12 DEC 2017

Bitcoin: record results for investors

Bitcoins

Bitcoins (BTC or XBT) is electronic currency based on peer-to-peer network.

The history of bitcoins begins in 2008 when an author who writes under the pseudonym of Satoshi Nakamoto, in an article, explains the algorithmic theory behind this currency. In 2009 an open source software is released. It allows people’s computers to enter into the Bitcoin network.

It is important to pay attention to the spelling of the names: if we refer to the technology or to the network, we use the term “Bitcoin” with a capital “B”; if we refer to the actual currency, we use the lower case “b” (“bitcoin”).

For bitcoins there is no Central Bank that deals with the production and distribution of money, in fact it is a digital currency, created and managed electronically. Even to exchange bitcoins there is no need for oversight of an external body. Once done, the transaction cannot be canceled, nor can you recover those coins.

The number of bitcoins is limited: to 21 million and by 2030 at least 20 million will have been generated. They will therefore start to become scarce and their real value will increase.

To obtain bitcoins it is necessary to solve, using the processor of your computer or its GPU (acronym for “graphics processing unit”, that is, the processor of the graphics card), certain mathematical calculations. This activity is called “mining”. The complexity of the calculations increases from time to time and as a result there is always more energy wasted to get the reward in bitcoins. Currently, to solve a mathematical calculation, more energy is necessary than the energy used by all of Ireland in just one day. Another way to get bitcoins is to buy them from an intermediary: in this case they exchange dollars for bitcoins. Once you have this cryptocurrency, you can speculate by holding on to it and hoping that the value continues to grow in order to sell it at a profit or use it to buy services. In Italy there is a start-up called “Inbitcoin”, that allows you to shop or pay for medical visits and various services using bitcoins. The aim of the start-up is to transform the Italian region “Trentino” into a “Bitcoin Valley”, that is to make the region the first bitcoin-based economy. Besides, there are platforms such as Purse.io that allow you to buy products sold on Amazon in bitcoins thanks to intermediaries who agree to convert the bitcoins they receive from those who want to make this purchase into the money needed to complete the transaction.

Bitcoins can be safely stored on your computer, in a digital wallet for which each user has cryptographic key pairs. These are a kind of digital signature that indicate the ownership of the money. It is essential not to lose these because, otherwise, it will be impossible for the Bitcoin network to recognize the ownership of that money and that sum will be lost, it will no longer be available to anyone. Situations like this have already occurred.

The value of bitcoins depends on the supply and demand lever. At the end of 2009 a bitcoin was worth $0.00076, in the second weekend of December 2017 a bitcoin reached the value of 18 thousand dollars. A curiosity: the male protagonists of the famous series “The Big Bang Theory” invested in bitcoins too. Unfortunately, due to a joke of Sheldon’s, to take revenge for having been excluded from mining activities, the bitcoins earned by his friends were irreparably lost and, as we have seen in these cases, it was impossible to recover them.

Blockchain

At the base of Bitcoins operations, is Blockchain technology, a technology that guarantees the security and the transparency of operations. Blockchain is a distributed database. This means that the database is not physically located on a single server (computer), but it exists simultaneously on all the computers connected to the network. In this way, the various information can be accessed quickly since the computing power of all connected computers is exploited. This database allows you to manage and track transactions that are made between multiple nodes on a network. Each transaction must be validated by the network itself.

The operation of the Blockchain is as follows: whenever a transaction is made between 2 persons, all the information relating to the transaction is entered in the network, in particular a “timestamp” is added, that is a sequence of characters which identifies the time and the date of the event. At this point the transaction is brought to the network to be verified and approved by the Blockchain participants. Then a new block is created, and it contains all this information and this new block, once authorized, validated and implemented, is added to the chain of blocks which already exists in Blockchain. All these blocks are accessible at any time by all participants. Very important is the fact that once the transaction has been approved, it cannot be changed, unless this change is approved again by the entire network.

Blockchain ​​safety problems

In Blockchain an important figure is that of the “Miner”, the one who makes available the computing power of its processor to perform the various complex calculations (hashing). If a person controls more than half of the computing power that is being used for mining, this person could write an alternative financial chronology that would become reality and, in effect, change the cards on the table. This means that the Miners that currently exist must not stop working, otherwise problems like these will arise.

Another problem concerns the information that is shared: everyone has access to certain information about the user (although they are anonymous). In fact, let’s suppose that, a user transfers bitcoins to another user: the latter is able to know, for example, how many bitcoins the other user has, what expenses he sustained and how much he spent. This mandatory information sharing, of course, is not very secure for a user’s data.

Finally, an obstacle to the spread of Blockchain technology is the fact that in order to carry out transactions, particular and complex IT skills are required which not many people have.

Experts are currently divided between those who believe that bitcoins are the beginning of a new monetary and financial era and those who fear that at any moment there will be a sudden drop in prices. To know what will happen, we can only wait and see.

Elaborated by Lucia D’Adamo, supervised by Marco Pirrone

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