Everything you always wanted to know about Bitcoin

Word “bitcoin” It appears with increasing regularity in the headlines related to all kinds of subjects: financial, political, technological or even environmental. How to understand a phenomenon with multiple dimensions? This article attempts to make sense of the different views on this cryptocurrency and articulate them so that everyone can draw their conclusions.

It’s best to start from the beginning: In 2008, on a crypto mailing list, an article was published describing the Bitcoin computer protocol. The text was signed with a pseudonym, Satoshi Nakamoto, who even to this day does not know who he is, although there are several theories.

Bitcoin, as explained here, would be based on a system of blockchain or blockchain, as is called this original way of combining technologies that already existed. These chains are made up of links of codes that record each transaction in an inviolable way, since each of them is mathematically linked to the others: if one of the links changes or is modified, consistency is lost and the chain breaks, which is why ‘it gives guarantees that no one could modify a past recording because it would become evident in subsequent links.

In 2009, the software created by Nakamoto started to work, the first bitcoins were created and other nodes joined the network. This is how the first was born motto based on a cryptographic system, that is, a cryptocurrency.

Networked

Networking is essential to understanding the main attraction of bitcoin: no one is responsible for approving transactions and saving them in a new link. This task is performed by computer nodes connected to the network which, when a packet of new transactions arrives, seeks to solve the mathematical challenge to validate them. Once done, it alerts the other nodes to verify that everything is fine and, if approved, they copy the link to their own records. In exchange for homework, the node that solved the challenge first will receive a bitcoin prize. This distributed system makes it difficult for someone to control the currency or “steal” it and for everyone to guarantee the validity of transactions together, something new since we usually trust a currency because there is an institution. that supports it.

What happens in practice is that the holders of this currency have an application that works as a virtual wallet where the code of their own currency is stored and from there they make transactions to others. wallets. People don’t need to reveal their name at all times, which makes it ideal for carrying out illicit transactions, one of the issues that has recently led several countries to ban its use or attempt to control it.

Bitcoin is very attractive, especially for those who do not believe in the state, both on the libertarian side and the communist corner

The financial question

The big question is: Why is this coin accepted as a carrier of value? Because people believe he has value and accept it. The answer is tautological, it’s true, but it also applies to tickets or numbers that appear on a screen with our account balance: money is almost always just a convention. As more and more people believe and get support, trust grows, especially when those who support it are known as Elon Musk, who drives the price of bitcoin up and down with his tweets. . This is why the currency has fluctuated in value for months from lows close to $ 30,000 and sometimes exceed 60,000.

Bitcoin is very attractive, especially for those who do not believe in the state, both on the libertarian side and the communist corner. But this lack of link with institutions, which is its power, also distances it from the real economy. If money or stocks have any support, even if it is a little volatile, it is because they represent something more or less concrete, a little of the real economy of a country or of a business: this does not happen with bitcoin which goes up and down much more fanciful. These big jumps make the currency a very tempting tool for speculators who, if they sell and buy on time, can make a big difference in months, weeks or even days.

On the other hand, it should be noted that in practice decentralization is not so great since almost 75% of mining is concentrated in China, where energy is cheap (economically, not environmentally) and where the specific equipment needed to speed up mining is manufactured. Why in China? The answer brings us to the question of energy.

Working test

One of the most problematic points of bitcoin is “proof of work” because the task that nodes perform to validate transactions is called. Whenever enough bitcoin transactions accumulate, the package that contains them flows through the network and nodes must validate it through a complex mathematical operation. In exchange for this work, bitcoins are obtained, as we have said, although in a decreasing way since the system is designed so that the last ones occur in 2140. To slow down the issuance, the remuneration for “mining” ( processing transactions and getting new bitcoins) it is decreasing, which has so far been offset by the currency’s rising valuation over time and by the commissions that are paid for each transaction.

Despite the sharp fluctuations in the value of the cryptocurrency, the average trend in recent years is upward Because of this, the incentive to invest in more powerful teams that do the mining and thus get the price has also increased. To balance the increased power of mining equipment with the need to regulate the production of new bitcoin, the system makes the problem-solving task more complex. In short, more and more investments are made to compete with the other members of the network, mining is accelerated and the system must complicate the tasks to be solved; As the price of bitcoin continues to rise, the incentive to invest in even more powerful machines increases and there is a spiral in the energy consumption required for increasingly demanding computation. The result is a colossal waste of energy in the management of bitcoin, a figure which according to a study by the University of Cambridge already equals the consumption of all medium-developed countries like Argentina or Egypt.

Despite the sharp fluctuations in the value of the cryptocurrency, the average trend in recent years is upward

Energy is, in turn, a key cost for mining profitability. That’s why companies go where it’s cheaper. For example, the city of Plattsburgh in the United States, next to a subsidized hydroelectric power station, has welcomed with open arms the mining companies that have come to settle in old disused factories. However, in 2018, he decided to ban bitcoin mining because the consumption of electricity had forced the city to import energy at market prices. These companies have not even created jobs. Some even announced that they would be installed in Argentina to take advantage of the southern cold and reduce the costs of cooling the machines. Does it make sense to spend energy on solving math problems without any practical social benefit?

Then?

What many see as a simple technological and neutral issue is woven, as always, into the fabric of society. What seemed to be a techno-financial curiosity has reached speculative dimensions such that some countries are advancing in its ban. One of the main reasons is its volatility which tends to hurt investors with low reserves unable to withstand currency fluctuations and sell when the price drops while the bigger players take advantage to reap profits. Seen this way, bitcoin is seen as a Ponzi scheme that attracts naïve investors with expectations of huge short-term profits, something that inflates the bubble indefinitely. In the long run, everything indicates that the bubble will burst and that the winners will be those who managed to escape a moment before it happened.

Another worrying problem is the lack of controls which make this currency an ideal medium for illegal transactions. In recent times, for example, viruses of the “ransomware” variant that block access to systems of all kinds, even large companies, require bitcoin payments to release the hijacked information, making it very difficult to track of that money, even if it isn’t. impossible.

The only other problem is the environmental impact of bitcoin management. Having machines consuming huge amounts of energy to solve one math problem before others doesn’t seem like the most sensible way to waste resources and pollute the planet. For countries like China which aims to dramatically reduce pollution levels over the next few decades, it makes sense to move forward with a mining ban, as happened recently. The promises of using renewable sources to manage bitcoin do not seem plausible as it would increase costs and leave the question of whether it would not be better to use this energy to produce certain things more necessary for the well-being of the world. population.

As the contradictions build up, the price of bitcoin tends to rise beyond the fluctuations and signs are building that the bubble will eventually burst. If this happens, the cryptocurrency will become a curiosity for tech experts. Gone are the dreams of a currency freed from the bonds of the State and governed by the perfect invisible hand of a market of which some still find a way to wield the strings.