Cryptocurrency has revolutionized how global citizens view what the definition of currency may mean. Even at a young age, most people understood the power of currency. We perceived money as a mystical object that provided access to our wishes: candy, food, and fun.
It was the power that our parents ultimately had that we did not have the ability to generate. They would use it as an incentive for us to mow lawns, clean dishes and in general, fall in line. However, when did people actually wonder what this sheet of paper actually meant?
Why did this paper make people drop everything, including their own well-being and happiness, to obtain this? It seemed almost magical in its abilities to cause rational adults to act irrationally over it.
Currency at its core is a baseline representation of society’s way to provide an IOU based on work. The origins of paper money can be traced back to China. Great lords and the government would provide payment to merchants by giving them slips with official stamps that promised payment if the merchant were to come to their vault.
According to Wikipedia’s definition of Banknote, “It’s roots were in merchant receipts of deposit during the Tang Dynasty (618–907), as merchants and wholesalers desired to avoid the heavy bulk of copper coinage in large commercial transactions.”
Merchants began to trade these merchant receipts with each other as they did not depend on who the receipt originally belonged to, only who ended up claiming it at the end.
Tang Dynasty 30 Kuan banknote (Source: wikimedia.org)
Cryptocurrency is similar to this concept of having a promissory note that is digitized. People are able to see transparently what transfers of these promissory notes were made.
There are a million examples on the net that describe this, but for the most basic, let’s refer to the Alice and Bob example.
Alice wants to purchase digital apples from Bob but they are both too far to make any physical transaction with paper money. Alice says, I’ll send over 5 credits worth 5 digital apples to you and later you can redeem the 5 credits from me for another transaction in the future.
Bob agrees to this and they are able to make this transaction. They broadcast this transaction to the world so neither party can later change or argue that 5 apple credits were not transferred.
Later on, Bob calls in on the owed credits and performs a transaction with Alice for 3 credits which leaves Alice with 3 credits and Bob has 2 credits remaining.
Okay, everyone knows that part by now that has read anything about blockchain. Now let’s turn this up to the next level to something more applicable.
Let’s assume that Alice will only ever issue 5 credits, ever. Those 5 credits are all that’s ever going to be produced. You wanted a transaction from Alice but need 4 credits and Alice for some reason refuses to accept any other payment than these credits. She’s just a pain in the butt, but she has the leverage on you and you have to agree.
You would need to obtain 4 credits from somewhere. A potential area would be to obtain Alice’s 3 credits, then ask Bob for the remaining 1 credit.
However, Bob senses that you have nowhere else to turn and decides to become entrepreneurial. Bob tells you that in order to obtain the remaining 1 credit from his side, you’ll need to provide him the equivalent of purchasing 2 apples with paper money for 1 apple credit since you all live next to each other.
He has essentially doubled the value of the credit to twice the price he obtained it. You tell him this is highway robbery! But since you have no choice, since you really need Alice’s service which she will only agree to credits, you agree.
This has caused the credits to have a new valuation to them.
Alice hears from Bob that you paid double the price for the credit, so she also increases her price for each credit to be worth twice the paper amount.
Now in order for you to get the rest of the 3 credits, you’ll need to pay what was most likely equivalent to double the price! Alice’s transaction automatically became twice as expensive because there was a buyer of the credit willing to pay twice the amount of the original credit.
Bitcoin was basically similar to the credit example but with much more nuance.
Bitcoin has a finite supply, much like the credits in this example. Depending on what the demand on Bitcoin determined its pricing. The way of obtaining or minting Bitcoin was to perform the broadcasting operations needed and maintain the almighty distributed ledger.
The reward for this work would be to receive Bitcoin which someone could use to transfer their “apple credits”. The network itself is the value since it provided a service of broadcasting and maintaining the ledger.
Without going into too much detail about Proof of Work which has many online resources, you can assume basically there is a sophisticated system in place to maintain the ledger and perform the broadcasting fairly.
So how does someone get Bitcoin? Well there essentially are only a few ways possible. You can perform the broadcasting and ledger maintenance, which is called Mining.
Or else you have to find someone who has mined, or obtained the Bitcoin from someone else to provide it to you. Currently, here are some of the methods:
METHODS OF OBTAINING CRYPTOCURRENCY
The purest form of obtaining cryptocurrency. By participating in the network, you are rewarded with Bitcoins. But the methods involved to ensure fairness have grown to epic proportions that have once again turned quite unfair.
If you were to setup your computer to mine, you may not be paid out for 100,000 years based on the odds. Again, we won’t go into too much detail here about this, but the rules of fairness involves solving a math problem that pretty much ends up being a lottery.
This is to ensure that the distribution is based on time and Bitcoin won’t become consolidated too early. The scale of which Bitcoin mining has become has resulted in solo mining becoming nearly impossible to obtain Bitcoins.
The competition in the lottery is immense, and you may be better off actually playing the lottery.
Antminer S17 Miner (Source: 99bitcoins.com)
In addition, due to the efficiencies of scale, the cost of mining at home just don’t add up anymore. The investment in computer systems to perform the mathematical computation, energy cost, cooling cost and others are not efficient when mining. Solo mining is just not really a good choice anymore.
To solve for the problem of daunting competition, and to increase your odds, people have formed into Mining Pools which combine the power of many solo miners to mine together and share the block rewards (get bitcoin). You can essentially think of it like an office lottery where everyone in the office buys tickets together and if they win the lottery, they split it.
If you purchased 100 lottery tickets, out of 200, it would make sense to say that the person who has increased the odds by 50% should receive 50% of the rewards of the winning lottery, even if they did not have the actual lottery ticket.
There was an agreement amongst everyone to share the rewards equally and that’s why they decided to pool their lottery in the first place. However, administrating the rewards, soliciting people to join the pool, and other things, can be a full time job.
The mining pool will usually charge a small percentage fee out of your efforts to pay for these operations and the time commitment to maintain this.
BitDeer’s Partner Mining Pool (Source: BitDeer.com)
Some people have brought out concern about some of these mining pools consolidating into over 50% of the network activities, which leaves the 51% attack vulnerability to be enacted. However, this is something people are overreacting.
The nanosecond that the trust is broken from a 51% attack, no one will ever trust Bitcoin again and it would do the 51% thieves no good, unless they were attempting to destroy the entire system as anarchists.
As we established, trust in the network is the underlying value of Bitcoin and other cryptocurrencies. If a group were able to break this trust, people would abandon Bitcoin and the perceived value would plummet.
To do this method, you would need incredible resources that would be on a government level of funding, potentially multi-national. The fear of a 51% attack on Bitcoin is not really possible, but for other newer PoW chains, this is still a real fear.
Players are not incentivized to do an attack like this. This would be akin to breaking into a castle by nuking the entire world. Unless you were trying to completely destroy everything, there will be absolutely no value to do this.
Computing Power Sharing Mining + Mining Pool
This is a strategy that has existed since the beginning of mining. However, people have been reluctant for good reasons. Instead of setting up the mining equipment at home, you and other miners all agree to pool resources together to get efficiencies.
Perhaps one person has access to cheap hardware, while another has low cost sustainable energy. Another person has expertise in managing large scale IT infrastructures, and etc. By working together, everyone is able to lower their costs and increase their chances of mining with higher efficiencies.
This has been seen before in history. In the beginning of the internet, many people ran their own home servers such as BBS. People would dial into a computer server that connect and transfer information. There were a multitude of issues with this.
In some instances, some people could only allow one person at a time, or the person who was hosting would require people to buy memberships so they could upgrade their equipment to allow for multiple connections. People eventually phased out hosting their own home servers and relied on companies to provide this hosting service while they created their content as companies could provide 24/7 uptime, allow millions of connections and not have any single point of failure.
Massive data centers hold a majority of the internet’s information and has allowed the internet to become a ubiquitous vault of human knowledge and ideas. There is absolutely no way that we can ever have reached where we are now with our technology without the economy of scale to host all these server technologies.
BitDeer.com allows for people to control their own mining without needing to focus on setting up equipment, brokering power contracts, maintain cooling and stable electricity and other things required to keep these miners productive. BitDeer.com differs greatly from other platforms that have existed due to the unparalleled transparency they provide into the process.
There are no black boxes with BitDeer.com as it is very similar to running your own operation at home, just without all the hassle. You can monitor real time how the server is running, and the mining pools that you participate in will pay you directly, not to BitDeer.com.
This is the only way mining will make sense in the future for any operations as Bitcoin begins to mint less over time. You can think of it as a video game speedrun where every small detail must be taken into consideration. BitDeer.com and other computing sharing platforms are the future of mining.
Direct Transfer - Individual
You can obtain Bitcoin directly from a miner. Miners are the ones who are minting Bitcoin and may be willing to sell Bitcoin to people if they need money to run their operations. You can approach miners to receive the tokens.
However, as the years have passed by and depending on your region, it may be illegal to purchase Bitcoin directly from another individual. In countries like the USA, you would need a money transmitter license to sell currency legally.
This basically has made sites like LocalBitcoins illegal and people have been in trouble with the law.
Direct Transfer - OTC
You can obtain Bitcoin from an institutional (OTC - Over The Counter) trader such as Circle or Koi Trading. These usually have a minimum requirement that is focused more on the accredited investor which can range between $50,000 USD to $100,000 USD. For a majority of people who are looking to get into starting Bitcoin, this would probably not be the place.
These services are mainly for large funds or institutions who want to buy Bitcoin. The reason they may not go straight to the exchange is due to the price volatility.
If someone were to purchase this much demand from an exchange directly, they could cause the price of Bitcoin to spike up as traders can see how much money netting the purchaser less Bitcoin.
The OTC helps line up buyers and sellers who make private off-the-record purchases without alarming the entire market and causing prices to spike in either direction.
Direct Transfer - Retail
You may have heard of things like a Bitcoin ATM. These essentially are small versions of OTC that allow you to purchase or sell Bitcoin. However, ATM is a bit of a misnomer as it’s more of a vending machine. These machines have the licenses to sell Bitcoin and allow for people to purchase Bitcoin for fiat or debit card purchase.
It’s no different than if you were to purchase Bitcoin off a website from a company. These companies if they are legally compliant will usually require you to fill out the same KYC as every other service.
These are a great way to attract beginning Bitcoin users with simple marketing. They also decreases market volatility as these usually get their liquidity supplier from OTC or other liquidity services and are more akin to direct transfer than by purchasing from the market.
Bitcoin AMT Machine (Source: Bitcoin.com)
For people who wish to purchase Bitcoin from other people but are looking for smaller amounts than thousands, an exchange is usually the best way to go about it.
Exchanges have a lot of different forms. Places like Coinbase and Binance are essentially exchanges that allow for things such as spot trading and offer a fiat on-ramp.
Exchanges are essentially marketplaces for token purchases. A seller places their sell price on the exchange and a buyer can purchase it from them by placing their buy price.
Legally compliant exchanges have all the necessary licenses to conduct this business where they will basically send all the financial information to the required government agencies, and a majority will require you to complete a “KYC (Know Your Customer)” so they can make sure you are following the law.
This is often done to prevent money laundering or funding of non-compliant illicit activities such as terrorism. They also offer purchase of Bitcoin with fiat usually through wire transfer which they sell their own personal reserves or their clients who want to sell through their OTC service.
Donation / Bartering
A unique way to obtain Bitcoin is by performing a service or selling goods and providing an address. You can consider this probably the oldest method as bartering has been around since the beginning of humanity.
If you end up being Alice in the example from the beginning of this article, you are basically forcing people to provide you Bitcoin for your service. There are lots of reasons for this as Bitcoin provides the advantage of being a peer to peer financial instrument.
Only network fees are usually paid and the transfer can be proven with confidence and can not be changed.
Organizations such as Wikileaks have accepted Bitcoin and other cryptocurrencies for fear of government’s shutting their banking down and hindering their operations.
Centralized Fiat Services such as PayPal are famous for shutting down or freezing accounts due to pressure from governments.
A very dishonest way is to compromise another person’s wallet or exchange account and transfer the Bitcoin. This is not a recommended way of obtaining Bitcoin as the consequences are extremely severe if you are caught. Also, to prevent being a victim, you want to make sure you have taken the appropriate precautions.
There has been an estimated 1,196,217 Bitcoin or over 12 billion dollars at today’s market rate ($10,000) that has been stolen from various exchanges. I’m putting this on the list as more of a precaution than a real on-ramp solution.
Now hopefully you have a better understanding of how people obtain Bitcoin. The three key takeaways are: Hashpower, Currency (Fiat or other Cryptocurrency) and Bartering.
Hashpower is often overlooked, but it is the actual origin of where Bitcoin comes from.
If you are interested in learning more, visit BitDeer.com and you can start mining your own Bitcoin or other cryptocurrency with the most transparent and honest platform in the world.
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(Disclaimer: The Author is the Founder and CEO at BitDeer)
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