Bitcoin is a decentralized cryptocurrency that has gained worldwide attention for its unique structure, anonymity, and independence from traditional currencies. However, due to its volatility, inconvenience of transactions, and legal restrictions, it is unclear if it can fully fulfill its role as a currency.
What is Bitcoin?
These days, the currency that gets the most attention in financial markets around the world is not the U.S. dollar or the Japanese yen, but the virtual currency Bitcoin. Bitcoin’s price, which was $0.4 per coin when it was first announced in 2009, reached $4,000 per coin in December 2023.
As the value of the cryptocurrency skyrocketed and the market grew larger and larger, the U.S. Treasury Department declared Bitcoin subject to supervised transactions. China’s central bank, the People’s Bank of China, also discouraged the use of Bitcoin, but the regulatory policies of governments have paradoxically focused the public’s attention on Bitcoin. To this day, bitcoin is still in the news, and interest in it is growing. How does the virtual currency work and why has it gained so much attention?
A decentralized cryptocurrency invented by an anonymous person
Bitcoin was announced in 2008 by an anonymous person named Satoshi Nakamoto. “We call him “Satoshi Nakamoto” because no one has ever seen him in real life, and it’s not even clear if the name Satoshi Nakamoto is a pseudonym or his real name. In 2008, he published a five-page paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” under an MIT license. The main concepts of Bitcoin in this paper have been developed by numerous activists and software developers into the Bitcoin system we know today.
Bitcoin is often referred to as a distributed crypto-currency. This is because, unlike traditional currencies, there is no separate administrative entity, and the issuance and management of the currency is done through a cryptographic algorithm and all participants in the Bitcoin network.
In the case of traditional currencies, the existence of a governing body is essential. For example, national currencies such as the US dollar, the Japanese yen, and the Korean won are issued by their respective central banks. The central bank issues money in consideration of the various conditions of the country’s economy and manages the process under the strict supervision of the government. In addition, existing virtual currencies, such as in-game money in internet games or points in online shopping malls, are also controlled by the company that operates the service.
However, Bitcoin does not have such a specific governing body. Bitcoin consists of many lines of computer code that implement an algorithm and users who participate in the Bitcoin network. The issuance, management, and use of bitcoins is done by these algorithms and network participants. In other words, in Bitcoin, every participating individual is the creator and custodian of the currency.
Minting money through cryptocurrency
In order to participate in the production and trading of money in Bitcoin, users must meet the following conditions Bitcoin traders are issued a 30-digit string of randomized English lowercase letters, uppercase letters, and numbers to identify them. Bitcoin refers to this string as a “wallet,” which can be thought of as the equivalent of a bank account in the real world. An individual can have as many Bitcoin wallets as they want, and since no personal information is required to issue a wallet, anonymity is guaranteed.
Monetary transactions between individuals on the Bitcoin network consist of information including the sender’s wallet string, the recipient’s wallet string, and the amount. This information is relayed to all users on the Bitcoin network. These transaction records are collected for about 10 minutes and then stored in a form called a “block”.
The blockchain is the concatenation of all these blocks, a giant data file that records every transaction that has ever taken place on the Bitcoin network. In other words, the blockchain is a transaction ledger that contains the history of every transaction on the Bitcoin network from the time Bitcoin was first created to the present.
Bitcoin is issued when the accumulation of transaction history is successfully formalized by cryptographically processing a newly created block. To mint Bitcoin, a user must solve a series of cryptographic algorithms that combine the contents of the new block with the contents of the previous block. This is summarized into a 32-digit hexadecimal number, and then a random hexadecimal number X is added to it. You need to find an X that causes this summarized value to be less than the number given by the current Bitcoin algorithm. There is no specific solution or algorithm for finding such an X, only a brute-force method of substituting numbers in all cases, which is why this process is difficult for the human brain and is usually performed by a computer. The more powerful the computer, the more efficient it is. The user who finds X owns the bitcoins allocated to that block. They then spread the word to other users who trade Bitcoin. If more than one user finds X, the first user to do so becomes the owner of the bitcoin. This process of issuing bitcoins is called “mining” because it takes a long time and is similar to mining coal or gold.
According to the Bitcoin algorithm, this mining process gradually increases the difficulty of the cryptographic problem over time. In addition, the total production capacity of Bitcoin is limited to 21 million coins, and the issuance of new Bitcoins will end around 2140. For these reasons, Bitcoin’s issuance and production is regulated without a governing body.
How Bitcoin transactions follow democratic principles
So, how do Bitcoin transactions work? In Bitcoin, transactions are simply the act of recording the sender’s wallet, the receiver’s wallet, and the amount of bitcoin being sent in a block. Based on these records, the sender and receiver calculate their balance by summing the total of the bitcoins they have received and the bitcoins they have sent, which determines how much bitcoin they own. The records of these transactions are spread to all users of the Bitcoin network as soon as they occur. Users who want to mine begin processing them in the same way as mentioned above. Since many users process blocks containing transaction records, it is impossible for a malicious user to commit fraud or manipulate transactions. This is because even if a malicious user manipulates a particular transaction, the correct information is recorded in the blocks being processed by other users. In Bitcoin, the democratic principle dictates that the transaction record of the majority of users, rather than the minority, is the correct transaction record. Even if a malicious user uses multiple machines to create a fraudulent transaction that is recognized by the majority, the blocks held by the majority of users on the network will still contain the correct transaction. This makes it impossible for a malicious user to manipulate transactions unless they own more than half of the world’s computers.
Bitcoin’s unclear future
Despite these somewhat complicated technical principles, Bitcoin has gained widespread popularity around the world. Exchanges are popping up in countries around the world that trade Bitcoin like stock markets. There are also a growing number of online stores that accept Bitcoin as an additional payment method. Bakeries and cafes that accept bitcoin as a payment method have become a hot topic, and recently, ATMs that accept bitcoin for withdrawals have been installed.
Bitcoin’s popularity is due to its ability to send money around the world reliably, quickly, anonymously, and with no exchange rates or fees. It is also attractive because it is an independent and free system that is not subject to any authority, as participants in the network participate in the issuance and transaction of money.
However, it’s unclear whether Bitcoin will ever be able to establish itself as a currency. The main reason is its volatility. In December 2013, Bitcoin hit a price of $1,000 per coin, but within a month, the price dropped by 30% and was trading at $700 in January 2014. If someone exchanged $1,000 in Bitcoin in December 2013 and bought $1,000 worth of goods that same month, they lost $1,000. In general, a currency must be stable in value over a long period of time, and cannot function as a currency if it is volatile.
Furthermore, Bitcoin does not currently function as a guarantor of payment, which is an important part of what makes it a currency. In order for a Bitcoin transaction to take place, a number of computers on the Bitcoin network must agree to formalize the transaction. This process involves numerous cryptographic operations, and as the number of users on the network grows, the time it takes for a transaction to be confirmed increases. Even if a payment is made with Bitcoin, if the transaction is not confirmed immediately, there are limitations to using Bitcoin in real life.
Furthermore, legal regulation of Bitcoin is not yet established. Bitcoin is a cryptocurrency with no specific governing body, and governments are still debating how to regulate it. This is because Bitcoin has the potential to be used for illegal purposes. For example, Bitcoin can be used to finance illegal activities such as drug trafficking, hacking, and terrorism. Governments also have concerns about tax issues and money laundering that could arise from trading Bitcoin. For these reasons, it’s unclear how Bitcoin will fare in the future in terms of legal regulation.
Conclusion
Since its inception, Bitcoin has garnered a lot of attention in financial markets around the world. As a decentralized cryptocurrency, Bitcoin has a unique structure that differs from traditional currencies, and this has attracted a large number of users around the world. Bitcoin is issued and transacted through the cooperation of network participants without any governing body, allowing for free and independent transactions anywhere in the world. However, Bitcoin has not been able to fully fulfill its role as a currency due to its volatility, inconvenient transactions, and legal restrictions. The future of Bitcoin is unclear, but its potential is still there, and many are watching closely to see how it develops.
