Decoding Crypto: How It Works, How To Get Started

Decoding Crypto

Bitcoin (BTC) is the most well-known and widely used cryptocurrency, but it wasn’t the first effort at a decentralised digital currency. While Bitcoin’s first lines of code were generated in 2009, previous versions of cryptocurrency persisted for far over a decade.

David Chaum, a cryptographer & computer scientist, has often been credited with creating Bitcoin’s intellectual and technological foundations. As a technique to encrypt knowledge and documents, Chaum invented the “blinding signature” protocol. In 1995, he founded DigiCash, an electronic money start-up that used his private information formula to generate one of the earliest types of digital money. 

Several followed suit shortly after. Bit Gold, a decentralised currency with its proof-of-work consensus algorithm, was designed by computer scientist Nick Szabo before Bitcoin. B-money, a decentralised, private money network built by developer Wei Day, is a similar endeavour. These attempts, in the end, were unsuccessful. They did, however, lay the groundwork for possible digital money.

Efforts to build digital currency in the 1990s occurred against a backdrop of the Internet entering homes of people with technology becoming ingrained in the fabric of daily life. Cypherpunks have been the early proponents of digital currency and, beyond broadly, cryptography as well as privacy-enhancing technology as political tools. They paved the way for the launch of Bitcoin a decade later.

The arrival of Bitcoin

Bitcoin comes to mind when people hear the term “cryptocurrency” (BTC). Bitcoin is the most difficult cryptocurrency to grasp. Bitcoin, the largest cryptocurrency with just a market capitalization of almost 700 billion dollars (at the time of writing), is dubbed “The Granddaddy of Digital Assets” by many of its most ardent supporters.

Apart from its imitators and competitors, Bitcoin began quietly in 2008 with the registration of the domain name bitcoin.org. After that, a cryptography email group received a short white paper named “Bitcoin: A Peer-to-Peer Electronic Cash System.” The initial lines of Bitcoin’s code were created in January 2009.

Who is the inventor of Bitcoin?

Satoshi Nakamoto, Bitcoin’s pseudonymous developer and author of the white paper, asked other technologists and encryption enthusiasts to join the fledgling cryptocurrency project. Nakamoto, on the other hand, quickly vanished from the project. Nakamoto’s true identity has remained a mystery to this day. Bitcoin has become the decentralised initiative that Nakamoto anticipated since it lacked a central figurehead or director. 

The proof-of-work algorithm that Bitcoin uses attracted early adopters to mine bitcoin using their computers. These initial investors contributed to the security of the Bitcoin network, spread the word about the cryptocurrency, and amassed newly generated bitcoin. Shortly after, affluent investors such as the Winklevoss twins began investing millions of dollars in Bitcoin as a long-term gamble on the nascent digital currency. Bitcoin had acquired a fervent, global community within the next few years of its inception.

What exactly is Cryptocurrency?

Cryptocurrency is fundamentally a value exchange mechanism. Because once investors purchase a cryptocurrency, they are betting that perhaps the asset’s value would rise in the future, similar to how stock market investors purchase stocks in the hopes of seeing the company’s value rise.

Discounted estimates of a company’s future cash flows are the basis for stock values. Since there is no underpinning corporation, there is no analogous valuation metric for cryptocurrencies; their value is solely determined by investor appetite. The chance of other investors purchasing the cryptocurrency or the functionality of the cryptocurrency’s blockchain are the two elements that determine its value.

What factors influenced Bitcoin’s growth?

Around May 22, 2010, Laszlo Hanyecz, a developer as well as early Bitcoin enthusiast, ordered two pizzas for 10,000 Bitcoins. Hanyecz’s pizza acquisition today is valued at $350 million. Bitcoin attracted more investors, miners, and fans throughout 2011. Its cost gradually climbed from pennies to dollars to tens of dollars. The Bitcoin Foundation was founded in 2012 to aid in the standardisation of Bitcoin’s adoption and development. 

Bitcoin attracted controversy as its fan base developed. The Silk Road’s online drug market employed Bitcoin as a payment method; the cryptocurrency’s anonymity makes it a useful means of exchange for enabling unlawful transactions. When the creator of the Silk Road, Ross Ulbricht, got arrested in 2013, it resulted in a barrage of negative press for Bitcoin. However, in 2014, Mt. Gox, the world’s largest Bitcoin exchange, got hacked, increasing concerns about investors’ capacity to retain Bitcoin safely. 

However, the unwanted attention attracted additional investors, driving up the price of Bitcoin. Despite starting at roughly $13 in 2013, the price had increased to $770 by the start of 2014. Bitcoin’s price remained in the mid-hundreds until the end of 2017 when that soared to almost $20,000 in a frenzy of mainstream interest and speculative investment. 

What is the best way to invest in cryptocurrency?

Cryptocurrency could be included in a well-balanced investment strategy. Unlike traditional stocks, bonds, and mutual funds, cryptocurrency provides the security of anonymity while also having the potential for significant development in the future. Furthermore, because it operates outside of the usual government framework, the assets are rarely frozen or seized by authorities.

Common investment programmes such as Robinhood, Coinbase, and Kraken all make it simple to buy cryptocurrency. There are even entire online trading platforms including exchanges devoted specifically to crypto goods (such as Gemini, BlockFi, eToro, and Bitcoin IRA).

People can also invest in actively managed portfolios that trade the currencies through publicly listed Bitcoin trusts and funds, which provide the same diversity and cheap prices as traditional mutual funds and ETFs.

The institutional attraction of bitcoin

Bitcoin’s price fluctuated between $3,000 and $12,000 for the following three years, however, its failure to reclaim its all-time high belied the outpouring of enthusiasm on Wall Street, where financial giants like J.P. Morgan began creating infrastructure to accommodate digital currencies. It masked the innovation taking place in crypto circles, as exchanges like Binance and Coinbase (COIN) grew, making Bitcoin investing more accessible to the general public. 

This also failed to consider the US government’s growing support of Bitcoin, with Federal Reserve Chair Jerome Powell comparing it to gold throughout congressional testimony as well as the Office of the Comptroller of the Currency granting crypto charters under President Trump.

The epidemic acted as a spark for Bitcoin’s 2021 breakout. Worries about inflation were fuelled by trillions of dollars in stimulus, heightening the appeal of Bitcoin’s inherent scarcity. In April 2021, Bitcoin reached an all-time high of over $63,000. 

Cathie Wood, a well-known investor, has set a price objective of $500,000 for Bitcoin, believing that more people would start buying the digital asset. Elon Musk and Mark Cuban, two well-known businessmen, have become vocal supporters of Bitcoin. A new generation of investors, known as Gen Z, is now purchasing digital assets.

Thousands of more cryptocurrencies have emerged in the twelve years since Bitcoin’s inception. However, Bitcoin’s position as the world’s most popular cryptocurrency seems to be more secure than before. Some fear that the original digital asset is losing its decentralised spirit as institutional investors and businesses pour money into it. Bitcoin, however, will be here to stay, regardless of how its investment base evolves. 

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