Bitcoin, the queen of cryptocurrencies
Bitcoin is currently the most famous cryptocurrency in the world. The asset was created in 2008 with the objective of being a solution to the financial crisis faced in European countries and the United States. At the time, the world was going through the worst economic recession since the Great Depression, due to the bursting of a housing bubble in the United States. The stock market was hit hard, and again the traditional financial system collapsed.
The first registrations of the cryptocurrency took place in mid-2008, when a user named Satoshi Nakamoto, a pseudonym used by the author or authors of the coin – to this day no one knows for sure the identity of this person(s) – published in a forum the “Bitcoin: A Peer-to-Peer Electronic Cash System” file. Satoshi not only invented a new form of payment, but he also invented blockchain technology, which supports cryptocurrency transactions. The blockchain is also the basis for many other types of crypto actives.
In January 2009, there was the first mining record, the process that generates new bitcoins and which we will explain further below. That same year, the Bitcoin.org website was registered anonymously, and the project was also launched on Sourceforge.net, a platform for distribution and development of open-source software.
Earlier that year, Bitcoin 0.1 was released and at the end of the year, the second version, Bitcoin 0.2. The year 2009 also marked the first currency transaction made in bitcoin history, between Nakamoto and Hal Finney. The exchange rate between cryptocurrency and the dollar was set by the New Liberty Standard as 1USD = BTC 1,309.03.
In July 2010, the Bitcoin 0.3 version was released, and in November, the total value traded on the market exceeded US$ 1 million. In 2010, the cryptocurrency market was already established, and it was possible to buy and sell bitcoins. The first real purchase of a product with virtual currency was made in Florida and consisted of nothing less than the purchase of a pizza.
A year later, an Australian put his car up for sale for 3,000 bitcoins and for the first time the virtual currency reached parity with the dollar. Thereafter, growth was staggering. In 2013, the year version 0.8 was launched, the total market value of bitcoin exceeded US$ 1 billion and in San Diego, in the US state of California, the first ATM for cryptocurrency was installed.
Other side of the coin
Despite its rapid popularization and rapid growth, the bitcoin story had complicated facts. In 2011, Silk Road was launched, a bitcoin marketplace for trading drugs and illicit products within the deepest layers of the internet, the dark web. That black market was closed in 2013, but an FBI report leaked in 2012 highlighted concerns about the currency’s use in the purchase of weapons and narcotics.
Another major problem faced was the veto of the Central Bank of China, in 2013, for institutions in that country to carry out transactions with bitcoins. As a matter of fact, as recently as September 2021, the country outlawed bitcoin transactions, mining and even advertising there. The veto itself, announced by the People’s Bank of China (central bank) and a dozen government agencies, is not entirely new, but it emphasizes the scope of the restriction, now greater than in previous bans.
How it works
Bitcoin’s biggest difference is that it is a limited currency. Only 21 million coins can be issued in the world. It was designed around the principle of a finite supply, defined on a fixed upper limit of how many bitcoins there can be.
Satoshi’s idea was that by limiting his maximum bid and decreasing the rate at which new bitcoins are created, each unit would appreciate in value over time. According to an email allegedly shared between Nakamoto and Bitcoin Core contributor Mike Hearn, Satoshi argued that if 21 million coins were used by some fraction of the world economy, 0.001 BTC (1 mBTC) could be worth around 1 euro. This prediction came true in 2013, when bitcoin surpassed this level.
“Bitcoin is the best experiment in supply and demand. It is an interchangeable asset, you can buy in one place and sell in another, you can explore price differences, arbitrage, there is no friction, no logistics and transfer is cheap,” says Fabrício Tota, from the Bitcoin Market. “Today, around 18 million and 200 thousand have already been issued and are in circulation, with 30% being lost/lost over time. It is believed that we will reach the limit in 2040”, he explains.
Acquisition and mining
Just like other cryptocurrency, there are 3 ways to acquire one: buying from someone, in a direct or indirect platform; buying from an exchange or mining. Mining, nonetheless, is not an easy activity as it used to be at the beginning of cryptocurrencies.
“Mining became a professionalized activity; it needs a big infrastructure to start to be relevant. You also need to have access to cheap energy and a significant initial investment. Today, there are mining companies listed in the stock exchange, to have an idea on how big business is”, says Fabricio
In the cryptographic ecosystem, the term “mining” is used to refer to the process of validating transactions on a blockchain, which also generates a reward for those who perform it. Although this activity is known by this name, it does not involve any type of extraction of materials from the earth or rocks. Rather, it is a way of running a program, a computing effort. The term has its origins in the validation of bitcoin transactions.
According to Bernardo Teixeira, CFO of BitcoinTrade, when the Bitcoin network went live, there was no currency created. Each bitcoin unit, although it existed “in theory”, had to be obtained in some form. The term mining is a colloquial metaphor that illustrates that bitcoin units need to be mined and will eventually run out.
The main objective of mining, therefore, is to establish and encrypt the transaction history in a way that it is impractical to tamper with it. Although mining began as a domestic activity, today it is an entire economic activity, in which large mining farms, manufacturers of video cards, and ASIC hardware participate.
Mining farms are sites specifically built for mining cryptocurrencies: structures where you can mine on a large scale, which require considerable investment and take up a lot of physical space. They typically consist of tens or hundreds of graphics cards, or ASIC processors (Application Specific Integrated Circuits) configured to run 24/7.
Some companies build large warehouses to store the equipment, considering projects that allow for savings in costs associated with mining, such as cooling or reducing energy consumption. Today, miners are looking for places with comparative advantage. Like Canada, where low temperatures lead to huge energy savings for refrigeration; or like Paraguay, where electricity is very cheap.
“Sites like Cambridge show the bitcoin mining map. Currently, there is a strong exodus movement of miners from China, the main global hub to other countries, such as the United States due to regulatory reasons. These changes take place in a moment of a lot of external pressure on miners – and the crypto industry as a whole – to use renewable energy to obtain bitcoins. In this country change, the pools are seeking to compromise these external demands, seeking places that combine energy use at expedient costs to a renewable matrix”, comments Bernardo.
- To mine it is necessary to organize the transaction block and then find the solution for the Proof of Work.
- Different miners compete for the same block, but only the first to guess the correct solution will be able to register on the blockchain.
- The result of the mathematical calculation is the hash (code) of the block.
- This algorithm encodes a variable amount of information into a fixed string of characters.
- Any minor change to the information generates a completely different hash.
- Each new block found when mining bitcoin includes the hash of the previous block, ensuring sequencing of the information.
- After a block is mined, network users running the software (full node) can validate if the work was done correctly, simply and at almost no cost.
- If there is any irregularity, these users running the software reject the block, in turn, the electricity used in mining is wasted.
Regulations, rules, and taxation
Still, despite possible negative uses of currency and vetoes, bitcoin was regularized in Europe and expanded worldwide between 2009 and 2015. The Bitcoin Foundation is responsible for regulating and monitoring bitcoin markets around the world. In Brazil, also recently, the House of Representatives approved bill nº 2303/15, presented by representative Expedito Netto (PSD-RO), which aims to regulate cryptocurrencies in the country.
However, representative Áureo Ribeiro (Solidariedade-RJ) presented a new, expanded and more detailed draft, through which bitcoin would receive legal status as a “payment currency” in Brazil. If the new bill passes, bitcoin will receive legal backing for the first time. The PL does not propose that the cryptocurrency be considered a currency, like the Real, although it is not clear in the proposal what would be considered a “payment currency”.
“Around here, cryptoactives are not yet regulated, but we can buy, exchange, sell legally, through an exchange that works within the current rules. For the Central Bank, cryptocurrencies are not a financial asset, and the Internal Revenue Service, therefore, taxes them as an asset, as if it were a car. Therefore, there are rules to declare transactions made with bitcoin and other digital currencies in Brazil”, explains Ana Rabello, accountant and specialist in cryptoactive declaration.
According to Ana, currently there are three taxation limits in Brazil. First one: if a Citizen transacted R$ 5 thousand of value or greater, even if he no longer owns the cryptocurrencies, he must declare the income tax in assets and rights. The second: if the citizen has more than R$ 30 thousand in monthly transactions outside an international exchange, he is required to pay a tax within the e-CAC of the Federal Revenue. And the third: if the citizen has more than R$ 35,000 in sales of a cryptocurrency, he must calculate the profit.
“In Brasil, even the exchanges are required to issue a monthly report with all transactions that took place inside their platform. There is a penalty of 3% over transactions in case of omission”, explains.
Security
Bitcoin is safe due to the technology blockchain and the cryptography that the keys provide. The coin became popular due to its security, after all, the mining isn´t easy. Thinking about the blockchain technology, the bitcoin is very difficult to be defrauded, since its transactions are practically immutable.
Since this is a chain of blocks that work across a network, tinkering with an old transaction would soon invalidate all later ones and immediately get the attention of all validators. In other words, it is worth much more – due to the mechanism established by the reward – to be part of the network rather than wanting to defraud it.
“Satoshi Nakamoto thought about every little detail to build the perfect engine. The cryptocoin is circulating for over 10 years, and its fundamentals are even stronger”, comments Bernardo.
Pricing
There are several factors that influence the appraisal of digital currency. Here’s what they are:
The law of supply and demand – As in any market, the law of supply and demand interferes with the value of bitcoin. The logic is simple and was strategically thought by Satoshi: bitcoin production is limited, and the rate of coin mining is decreasing. Likewise, the demand for currency changes according to the period and market situation. And the appreciation or devaluation of the currency also takes place from these fluctuations.
Market acceptance – The value is also influenced by its acceptance in the markets. The more businesses that accept bitcoin and the larger institutions use the currency, the more it becomes popular and, as a result, appreciates in value.
The increase in the number of digital wallets – The more people download apps and use bitcoin; its price can increase due to demand.
The market´s role – Although bitcoin is a currency independent from governments, it is not exempt from market regulations. Its value also differs depending on the performance and status of the financial landscape.
During moments of crisis, for example, with the drastic appreciation and devaluation of European currencies, bitcoin can also suffer some interference on its value.
“At the beginning, some people would buy bitcoin abroad and sell them here. This negotiation became sophisticated and started to circulate here in Brazil, according to the cost of transactions and supply and demand. Today, professionals explore these prices globally and there are even robots operating across the world. Therefore, the price tends to stay balanced, with small fluctuations due to exchange rates”, explains Fabricio. “The cryptocurrency market is small if compared to other active ones, being valued at US$ 2 trillion. To have an idea, only Apple is appraised at a higher market value.
Current moment and projections
In 2020, bitcoin experienced the biggest appreciation in history: 837% in dollars over a 12-month period, according to data from exchange Coinbase. On March 20, 2020, while the world was suffering the first consequences of the spread of the new coronavirus, the crypto asset was quoted at US$ 6,198.78. A year later, on March 19, 2021, the coin hit $58,126.10.
Bitcoin trading volume grew by 603% in 12 months. This, added to the appreciation of the cryptocurrency, boosted the capitalization of the asset to reach the record mark of US$ 1 trillion, a number equivalent to the sum of the value of all shares traded on the Ibovespa.
As of October 2021, bitcoin was worth just over $55,000, and analysts predict this is just the beginning. According to BitcoinTrade’s CFO, the biggest trend in the cryptocurrency market is the quantity and quality of human capital that is entering this market. With each passing day, the best minds and companies in the financial market and traditional technology are innovating in the creation of unique products. All this human capital is generating a revolution that will certainly transform several industries beyond the traditional financial market.
For Fabrício, from Mercado Bitcoin, today the thesis is that bitcoin is more used for investments and not as currency. After all, to buy a coffee with cryptocurrency, it would take a person about 30 minutes and it would be very expensive. “Bitcoin is a very new technology, which will still develop a lot in the future. Bitcoin is like the internet of the 90s, and many opportunities will arise from here. There are a lot of people entering this market and a lot of people will enter. We’ve had a wave of customers in the last year and we believe there will be a new boom. It is a growth in the universe of investments”, he shares.
According to BitcoinTrade’s Bernardo, as the most reliable cryptocurrency, bitcoin will be the fundamental protocol for storing savings in the new digital economy. “It is demonstrably immutable and scarce, in addition to having the highest track record, therefore. In the long term I have a very optimistic view of the currency’s future. It is worth mentioning that the currency should continue to be volatile and, therefore, should be considered a high-risk investment”, he concludes.
Source: Eletrolar News #146
