it would not be advisable to use it as a mode of payment; instead, one can use it as an investment asset.

 In case an individual forgets the password of his/her account, then there is no way of recovering it. This will result in loss of his/her bitcoins.

 Mining Bitcoin requires a large amount of computing power and electricity, which could negatively impact the environment.


Bitcoin’s Current Situation Globally

Currently, bitcoin valuation is clocked at $55,831 USD. There has been a gradual increase in the popularity of bitcoin since 2008-09, which in turn increased bitcoin’s valuation over the years. There can be many reasons for the increased popularity of bitcoin and its value globally.

Some of them are:
 Companies like Tesla, Square, MicroStrategy have invested in Bitcoin as an
investment asset.

 Some companies have started accepting Bitcoin as a mode of payment (ex: PayPal).

 More people are trading bitcoins due to new cryptocurrency platforms, which makes selling and buying bitcoins easier.

 The belief shown by some central governments in blockchain and bitcoin has
motivated more people to begin investing in Bitcoin.

 Limited circulation of bitcoins raises concerns about supply shortages and increased demand, resulting in a higher valuation.


Bitcoins Situation Country-wise:

Investing in bitcoin is straightforward, but things get complicated once we start treating bitcoin as a mode of payment due to the variety of regulations and rules maintained by different countries.

Let’s have a look at the situation in various countries:

Netherlands: The capital city Amsterdam is home to the largest cryptocurrency start-ups. According to a report in 2020, around 1 million Dutch people have already invested in cryptocurrency. There are over 74 merchants accepting bitcoins. Bitcoin ATMs are also found frequently, making it one of the most loved countries for bitcoin users.

USA: The US has broadly adopted a positive approach to Bitcoin, while some federal departments are working on preventing or reducing Bitcoin usage for illicit
transactions. Many American-based tech companies have already started investing
and accepting bitcoin as payment.

India: In 2020, Indian Supreme Court lifted the ban on bitcoin exchanges which refrained individuals from converting their bitcoin into INR. Now Indians can start investing in bitcoin through different exchanges. But it is still not accepted as a legal tender. However, India is planning to regulate the usage and come with its own cryptocurrency.

European Countries: The European Court of Justice (ECJ) declared that digital currency transactions are considered as supply of service and are also exempted from VAT in all EU states.

Russia: The use of Bitcoins as a payment method for products is regarded as
unconstitutional.

Australia: They have shown a positive attitude towards Bitcoin and cryptocurrency generally.  Australia has legalized cryptocurrency exchanges to some extent.

China: China doesn’t encourage Bitcoin as a legal tender and has some strict policies against cryptocurrencies. They have also brought a law into action to stop Bitcoin mining. However, one can continue investing in Bitcoin through different exchanges.

COVID-19 Impact on Bitcoin:

Even though COVID 19 had a severe impact on the Global Economy, Bitcoin proved resistant.

The value of Bitcoin was halved in March 2020, but currently, it has reached an all-time high. The major reason was the loss of jobs during the pandemic, resulting in many people investing in Bitcoin to earn a side income.

Many people get intimidated by the term cryptocurrency and the technology behind it, which led to creating jobs like crypto-influencers and technical analysts. Their job is to bring awareness about cryptocurrency and blockchain and encourage people to invest in them.

We could conclude that the pandemic has positively impacted and encouraged other investors to start investing in it even during times of uncertainty.

What Can We Expect From Bitcoin In The Future?

Credits: Finyear.com

As the popularity of Bitcoins continues to rise, the first question that comes up in our mind is, Will Bitcoin ever be the "Future Currency" that is accepted globally?

Bitcoin has the potential to change the global financial industry and the way we look at currency in the future. The popularity of Bitcoin and cryptocurrency is going enormously globally, and many users are adopting bitcoin as an investment asset and mode of payment.

It is estimated that there will be around 200 million users utilizing digital currencies by 2030. With many users showing interest in Bitcoin and Cryptocurrency and its advantages over fiat currencies, financial experts believe that Bitcoin can become a future global currency.

Suppose the popularity of bitcoin and cryptocurrencies increases at the current pace. In that case, central banks around the world must take reasonable measures to embrace the fast-growing technology to ensure a crypto-friendly future.

Some of the measures which can be implemented by the central banks are:

 Regulating Bitcoin by imposing some restrictions to curb illegal activities.

 Introducing own form of cryptocurrency, i.e., CBDC (Central Bank Digital
Currency).

 Integrating cryptocurrency with the present payment platforms could be an efficient approach.

Bitcoin’s future depends on the opinions of current banking structures and the amount of confidence people have in bitcoin.

Only time will reveal whether bitcoin will go on to become the single currency globally.