CoinGrades

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BITCOIN

By Victor & Grayson
August 22, 2019

Disclaimer

The following review is not financial advice. Coin Grades’ ratings and letter assignments reflect the technical and practical viability of these cryptocurrencies in the eyes of the Coin Grades team. As always, we encourage you to do your own thorough research from multiple sources before choosing to invest in any cryptocurrency.



Overview

In the late 2000’s, a mysterious document surfaced on the internet written by someone or a group of people with the alias of Satoshi Nakamoto. This document was the Bitcoin whitepaper, and detailed a vision for a digital currency of the future. Then, in early 2009, Bitcoin itself came into existence, aiming to fulfil this vision of providing a digital alternative to traditional money––one that could take the power away from the elites at the top of the money structure and redistribute it to the users of the Bitcoin network.

Since the mining of the first block (referred to as the Genesis block) in 2009, Bitcoin has proven its worth as a secure network, a potential store of value, and as a reliable way to move large sums of money without the oversight of a central authority. The Bitcoin blockchain is a public, distributed ledger that records all transactions on-chain. Due to its age, limited supply, and perceived advantages over traditional currencies, Bitcoin has become heavily sought after and has delivered the greatest and most consistent year-over-year returns of a speculative investment over the past decade.

Bitcoin is no stranger to growing pains. It has encountered, though survived, numerous severe price swings and controversies. When assessing the true value of a network and its potential, one must acknowledge the various obstacles that lie in its way. Disputes over alterations to Bitcoin’s code, slow/expensive transactions, and escalating energy consumption have caused some uncertainty towards the long term viability of Bitcoin as an actual currency. This has led to Bitcoin being widely accepted as a store of value, a hedge against inflation, or a “digital gold” as it is commonly named.


Security 10/10:

Bitcoin requires Proof Of Work (PoW) in order to validate transactions, meaning that the moment a Bitcoin transaction is sent, a complex mathematical problem is transmitted to nodes throughout the network. These nodes, located all over the world, use their computing power to race to solve the mathematical problem first. This process is commonly referred to as “mining”. When a problem is solved, the transaction is then verified as being authentic, and the transaction is added to a block to be attached to the blockchain. The node operators are then rewarded in Bitcoin for each block they are able to mine, these are referred to as “block rewards”.

Bitcoin is encoded using a SHA-256 cryptographic hash, an algorithm developed by the NSA. This process keeps the network incredibly secure. As time goes on, the number of possible blocks available to mine decreases, which increases the difficulty over time. The block reward halves every 210,000 blocks, which translates to roughly once every 4 years. The difficulty is adjusted every 2,016 blocks based on a recent performance by the network. The aim is to keep the average time between blocks around 10 minutes.

It is important to note that Bitcoin transactions are not private, as with most other cryptocurrencies. All transactions are viewable on the public ledger, meaning that anybody with your public wallet address will be able to see your transaction history by using online blockchain explorers. The counterpart to a public wallet address is the wallet’s private key. This key is the cryptographic hash necessary to access your funds, and should remain private at all times. In order for a user’s funds to be stolen, a hacker would need to figure out the user’s private key to their address. This is nearly impossible as there are 2 to the 96th power possible combinations of private keys, or a 7 with 40 digits behind it. As such, it is effectively impossible for anybody to guess your private keys, though some raise concern over the use of supercomputers to guess private keys in the future. It is still however recommended that private keys be stored safely on paper and on a secure offline device for maximum security. However, if you own your Bitcoin on a centralized exchange, this process is automatically handled for you. It is recommended to stick to well-established centralized exchanges if you are new to crypto, as mistakes that are irreversible can be easily made if one does not properly understand the technical aspect of cryptocurrencies.


Decentralization 9/10:

Bitcoin is the largest cryptocurrency network with the most hash power currently in the market. In layman’s terms, this means that it is very difficult to disrupt or “attack” the network, making it secure, stable, and relatively decentralized. Currently the vast majority of Bitcoin transactions are processed through a handful of mining pools, meaning that Bitcoin isn’t quite as decentralized as most think, though still far more than most. It is also important to note that all transactions on the Bitcoin blockchain are immutable, meaning that no one entity has control over who is and is not allowed to transact, making it unlike traditional banking infrastructures. These are some of the many reasons why being a store of value is such an attractive use-case for Bitcoin moving forward.


Scalability 1/10:

Many people believe that Bitcoin’s scaling potential is limited, meaning that it could get bogged down as it grows, creating a negative network effect. Others believe that as Bitcoin grows, the network will organically adjust and equilibrium will ultimately be reached. Currently, Bitcoin is only able to process approximately 7 transactions per second. To put this in perspective, Visa is able to process approximately 45,000 transactions per second. This makes Bitcoin transactions incredibly slow, with the average person needing to wait upwards of ten minutes for each transaction to be fully processed.


Speed 1/10:

Bitcoin transactions are relatively expensive to send. The average Bitcoin transaction costs around $2 worth of Bitcoin in order to send. This fee is given to the miners in exchange for processing the transaction. Some, however, believe that the lack of speed and expensive nature is well made up for by the security of the network, especially in regards to sending very large sums of money. At the peak of the Bitcoin bubble in late 2017 and early 2018, Bitcoin transactions cost over $50 to send and took several hours to be confirmed. This concerned many who saw this as a major fault in the salability potential of the network. It should be noted, however, that Bitcoin is still less expensive than traditional payment methods, since it lacks the potential for chargebacks, on top of already reducing merchant-paid fees by up to several percent. The issue here remains scalability, and whether or not Bitcoin can actually process the volume of transactions handled by VISA or PayPal.


Energy Consumption 1/10:

A concern with Bitcoin’s technology is that it will only consume more power over time as it becomes more difficult to mine. As energy consumption increases, so does the negative impact on the environment. At this time of writing, Bitcoin mining worldwide uses as much energy per year as the entire country of Switzerland. Even so, efforts are being made to pivot to more renewable energy sources for mining farms.


Team 10/10:

The Bitcoin core team is comprised of many different contributors since the code is open-source, meaning anybody can work on it, however, all changes must be validated by nodes throughout the network. Over the years, several measures have been taken in order to improve speed and scalability, including SegWit (2016) and the Lightning Network (2018). SegWit is a “soft fork” or backward-compatible upgrade that improves scalability, reduces fees, and increases transaction capacity. The Lightning Network is a layer-2 solution on top of the original Bitcoin code that operates through bilateral channels. One of the major issues in using the network is that both channels must be open at once, which makes it a rather clunky and time-consuming user experience.


Community 9/10:

Bitcoin has a strong community of developers, investors, and internet personalities. Since it’s the most well-known cryptocurrency, it would be hard to compete with the community on sheer scale. However, there has been plenty of infighting over the years, which some may see as a general red flag. Disputes over specifics in the Bitcoin code (such as block rewards and difficulty) are what have led to multiple forks from the original Bitcoin blockchain. A “fork” occurs when the open-source code of Bitcoin is copied and changes are made. The “forked” version of Bitcoin then goes on operate as a completely separate entity from the original Bitcoin. Examples of Bitcoin forks are Litecoin, Bitcoin Cash, and almost every other cryptocurrency with “Bitcoin” somewhere in its name. Tribalism continues to be rampant among the groups supporting different Bitcoin forks.


Adoption 8/10:

Bitcoin has seen arguably some of the most adoption within the cryptocurrency space, primarily due to its first mover advantage and name recognition. To many people “cryptocurrency” and “Bitcoin” are synonymous. The amount of Bitcoin ATMs throughout the world has been growing rapidly over the past several years, and Bitcoin has become an asset akin to gold in countries currently facing economic turmoil such as Venezuela, with citizens saying ‘they can take your money, but they can’t take your Bitcoin’. Bitcoin is also currently the main focus of traditional investors looking to branch into the emerging market.


Potential 6/10:

The future success of Bitcoin depends on how, if at all, cryptocurrencies will be merged and incorporated into modern financial infrastructure and if its store of value case will continue to stand the test of time. The apparent difficulty in the actualization of the Lightning Network seems to really put Bitcoin behind the curve when it comes to becoming an accepted everyday currency. Regardless of what the future holds, Bitcoin continues to be the gold standard in the world of cryptocurrency and that doesn’t seem to be changing anytime soon.


Liquidity 10/10:

Bitcoin has the highest liquidity of any crypto asset. This comes as no surprise, given its status as the flagship cryptocurrency. It has an ever-expanding derivatives and futures market, and is available on the largest number of exchanges. As such, it experiences the highest trade volume in the cryptocurrency market.

Summary

Bitcoin is currently the most valuable and well-known cryptocurrency in the market. While slow and expensive by modern standards, the security and durability of the network cannot be disputed. While some are saying that Bitcoin will eventually be dethroned as the premier cryptocurrency, others believe that it still has plenty of gas left in the tank to continue to be the preeminent cryptocurrency in the market.

Final Rating

Pros - Consistent price appreciation, durability, security, first-mover advantage, name recognition, very large community.
Cons - Community infighting, large energy consumption, speed, fees.
CoinGrades Rating: 65/100
Coin Grade: B-

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