Bitcoin and Beyond
Bitcoin: The OG Crypto
Bitcoin (BTC) was the first cryptocurrency to be created in 2009 by a person (or possibly a group) using the pseudonym Satoshi Nakamoto. Bitcoin was designed to be independent of any government or central bank. Instead it relies on blockchain technology, a decentralized public ledger that contains a digital record of every bitcoin transaction.
In essence, Bitcoin established the basic system of cryptography and consensus (i.e., peer-to-peer) verification that is the foundation of most forms of crypto today.
Bitcoin History
In 2008, an individual or group of individuals going by the pseudonym Satoshi Nakamoto, published a paper called, “Bitcoin: A Peer-to-Peer Electronic Cash System.” It was not the first case ever made for a digital currency — there were many attempts in the decades prior — but this was perhaps the first to propose a “trustless” system of electronic transactions that would depend on a peer-to-peer system of verification via blockchain technology. This innovative approach also solved a persistent problem with digital currencies, the so-called double-spending problem — or the risk that digital currencies could be hacked and spent more than once.
Thanks to the research detailed in this paper, the first Bitcoins were created in January 2009, and the bitcoin mining system was established. But the number of BTC in the market is capped. While there are more than 18.8 million Bitcoin tokens in circulation as of November 2021, worth over $1 trillion, the total limit is 21 million BTC.
How Bitcoin Works
Bitcoin miners use powerful computers to verify blocks of transactions and generate more bitcoins — a complex, time-consuming process called proof-of-work (PoW). Each block of transactions is logged permanently on the blockchain, which helps to validate and secure each bitcoin and the network as a whole. Owing to the vast number of computers or nodes on the bitcoin blockchain, the PoW process ends up using so much energy that many people question whether it’s sustainable.
How To Get Bitcoin
There are a few different ways to buy bitcoin.
• Exchanges. As noted above, you can trade crypto — including bitcoin — on centralized, decentralized, or hybrid exchanges. All you need is a crypto wallet for storing your bitcoins.
• ATMs. There are several thousand crypto ATMs where you can purchase bitcoin: estimates range from 14,000 to 26,000. Unlike a traditional ATM, though, you can’t withdraw actual cash from these machines; they make digital only transactions via the blockchain.
• Brokerages. A growing number of brokers now allow you to buy and sell crypto, similar to any other security, including SoFi Invest®.
Pros and Cons of Bitcoin
Bitcoin may be the oldest and most popular form of crypto (by market share), but it comes with its pros and cons.
• Market capitalization. The crypto-verse has thousands of players, but bitcoin outstrips them all, with a market cap of over $1.1 trillion as of Nov. 15, 2021. For context: Ethereum, the number 2 crypto by market cap, is about half that at $5.5 billion.
• Volatility. In 2021 alone, the value of bitcoin ranged from about $29,000 on January 1 to $64,000 in mid-April, dropping to about $26,600 in late July and rising to about $64,000 again as of Nov. 15. Even within the course of a single day, the value can fluctuate by thousands.
• Not SIPC insured. Most investors are insured by the SIPC up to $500,000 if a brokerage fails (or funds are stolen). But the SIPC doesn’t cover crypto.
• Regulation and usage. The inconsistency of regulations governing crypto has limited the use of these currencies around the world. That said, a number of companies do accept bitcoins as payment — just do your research first.
Meet the altcoins: Bitcoin alternatives
“Altcoin” is a catch-all term for alternative cryptocurrencies to bitcoin. There are many different altcoins — different types, and within those categories, different specific products. Litecoin is generally recognized as the first altcoin.
Understanding DeFi Tokens
DeFi, short for decentralized finance, is disrupting legacy financial models by providing the same financial services (e.g., lending, trading, payments, etc.) using blockchain technology, thus theoretically making financial products and services more affordable and accessible. DeFi encompasses many new products: e.g. dApps (or dapps), which are decentralized computer programs built primarily on the Ethereum blockchain and governed by smart contracts, as well as crypto coins and tokens.
What is the difference between DeFi coins and tokens?
DeFi coins (like Bitcoin) are similar to fiat coins in that they are fungible, and they’re a digital means of storing and transferring value.
The important thing to know about DeFi tokens is they are more like financial tools, meaning that tokens are non-fungible assets, and perform other functions than just being a store of value. Many DeFi tokens offer innovative solutions to existing blockchain problems, and for this reason may provide different opportunities for investors than being a store of value. Following are a few common DeFi tokens.
Non-Fungible Tokens (NFTs)
Non-Fungible Tokens, NFTs, are cryptographic digital assets that have uniquely identifiable metadata and codes. An NFT’s data is stored on a blockchain like Ethereum (which supports many NFTs) or up-and-comers like Tezos, ensuring that the NFT can’t be replicated or forged.
The tokens act as a representation for either digital or tangible items — like digital artwork, virtual real estate in a game, collectible Pokemon cards, or a tokenized version of the first-ever tweet, created by Twitter CEO Jack Dorsey (which sold for $3 million in March 2021).
The real value of NFTs is still emerging, but already these tokens are transforming art, travel, gaming, even supply chains and personal identification, thanks to the use of blockchain technology, which is designed to prevent duplication and fraud and takes issues like ownership and personal data security to a new level.