A new form of currency that came about recently which changed the way people perceive investments and trade is Bitcoins.
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Top things you must know about Bitcoin
One thing for sure, no one is able to grasp everything there is to know about Bitcoin. In fact, even the most sound investors or the most tech-savvy ones would need time before they get the hang of it. The basic idea is that it is a digital currency and is among the 800+ out there. Bitcoin is the oldest cryptocurrency in the market which has been around for slightly less than a decade.
Here are the top things you should know about Bitcoin before considering jumping into this market.
- How it started – Bitcoin started in 2008 by Satoshi Nakamoto. The date of its birth was actually 3rd January. Nakamoto published a proof of concept that was published but he just vanished in 2010 which was then picked up by other developers. It must be stated that the true creator of Bitcoin is still unknown as Nakamoto has denied it all this while. Some names have surfaced but nothing is confirmed
- You can use Bitcoins for spending – the first bitcoin transaction took place in May 2010 which was to buy pizza. Since then, it has been used for all types of transactions that include paying for air tickets and hotel stays. The first pizza was purchased for 10,000 bitcoins which were at a very low value then. In November 2017, 10,000 bitcoins is equivalent to almost USD100 million.
- Illegal trading using Bitcoin – the US FBI shut down a darknet site Silk Road in 2014 where bitcoins were used to buy and trade drugs. Then, the US government took over all the wallets that contained about 150,000 bitcoins. That was a moment when the US government became the largest bitcoin holder before selling them off to bidders.
- Risks from hackers – Bitcoin is not entirely safe from hackers. Like any financial engine and the fact that it operates fully online, it is open to threats. The biggest setback came in 2014 when about USD$460 million of bitcoin currency was hacked and stolen from Mt Gox.
- What the billionaire investors think? – so far, Bitcoins have a bit of both. Warren Buffet has warned against investing into Bitcoin. Others have supported it. The main challenge is spending your money in something virtual (online). But that was what happened when E-Commerce first came in.
- Bitcoin Billionaires – There has been some really remarkable successful investors which include the Winklevoss twins (Cameron and Tyler). In 2013, they bought USD11 million worth of Bitcoin. They have later declared the first Bitcoin billionaires when the value hit USD11,000. This has even attracted celebrities like Gwyneth Paltrow and Ashton Kutcher, to name a few
- Financial institutions taking notice – although Bitcoin is not regulated by any agency, it has attracted a lot of interest from large financial institutions. Among them is Fidelity Investments while many others have become more receptive although rejected it initially.
- What is going on now? – as at the end of 2017, the value of Bitcoin is USD18,000 per unit. About 16.7 million Bitcoins are circulated around which is about a market capitalization of around USD300,600 billion. To put that into context, it is higher than top firms like IBM and Disney. The price slump to $10k and hovering around 8k and waiting for next moment to surge again.
Basically, Bitcoin is a type of digital currency which uses electronic means. What makes Bitcoins so interesting is that it is not like any other physical currency which are neither printed nor produced. Created and maintained electronically, it has become one of the major revolutions in recent years.
First type of cryptocurrency
A distinctive feature of Bitcoins is that it is not controlled by anyone. It is in some way, user-generated and maintained. Software applications are used to calculate and ensure security when it is used or traded.
What is Bitcoins used for?
Typically, Bitcoins are like any other currency that exists in the world, except that it does not have a physical form. With Bitcoins, you can:
- Make purchases
What makes Bitcoins so special?
One word distinguishes Bitcoins from every other form of currency in the world. it is decentralized. This means that no bank controls or regulate it. Developed by Satoshi Nakamoto, the idea behind Bitcoins was to have an independent currency and this has been a hugely successful project.
How is it produced?
The term coin is used which means there would be some form of ‘mining’ involved. Computers are used to process the transactions of this virtual currency and in return ensuring that its payment network becomes effective.
Would this then mean that there can be an unlimited number of Bitcoins being mined? According to the protocol specified, miners can only produce up to a maximum of 21 million bitcoins. That is the maximum number of bitcoins which can exist at any time. However, these coins can be further divided into what is known as ‘Satoshi’s. that would be a one hundred millionth of a bitcoin.
So, what is the basis of Bitcoin?
While conventional currency are developed based on the amount and price of gold or silver, bitcoin used mathematical algorithms. These software programs are being used globally for bitcoins to be produced.
Highlights of Bitcoins
The following are what sets Bitcoins apart from conventional currencies:
- It is not centralized – the entire network governing Bitcoins does not come under anyone’s control. It is collectively created and maintained by the machines that are designed to mine for bitcoins as well as in processing the transactions. In other words, Bitcoins are not subjected to any form of policy in monetary issues.
- Easy to manage – One of the biggest problems for merchants when it comes to trading is opening a bank account. If the red-tapes do not turn you off, the time and process will. With Bitcoins, setting up can be done within minutes after registration and the best thing is that there are no fees involved.
- Anonymity – As a user, you can have several Bitcoin addresses. One of the good things about Bitcoins is that your addresses need not be linked to your personal information or that which could be detrimental to you. It can be a purely merchant-based account.
- Transparency – A blockchain is used in Bitcoins. This is some form of a huge general ledger that logs all the transactions. This does not mean that people will know everything about you. If you store your bitcoin in a public address, it can be seen but without the information of who owns it.
- Fees – Transferring funds have never been cheaper. There might be some charges involved but it would never be as high as those imposed by conventional banks
- Speed – with Bitcoins, transferring funds is fast and efficient. After all, you are using a computer to carry out this transaction and the network is a collection of computers
Current issues behind Bitcoins
A lot of talks has been going around on Bitcoins. After all, this has been a revolutionary product that has taken the world by storm which potentially changed financial markets. As such, it has garnered a lot of media attention. One of the issues that came out was around 2011 when criminal traders used it for money laundering. The value of bitcoins went through the roof then when they bought batches of Bitcoins in millions to move their money around.
So what did that teach us? With Bitcoins, the power of producing money has been removed from the federal banks of the country. In fact, the general public has been given some form of power to produce money. Unlike standard bank accounts, Bitcoin accounts do not come under the jurisdiction of any legal system.
This means that no one can freeze your bitcoin account. Without control or power of the police or legal system on these monetary practices, the sky becomes the limit for criminals and those who are looking to manipulate the system.
Bitcoin to replace Ringgit?
Online retailers are the most common type of parties who are ready to accept digital currencies. Meanwhile, brick and mortar retailers are beginning to see Bitcoin as a good way of accepting transactions. However, in a recent report, the F & B industry too is taking notice.
Among them are foot stalls who have since advertised that bitcoin is accepted. In major cities like the Klang Valley, there are now food stalls stating they accept Bitcoin and Ethereum, collectively 2 of the largest cryptocurrencies globally. Some food stalls in smaller cities are accepting them as well although they are more prone to accepting only bitcoin.
Still in infancy stages
Although merchants have started accepting cryptocurrencies, this is still a very new market. A lot of merchants are gearing up for what will happen once cryptocurrencies become mainstream and those who have started the ball rolling will surely benefit from it.
Besides that, there has been a few training centre that has sprung up in recent months that offer people who like to know more about how cryptocurrency works, the trading mechanism and other related issues. One of the exchanges operating has recorded a million wallets ever since.
To put that into context, around 1000 bitcoins were traded in a single day which amounts to about RM50 million while the value between RM2 and RM3 billion is being traded in Bursa Malaysia daily.
How big is Cryptocurrency?
One thing for sure, those who are for cryptocurrencies believe that it is the future of investment and that it is definitely here to stay. After all, since Bitcoin enters the scene, it has made inroad across the world. There will not be so much talk, particularly from the finance fraternity if it has not created any waves. Some has strongly claimed that Bitcoin and digital currency is a bubble and would be ready to burst anytime.
What it means to have Bitcoin?
Owning any form of Bitcoin means you become part of the worldwide community to have some form of accountability in this currency. Never before has there been any currency in the history of the world to be this huge. To put that into context:
- Bitcoin will be the single biggest currency if it ever gets there
- The value of a single Bitcoin could breach the USD20,000 mark if it is dominant
What about price volatility?
The risks and liabilities have all been mentioned numerous times. Whatever the situation, there are many other concerns especially amongst Malaysia’s investors. Among them:
- Price – Perhaps the biggest concern with cryptocurrency is the fact that its prices have been surging and fluctuating uncontrollably.
- Options – there are literally thousands of different cryptocurrencies in the world today and they are all readily available online. While Bitcoin and Ethereum is currently the top 2 currencies, users can buy from any which means the risk of losing is obviously higher
- ICOs – known as initial coin offerings, they are mushrooming because it is easy and there are now even local ones too
- Knowledge – Malaysians need to be well educated about how this works. It is not about bitcoin or Dash but it is the blockchain technology which should take center stage.
The Bitcoin Architecture
Having said all the good and bad things about bitcoin and cryptocurrency, it becomes all the more important to know what underlying architecture is. In fact, you need to know the technology behind it so that you know where your money is going. The internet in nature is a very large network and blockchains can be simply understood as many networks on top of the internet (made up of many networks too). So it can sound really complex. The blockchain is actually many layers of networks operating on top of each other, all of which have their own distinct characteristics. In general, blockchain platforms have 3 main features which are:
- Shared memory – The network is extremely secure especially against threats like fraud and possible loss of data. This is because all the transactions carried out on the blockchain are recorded. They are stored in all the computers in the network so that they are transparent
- Cryptography – Encryption is enabled in all the transactions happening in the blockchain. This is actually a set of algorithms which is highly complex
- Decentralization – Like the internet (from where blockchain was born), nothing controls it. There is no entity that governs blockchains. In fact, blockchains are kept active because of the constant participation of everyone in the network. This means when security breaches happen, not everyone will be affected
How do they add up?
In general, the 3 features are found in all the blockchains where some are used interchangeably. However, in the case of Bitcoin, these features are used for 2 main reasons:
- As an enabler of financial transactions between the users directly
- As a storage space for the value of the currency
Enabler of Financial Transactions
In the conventional currency, there is a very high level of trust involved. For instance, a $5 note means it carries the value which is stipulated and defined by the government where you will get your $5 worth of product or service no matter when. We trust that the bank accepts the value as it is.
This is where the government works with the bank to create that trust by sanctioning them. In a Bitcoin network, you get the same service and value. The main difference here is that while you still have that $5 value in your account, you will not be needing any bank or intermediary to place your trust on. You can carry out the transactions as you like and still enjoy the same security.
As a storage space
As compared to the conventional currency, the $5 value is guaranteed by the government with some form of collateral as it owns a lot of assets. However, the government has the prerogative to print money which could devalue the currency if it overdoes it.
Blockchain allows you to store your own value and that is not influenced by any party who might not be aware of how to manage them. Bitcoin, like gold, must be created (in this case, mined). There is a maximum number of Bitcoin that can be mined which is 21 million.
To date, it has reached more than 17 million. The whole idea behind this is to ensure that the amount of value that you have now would not be less some years down the road.
Who controls them then?
Having all the security and transparency issues taken care of is one thing, knowing who runs all these is another. It is natural to have questions like:
- Who is involved in the encryption?
- Where do Bitcoins come from?
- Who ensures that the network is not centralized (thereby controlled)?
- Who is the record keeper?
The answer is simple, Bitcoin was built on the philosophy that no one controls it, more so when it involved governments. This was done in light of the 2009 world financial crisis which saw a lot of people across the world losing their money.
The banks had then lost their control and failed to serve its customers as they were not ready for the crisis. This money system was although robust, still volatile.
The thing about Bitcoin is that it comes from computing power. It is made up of people that form the network which means that it would not exist if there are no participants. There are people across the world who build dedicated machines for Bitcoin to run.
They are known as miners who over-time, keeps the network from shutting down. At the moment, they will run out of Bitcoin somewhere around 2140 and when that time comes, the miners will be paid transaction fees for keeping the network active.
As a network run by the participants for the community, coupled with the fact that it is stored publicly means that it is safe as it serves everyone’s interests. The more people getting involved in maintaining the blockchain will help everyone to profit which means that they will do all they can to ensure that it doesn’t go down anytime soon.