Bitcoin Zooming Higher Again. Speculation or the Future of Money?

As Bitcoin threatens to break through its record highs set a few years ago, at least some people are likely to get involved in speculating in them again.

Many seem to have forgotten the purpose of Bitcoin: To replace cash. It’s worth understanding what Bitcoin really is and should do, not simply treat it like a kind of stock or commodity trading vehicle.

A Bitcoin transaction is a peer-to-peer electronic payment. People paying people, no banks or issuing government between them.

Because Bitcoins are electronic, there have never been any physical Bitcoins and there will never be. In fact, technically, Bitcoins don’t really exist at all, not even in the electronic realm.

Bitcoins don’t exist on spreadsheets, in hard drives, or even on a server in some far-off, remote location. Instead, think of a Bitcoin transaction as data. This data is a message.

The data needs to be digitally signed on both sides of the transaction, the input and the output, through cryptography.

Source: Cointelegraph

When it is signed for, then it is sent out to the larger Bitcoin network, called the blockchain, for verification. First, the blockchain needs to verify that the amount of Bitcoin you wish to send actually exists in your account.

The blockchain stores all the previous Bitcoin transactions on its network, so first it must verify with itself that all the transactions that led to that Bitcoin being in your account took place.

The second signature comes on the output side of the transaction, the individual who received the Bitcoin.

This signature marks the transaction complete, and the data is inscribed in a block. This block is attached to the previous block on the blockchain, making the history and data of the transaction readily available for when the next transaction needs to take place.

That’s why blockchain is often called a virtual ledger.

Satoshi Nakamoto, in the seminal Bitcoin white paper, broke down Bitcoin transactions this way:

“We define a Bitcoin as a chain of digital signatures. Each owner transfers Bitcoin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership.”

Every transaction on the blockchain gets its own unique identifier, called a transaction hash. The transaction hash is a 64-character string of random letters and numbers.

Anybody can track a particular transaction through typing the transaction hash into a blockchain explorer.

Transactions can’t be undone or meddled with once they are on the blockchain. Doing that would mean redoing every single block on the blockchain — far too labor intensive. 

Bitcoin’s challenges

One of the biggest issues facing the Bitcoin community are its lengthy confirmation times. It has been known to take anywhere from a few minutes to a couple of days for a transaction to be confirmed.

The two factors that determine how long it will take for a transaction to be confirmed are, first, how much traffic is on the Bitcoin network and, second, how large the transaction is.

Generally speaking, larger transactions with higher fees will be confirmed more quickly. 

The process through which a Bitcoin transfer is confirmed is through Bitcoin mining.

Miners do not mine transactions. Instead, miners are mining blocks, which are collections of transactions. Ultimately, the miners are the ones confirming every transaction on the blockchain.

Mining is resource-intensive computational labor. The incentive for miners is that for every block they solve through cryptography, they are subsequently rewarded in Bitcoin.

That’s why large transactions get solved first. There is more incentive to solve them.

Another reason for Bitcoin’s long confirmation times is that under the current protocol blocks are limited to 1 megabyte.

This protocol limits the amount of transactions that may be coded into a block. A limit on the amount of transactions, slows confirmation times, and through this, the entire blockchain. 

Investing 101: Do Bonds Belong in Your Portfolio?

Portfolio diversification is a strategy that helps investors manage risk. Investors often choose to diversify among industries for stocks, for instance. But they also consider diversification within different assets types.

Should You Use Extra Cash to Invest or Pay Off Debt?

Deciding between repaying debt repaying versus investing may seem impossible. Everyone’s financial situation is different and only you know from an emotional standpoint what might work best. Start with your

6 Healthy Morning Rituals That Make the Most of Your Day

Whether you are a “morning person” or not, how much thought do you give to the start of your day? Do you realize that by adopting a few simple morning

How to Read and Understand an Options Quote

When you begin trading options you'll spend part of your research scanning for the right options to buy. When you find a list of options, then you'll need to learn

Test Your Financial Advisor’s Loyalty with These Simple Questions

You have a financial advisor in order to make certain you have budgeted your money correctly, have planned for future financial needs, and, in some cases, to turn some of

Sell Puts the Smart Way: Get Out Before Expiration Nears

Selling put options can be a great way to help increase the value of your portfolio without taking on too much risk. At its core, a put sale allows investors


4 Pros and 1 Con of Refinancing Your Home

Two years ago the 30-year fixed mortgage rate was 4.6%. Today it is 2.9%. If your mortgage is in the high threes, you should consider refinancing. Refinancing would lower your

Easy Finance Tip: How to Calculate Your Net Worth

To calculate your net worth, just subtract your liabilities (what you owe) from your assets (what you own). While the equation is simple, it's important to get a snapshot of

Just a Few Bad Market Years Can Slam Your Retirement: How to Cut Your Risk

I believe one very underappreciated risk for investors preparing for retirement is the concept of “sequence of returns.” Sequence of return risk is the danger that the timing of withdrawals

Tai Chi Can Benefits for Those with Chronic Diseases

The Chinese martial art of tai chi can be beneficial to people suffering with chronic illnesses, according to research in the British Journal of Sports Medicine (2015), conducted by Dr.

Two Measures of Options Volatility That Matter

Most people often have a notion of what volatility means. They understand, at least conceptually, that it has to do with data of situations that vary over time. Weather is

3 Financial Habits to Adopt Before You Retire

Nobody wants to work until the day they die. We all want to get to a point where we can simply sit down, relax, and enjoy life.  Consider adopting these