Most recent update: [July 22nd, 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or Bitcoin, made available on the VirgoCX Platform, including an opinion that Bitcoin is not itself a security and/or derivative.
What Is Bitcoin?
Bitcoin can be defined as a type of digital currency or cryptocurrency. It is entirely independent of any central authority such as banks or the government. The domain bitcoin.org was registered in August 2008, shortly after which the Bitcoin whitepaper was published online by Satoshi Nakamoto. Satoshi Nakamoto's true identity is still not known. The whitepaper gave us the first glimpse at the concept behind Bitcoin, a digital currency that could be used for peer-to-peer transactions over the internet. Bitcoin's genesis block had a reward of 50 BTC, and it is widely accepted as the world's first established cryptocurrency.
Bitcoin was created after the 2008 financial crisis as a response to the disillusionment with the existing financial system after the collapse of banks in 2008. People accused the big banks of misusing the people's money. The creators of Bitcoin wanted to put the control of their funds back into the hands of the people, eliminating the involvement of intermediaries (in this case, banks) and making transactions directly between individuals possible. To achieve this, they created a decentralized system where users could be in complete control of their funds. Because Bitcoin is decentralized, two people based anywhere in the world can send currency directly to each other. Transactions are stored on a public ledger, known as the blockchain, that records every transaction made on the Bitcoin network. This ensures complete transparency when it comes to transactions.
Key Highlights in the History Of Bitcoin
- 31st October 2008 - The Bitcoin whitepaper is published
- 3rd January 2009 - Bitcoin's Genesis block is mined
- 12th January 2009 - The first transaction on the Bitcoin network takes place.
- 16th December 2009 - Bitcoin Version 0.2 is released
- October 2011 - Bitcoin undergoes its first hard fork, leading to the creation of Litecoin
- 4th December 2013 - Bitcoin reaches an all-time high price of $1079
- 1st August 2017 - Bitcoin undergoes second major hard fork, leading to the creation of Bitcoin Cash.
- December 2017 - Bitcoin's price rallied to another record high
- 11th May 2020 - Bitcoin's third halving occurs
How Does Bitcoin Work?
To understand the workings of Bitcoin it is essential to understand a few terms associated with the cryptocurrency.
- The blockchain - Bitcoin runs on a public ledger known as the blockchain. The blockchain is at the center of Bitcoin and several other cryptocurrencies that have come after it. Transactions confirmed are recorded on the blockchain allowing wallets to calculate and verify new transactions, ensuring ownership of the funds.
- Public keys and private keys - Bitcoin wallets consist of a set of keys, known as the public key and the private key. Once a transaction is added to the blockchain, bitcoin wallets can use the private key to sign transactions, proving that the funds for the transaction have indeed come from the wallet owner. Once signed, any authority cannot alter the transaction.
- Mining - Mining is the method through which pending transactions are added to the blockchain. To confirm transactions, they are first arranged in a block that must adhere to strict cryptographic rules verified by the network. These rules prevent the blocks from being modified, as any modification would render all subsequent blocks invalid. Miners are rewarded for their efforts in new Bitcoins. The current reward stands at 6.25 BTC.
Bitcoin does not function like traditional payment platforms such as Visa or platforms such as PayPal. Bitcoin is an entirely decentralized, open payment network that anyone with an internet connection can access. Bitcoin has absolutely no dependency on banks or any central financial institution as it was designed to be used directly on the internet.
When you receive Bitcoin in your wallet, the blockchain registers the address from where the transaction originated as the "transaction input." The address where the transaction is sent is registered as the "transaction output." Once a transaction is initiated, the bitcoin network records it in the public ledger, containing records of all transactions processed by the network. Miners then verify the transaction, and once verified, it is added to the block. Each transaction takes a few minutes to complete with the protocol ensuring that each block takes about ten minutes to mine.
Bitcoin can be mined through high-powered hardware. Certain types of hardware are more efficient, yielding a higher reward. Mining rigs such as Application Specific Integrated circuits (ASICs) and Graphic Processing Units (GPUs) are examples of such hardware.
The Creator and History of Bitcoin
It is still not known who is the creator of Bitcoin. In October of 2008, an individual or group going by the pseudonym Satoshi Nakamoto published a whitepaper that outlined his vision for Bitcoin, detailing designs for a peer-to-peer electronic cash system. Despite numerous efforts by journalists and the cryptocurrency community, Bitcoin's actual creator or creators remain anonymous. Bitcoin's domain, Bitcoin.org, was registered a few months before publishing the whitepaper, with the network coming into existence on 3rd January 2009. This was the day the first block or the "Genesis Block" was mined, with the block carrying a reward of 50 BTC. It is widely accepted that Bitcoin is the first established cryptocurrency in the world.
Satoshi Nakamoto created Bitcoin with the vision of creating a completely decentralized electronic cash system that is entirely independent of any central authority. In 2010, Satoshi left Bitcoin, handing over the control of the cryptocurrency to select prominent members of the Bitcoin community.
Unique Characteristics of Bitcoin
Several characteristics make Bitcoin unique. Some of them are listed below.
- Irreversible - Transactions, once confirmed, cannot be reversed. Unlike transactions using traditional modes of payments that can be reversed, a Bitcoin transaction can only be reversed if the receiver is willing to return the funds. Bitcoin's non-repudiable nature ensures that there can never be a situation where a beneficiary can trick a sender by saying that he never received the transaction.
- Decentralization - Bitcoin's decentralized nature is one of its primary characteristics. One of the main goals of Satoshi Nakamoto was to make Bitcoin completely independent of any centralized controlling authority. Unlike traditional currencies and financial institutions, Bitcoin has no central authority trying to regulate or control it. Decentralization has several advantages for Bitcoin, such as security from theft.
- Transparency - Bitcoin ensures transparency because every transaction that has taken place on the Bitcoin network is recorded on the blockchain. Transactions made on the network can be viewed by anyone going through the ledger. However, if individuals desire some anonymity, they can take certain measures to ensure privacy by using wallets that ensure better privacy.
- Speed - When compared to traditional payment methods, Bitcoin is fairly quick. A user can send money from one corner of the world to the other in a matter of minutes.
- Anonymity - Traditional payment methods and banks require users to part with a significant amount of personal information such as an address, telephone number, ID proof, and other documents. Bitcoin does not need users to part with their data to use the cryptocurrency, ensuring that users control the information they share and guaranteeing them privacy to conduct transactions.
- Value Depends on Demand - Bitcoin does not have a fixed price, with its value depending entirely on its demand at a particular point.
Bitcoin was the first established cryptocurrency that made its way to the mainstream market, creating a global crypto industry and giving millions of individuals the chance to invest in different digital currencies. You can say that the entire crypto market is based on the idea propagated by Bitcoin, that of an open financial system that anyone can use to send funds to any part of the world.
Technology And Security
At the core of Bitcoin is blockchain technology, the same technology used by other cryptocurrencies such as Ethereum, Litecoin, Bitcoin Cash, etc. The blockchain can be defined as a public record of all transactions that have taken place on the Bitcoin network, from Bitcoin's Genesis Block to the most recent block generated. It is completely secure and decentralized, with a copy of the blockchain stored with each user, allowing them to verify transactions.
Blocks are created by users known as miners. Miners group transactions into blocks and use a consensus mechanism known as a Proof-of-Work consensus mechanism to validate transactions. Verified blocks are added to the blockchain, making the transaction visible to the Bitcoin network. Each block is linked to the previous block through a hash of the previous block. What is a hash? The hash function takes data as an input, returning a fixed-length output. Bitcoin uses the longest chain rule, meaning the longest chain is the main chain. So if two miners mine a block simultaneously, the following block to be added to the blockchain will determine which block makes it to the main chain—users on the Bitcoin network act as nodes that are connected. The nodes are considered equal as they are part of a peer-to-peer ledger.
Bitcoin’s underlying technology can be upgraded in two ways, a hard fork and a soft fork. A hard fork is not backward compatible, which means every node on the network needs to agree to upgrade to activate the new hard fork. A soft fork on the other hand, is backward compatible and only a majority of miners need to upgrade to enforce the new rules of the fork. An example of a hard fork is Bitcoin’s hard fork that led to the creation of Bitcoin Cash.
The SHA-256 algorithm secures the Bitcoin network. This algorithm is used by several cryptocurrencies such as Bitcoin Cash and comes from the SHA-2 hashing algorithms.
Supply Model and Incentives for Miners
The total supply of Bitcoin has been limited to 21,000,000 Bitcoins, which means that Bitcoin will never cross this figure unless there is some major upheaval. New Bitcoins are created through a process called mining. When transactions are sent across the network, miners transfer them into blocks protected by complex cryptography. Miners are rewarded for their efforts to verify transactions, add blocks to the blockchain and spend their computational resources in the form of new BTC. The current reward for miners is 6.25 BTC. The reward for miners is halved every four years or every 210,000 blocks. Bitcoin's genesis block had a reward of 50 BTC, but with the cryptocurrency having gone through 3 halvings, the reward stands at 6.25 BTC.
Bitcoin as a Store of Value
Bitcoin has often been referred to as digital gold, with supporters of the cryptocurrency stating that it has a very sound argument for acting as a store of value. Bitcoin supporters believe that it is the best way to store wealth and prevent it from being devalued. Several factors make Bitcoin an efficient store of value. Some of those factors are
With the evolution of the crypto space, Bitcoin is increasingly viewed as a store of value rather than a currency. Individuals and investors are both buying the cryptocurrency and holding on to it for the long term.
Bitcoin as a Hedge Against Inflation
Bitcoin also sees use as a hedge against inflation, thanks to its limited supply, and because the cryptocurrency's price does not influence supply. Several companies have bought vast quantities of Bitcoin to hedge against inflation and shore up their reserves.
The Bitcoin Lightning Network
The Lightning Network was created in 2015 to solve Bitcoin's scalability issues and is easily one of the most critical innovations in the crypto space. The Lightning Network is a Layer-2 or an off-chain solution that allows users to carry out transactions off the main chain. The Lightning Network operates independently, enabling trustless, high volume, and private transactions between two parties off-chain while maintaining communication with the main Bitcoin blockchain.
The Lightning Network has come into prominence because it offers a solution to Bitcoin's scalability issues. The network's ability to operate separately from the main blockchain allows for better scalability and flexibility. It also means that it will have absolutely no impact on the main blockchain if a process goes haywire.
Risks Associated with Bitcoin
Price Volatility: Bitcoin's price is notorious for its volatility. Thanks to this volatility, Bitcoin's value can be pretty unpredictable, and investors should always be prepared for a cycle of volatility when investing in Bitcoin.
Hard Forks - Bitcoin has already undergone one hard fork that led to the creation of Bitcoin Cash. Bitcoin Cash was created as the finale of a long drama that had raged in the Bitcoin community from 2010-2017. Bitcoin finally hard forked at block height 478559, creating a new chain incompatible with the original Bitcoin blockchain. Bitcoin’s block size was limited to 1MB by Satoshi Nakamoto. This block limit essentially throttled the network, limiting the transactions that could be processed. The debate can be traced back to March 2011 when Jeff Garzik proposed increasing the number of tps through a simple patch. However it was pointed out that this was a consensus parameter change and was rejected. At this point Satoshi interceded, stating that the change could be phased in at a later date. However, Satoshi left in 2010 without resolving this debate. Discussions about the block size remained muted until 2015 when the debate was revived again. However, without Satoshi there was no consensus on the way forward and the Bitcoin community was split down the middle. Eventually a hard fork was initiated, leading to the creation of Bitcoin Cash.
As with all crypto assets, there are general risks associated with Bitcoin and the Crypto Contracts available on the VirgoCX Platform. For additional information on these risks, please refer to the VirgoCX Platform Risk Statement.
Prior to listing Bitcoin on the VirgoCX Platform, VirgoCX performed due diligence on Bitcoin and determined that Bitcoin is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of Bitcoin and/or its primary development team;
- The supply, demand, maturity and liquidity of Bitcoin; and
- Legal and regulatory risks associated with Bitcoin.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.
You can download the Bitcoin Whitepaper here.