Bitcoin: The best performing currency of 2016

The year 2016 was a year of anomalies. From Brexit to the US election results, it was a year that fully tested the limits of our wildest imagination. However, amidst all this chaos, there was another anomaly which was observed by much lesser people across the globe. For the first time in the history of money, the year's best-performing currency was a digital currency. The Bitcoin.

The Bitcoin Symbol (Image courtesy: huffingtonpost.com)

Bitcoin and the legend of Satoshi Nakamoto

Before we talk about the Bitcoin's past performance, let me briefly walk you through what the currency is all about.

What is Bitcoin?

Bitcoin is a cryptocurrency (a term coined by its creator, Satoshi Nakamoto), which is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.

The bitcoin uses blockchain technology where transactions are verified by network nodes and recorded in a public distributed ledger. Since it is a peer-to-peer technology, transactions can take place directly between the users, without the need for intermediaries such as banks or brokers. In a nutshell, the bitcoin is a decentralised currency designed for the digital realm.

Who is Satoshi Nakamoto?

So far, nobody knows who he is. One of the most intriguing things about Bitcoin is that its creator still remains anonymous. Bitcoin was created by a person who referred to himself on the internet as 'Satoshi Nakamoto'. Nakamoto anonymously published his invention on 31 October 2008, to a mailing list consisting of cryptographers, in a research paper called "Bitcoin: A Peer-to-Peer Electronic Cash System". Nakamoto never revealed any personal information even while discussing the technical details with these cryptographers. Although he claimed to be a man living in Japan and born around 1975, most of the speculators do not believe these claims to be authentic. This is because of two main reasons. Firstly, Nakamoto used perfect English in all his conversations with the cryptographers. Secondly, the documentation and labelling for the software were not done in Japanese.

However, everyone in the Bitcoin world keeps speculating and there are a few people who are suspected to be the real Satoshi Nakamoto (Read: Who is Satoshi Nakamoto?). Unfortunately, it is hard to point out a single person.

When did the first bitcoin transaction take place?

The very first transaction of bitcoins for US dollars was done in fall of 2009 between Martti Malmi (A.K.A. Sirius) and another user who called himself NewLibertyStandard. In this transaction, Sirius sent NewLibertyStandard a total of 5050 bitcoins in exchange for $5.02 (a super nominal price of less than $0.0001 per bitcoin). They had calculated the value of these bitcoins based on the cost of electricity spent to generate them. Just about seven years later, the same amount of bitcoins were worth $5,085,035 on January 1, 2017.

Past Performance

The below chart shows the overall growth of the currency from 01/01/2016 to 01/01/2017 during which the price of a Bitcoin more than doubled appreciating from $423 to $1,007 (in a brief span of just one year!).

Bitcoin Price Performance in 2016 (Generated on coindesk.com)

Even though the currency has appreciated significantly this year, the ride has been far from smooth since its release. Looking at the overall volatility of the currency, one can infer that Bitcoin is a high-risk high-return currency. With levels very close to its previous all-time high of $1,163 attained in 2013, people have already started speculating that it might be a bubble.

Bitcoin Price Performance between 2010 and 2016 (Generated on coindesk.com)

How do I get a bitcoin?

There are three ways you can get your (virtual) hands on some bitcoins:

Buy them from one of the exchanges
Exchange Bitcoins for goods and services
Mine them yourself

Mining Bitcoins... What does that mean?

The traditional paper currency comes into existence when the government decides to print and distribute money. However, bitcoins do not have a central bank. Bitcoins come into existence through a competitive and decentralised process called 'mining'. Miners use special software to solve highly complex mathematical codes and are issued a certain number of bitcoins on successfully solving it. Apart from being a smart way of issuing currency, this method also incentivizes more and more people to start mining Bitcoins.

Bitcoin Mining (Image courtesy: coindesk.com)

But why is it called mining?

Because we have limited resources similar to the mineral mines in the real world. In other words, there is only a set number of Bitcoins that can be created. According to the white paper, no more than 21 million bitcoins can be created in total. So far there are approximately 16 million Bitcoins in existence. This means that 5 million Bitcoins are yet to be mined. However, the lesser the number of Bitcoins left, the harder it becomes to mine a new one.

What are the advantages, disadvantages and the concerns?

Now that we know about the bitcoin, let us have a look at its good, bad and ugly aspects:

The Good

The future of currency: Bitcoin has serious potential to completely revolutionise payment systems and transactions.
No third party required: As the Bitcoin is a distributed ledger currency, it does not require a bank or a trust to act as a mediator. The money can be transferred from one peer to another directly.
No Costs: If you start accepting bitcoins, you need not incur any cost.
Easy to set up: To set up bitcoin, all you have to do is install and run the software.
Blockchain: Bitcoin uses blockchain, which has been touted as the future of the banking and financial services industry. This makes its case even stronger as the currency of the future.
Open Source: Bitcoin is an open source software. So developers across the globe can use their knowledge to improve Bitcoin. On the other hand, they can also build new services or software that can use Bitcoin.

The Bad

Volatility: As the market volatility suggests, people still do not have complete faith in Bitcoin. The past performance suggests that investing in the bitcoin is not for the faint-hearted.
Internet Access: Almost 60% of the world still does not have internet access. As Bitcoin requires access to the internet, its implementation is still not possible in these regions.

The Ugly

Robbed Exchanges: Bitcoins hackers have on certain occasions destabilised or 'robbed' some of the bitcoin exchanges. The most famous case is that of the Mt. Gox exchange, which had to file for bankruptcy protection in February 2014 after bitcoins worth $450 million were 'stolen' from the exchange.
The Dark Web: As it is easier to transact anonymously over the internet using darknets such as TOR and Invisible Internet Project (I2P), there have been cases where Bitcoin has been used for nefarious activities such as hiring a hitman, drug peddling and purchasing guns.
The Silk Road: The article would be incomplete without a mention of the Silk Road. This was the biggest online black market for illegal drugs before it was shut down by federal law enforcement. In short, it was like Ebay for criminals. With such highly critical threats, it seems like a herculean task to define a clear cut regulatory framework which ensures that such activities do not proliferate further.

Are we ready for Bitcoin?

So is it time to say goodbye to paper money and hello to digital currency? Not yet. In my opinion, it will take quite some time before such a digital currency comes into full-blown worldwide circulation.

Yes, it is a good technology and is being adopted and experimented with. For instance, the Canadian government has recently come out with the MintChip which borrows a lot from the philosophy of bitcoin. This is one of the several instances of bitcoin implementation. However, due to the above-mentioned concerns, it will take another couple of years to make it a safe, secure and stable currency. Till then, we will have to make do with the era of paper currencies and quantitative easings.