What is Bitcoin and how is it created?
In late 2008, in the midst of the worst global financial crisis since the Great Depression of the 1930s, an anonymous programmer (or group of programmers) named Satoshi Nakamoto published an article entitled: “Bitcoin: A Peer- to-Peer Electronic Cash System “. In this article, Nakamoto introduced / introduced the underlying bitcoin system and blockchain technology. According to the article, sometimes referred to as the ‘Bitcoin Manifesto’, the purpose of the system was to enable the transfer of funds using the Peer-To-Peer method, ie directly between users, without the involvement of a financial entity, such as a bank, brokering the transaction, and charging fees. through. While one might be impressed by the modesty of this stated goal, given the weakening of many in the political and financial system following the Great Depression, Bitcoin soon, as a virtual currency and a kind of alternative monetary system, gained a wider garnet as a defiance against the existing political-economic system.

How does Bitcoin work?
Blockchain technology generates a database using a string of encrypted blocks that contain the entire transaction history. Using the blockchain, financial transactions can be made and verified anonymously between different parties without an intermediary. The truth of the transactions is verified by a computer network when each action is stored in a data block that joins the chain of existing blocks – hence the name of the technology. This database is distributed, sorted by time and without a central body controlling its contents. Once every action on the block has been registered it cannot be canceled or changed.

When we use regular currency, any act of buying, selling or transferring is required for verification and registration in the books of financial entities. Unlike those departments that deal with transaction verification in these entities, when it comes to Bitcoin, the computer network connected to the blockchain performs this process by solving complicated mathematical puzzles that require a lot of computational power. The computers that are connected to the network and help carry out the registration and verification activities are called ‘miners’ and they are rewarded for their work with new bitcoin coins – a metaphor for the old days when there were gold miners from the depths of the earth.

The bitcoin is stored in a virtual wallet with a unique address for the user when each activity of buying, selling or transferring the currency between different wallets is stored on the blockchain using a unique code snippet for each transaction. Like other currencies traded at a daily level against the dollar exchange rate, the Bitcoin currency is tradable and its value changes at every moment. As of this writing, the Bitcoin rate is about $ 66,000 for a single Bitcoin currency.

Supply and Demand
Proponents of Bitcoin tend to mention that Bitcoin has a limited supply of currencies while central banks can, at least in theory, print ‘fiat money’ (regular money issued by a central bank) in unlimited quantities, as they please. To date, an estimated 19 million Bitcoin coins have been mined, and mining will stop when supply reaches a maximum of 21 million coins. That is, a total of about 2 million coins remained for mining. They cite this characteristic as a factor that supports the value of the virtual currency.

On the demand side, they will note that the fact that there is a growing trend of global companies, large and small, which are adopting Bitcoin as a possible means of payment for their products or services. In the United States, for example, AT&T, one of the largest media and communications companies in the world, allows its customers to pay for its services in Bitcoin through the BitPay app. Food companies Subway, KFC and Starbucks also allow their customers to pay in Bitcoin through various apps linked to their customers’ digital wallets. At the same time, it should be noted that the adoption of Bitcoin as a means of payment has not caught, at least not so far, a significant acceleration as the currency proponents had hoped. Currently, most of the demand for Bitcoin stems from its (increasing) use as an investment asset and not as a means of payment.

Arguments against Bitcoin
The claims of Bitcoin critics are many and varied:

1. As mentioned, its use as money is extremely limited. If Bitcoin is supposed to be a means of payment, why can it not be used in a supermarket, at a gas station, as a payment of the property tax or electricity bill? In addition, given the high volatility in its value, there are no products or services whose price is denominated in Bitcoin (throughout the history of Bitcoin, its price has experienced three depreciations of over 80%!). Finally, in practical terms, even after more than a decade since its invention, few banks allow free movement of money between digital wallets, where bitcoin is held, into bank accounts. Their customers find themselves frustrated with money in the digital wallet, unable to use it.

2. Environmentalists are protesting the huge amount of power required for the day-to-day operation of bitcoin and the blockchain system. According to the University of Cambridge, Bitcoin’s annual electricity consumption has already crossed the 120 terawatt hour threshold, more than the annual electricity consumption of Argentina, Finland, Saudi Arabia and slightly below that of Norway.

Bitcoin uses the most energy of all of Argentina (Photo: None)

3. There is still uncertainty about the countries’ attitude towards Bitcoin – which will affect what its future will look like. Of the major countries, China is the currency’s biggest opponent. Last September, China banned all use of cryptocurrencies, including bitcoin, on the grounds that these endanger the country’s financial stability. There are other developing countries, such as Turkey and Nigeria, that have also banned the use of bitcoin.

Some of the concerns about Bitcoin also stem from the fact that historically the currency has been a convenient tool for transferring money anonymously by various criminal elements. According to the U.S. Treasury Department, about $ 590 million has been transferred to hackers since the beginning of the year. Money launderers, drug dealers, arms and even terrorist organizations have also found solace in the digital space.

El Salvador, on the other hand, recently took an extraordinary step when it decided to adopt Bitcoin as an official currency (legal tender) in the country. In addition to purchasing products and services in currency, citizens will now also be able to pay taxes in Bitcoin. Finally, as it currently stands, developed countries in the West, the US and Europe have chosen the middle way – their tendency being to allow bitcoin activity but subjecting it to financial regulation.

What is between Bitcoin and other cryptocurrencies
It is worth noting that besides Bitcoin, there are other cryptocurrencies like Ethereum, Litecoin, Cardano and Ripple. They are also built in an open source configuration based on blockchain technology. The total market value of cryptocurrencies is currently over $ 2.8 trillion (of which, the bitcoin market accounts for about 43%, ie about $ 1.2 trillion). The various cryptocurrencies are used to create ‘smart contracts’, monitor, validate and share data securely, develop distributed financial applications (DeFi), create NFTs (in the art field, for example) and more. At the same time, most currencies do not yet have significant uses in everyday life, but according to proponents of the field we are only in the infancy of the technological revolution called blockchain.

In Part B we will review the establishment of Bitcoin as an investment asset and other notable uses of cryptocurrencies.

Eran Peleg is the Chief Strategist and Maor Levy is the Investment Manager at Clarity Capital

By Editor

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