You may have heard that Bitcoin is revolutionary or that it is just a scam. I believe that crypto-currencies have many problems they need to get past, but ultimately they will change the world.
What is Bitcoin and Where Did it Come From?
The creator of Bitcoin is shrouded in mystery. He goes by a Japanese pseudonym, Satoshi Nakamoto. He is believed to own roughly 1 million Bitcoins, which today is worth about $6 billion.
Bitcoin is one of many cryptocurrencies that are operational today. It started just after the financial crisis in 2008, and it’s similar to regular currencies in that it fluctuates in value. But it also works as an electronic payment system to make transactions, in a similar way to Paypal.
What I think is really ingenious, and also somewhat complicated, is the way Bitcoins are created and protected, through ‘mining’. The system involves ‘miners’ who help to solve incredibly difficult mathematical problems, which support the network. The miners are then rewarded with new Bitcoins, which have been created from their work. There is a limit of 21 million Bitcoins that can ever be mined – and that total has nearly been reached. So a bit like gold, it is a finite resource.
This is a simplified explanation of how Bitcoin validates transactions – for more detail check out my post on Blockchain.
Intriguingly, although Bitcoin users remain anonymous, the network is actually completely transparent. This is because it uses blockchain technology, which creates a ledger of all transactions that have happened on the system, as well as how many are stored at each address. Every transaction made in a short period is put into a block and then linked to the other transactions in a ‘chain’ – hence the name. This ledger is in the public domain and stored on computers all over the world. No single person controls it, and the data is not stored centrally, this makes it nearly impossible for hackers to exploit it – so far, at least.
I believe that Blockchain is a revolutionary technology and has many more potential uses beyond crypto-currency. I’ve written more about this here.
Pros and Cons Of Bitcoin
In 2017, JP Morgan’s CEO, Jamie Dimon called Bitcoin ‘a fraud’ and compared it to the tulip bubble of the 17th century. But I disagree with his analysis because the benefits of Bitcoin are more tangible than tulips, and won’t’ simply disappear when people lose confidence. Perhaps, as head of an investment bank, it’s not surprising he should take this position.
✓ The brilliant thing about Bitcoin is that anyone can use it. You can set up an address in seconds, with no questions asked and no fee from a third party. Compare that with the rigmarole of signing up with a new bank and all the forms and information they require. Once you’re signed up you can send or withdraw money from anywhere in the world, without restrictions or limitations.
The other side of this coin is that the lack of regulations and the ability of users to remain anonymous means that it’s used for money laundering, drug-dealing and other illegal activities. One site that was set up to trade in these things was called Silk Road – but despite that fact that it was shut down by the FBI, new illegal marketplaces have taken its place.
✓ What really inspires me though is the potential to help people in developing countries, who have unstable and corrupt economies. As Bitcoin is a peer to peer cryptocurrency, people don’t have to place their trust in a single institution.
“Blockchain solves the problem of manipulation. When I speak about it in the West, people say they trust Google, Facebook, or their banks. But the rest of the world doesn’t trust organizations and corporations that much — I mean Africa, India, Eastern Europe, or Russia. It’s not about the places where people are really rich. Blockchain’s opportunities are the highest in the countries that haven’t reached that level yet.”
– Vitalik Buterin, inventor of Ethereum
However, in my view, the biggest downside at the moment is the Bitcoin networks phenomenal power consumption. It consumes more energy than 159 individual countries and between 60% to 70% of the mining is done in China, where the main source of energy production is from coal-fired power stations. Luckily, there are some potential solutions being explored. I’ve written about them here – Will Etherum solve the Crypto energy crisis?
So, Will Bitcoin Revolutionise International Finance?
At the moment the currency is incredibly volatile. Perhaps because it’s still in its infancy, people invest in it like a stock because they think the price will rise in the future, rather than use it in the way its intended. I believe that this was the primary cause for the Bitcoin euphoria in 2017, where its value sky-rocketed. If you bought $100 of Bitcoin in 2010, it would have been worth $140 million during the peak of the bubble. – This is fascinating to me.
Like all bubbles, it eventually burst. But despite this, I think that Bitcoins value on the stock market has little to do with its real-world potential. And overall, while I don’t imagine crypto-currencies completely taking over conventional currencies any time soon. I do believe they will continue to exert an ever-growing influence on the world and will someday rival currencies like the Dollar or Euro.
If you want to read more around this topic and find out where I got some of my information from, check out –The ‘Internet of Things’ will be the world’s most massive device market