BITCOIN. What Is It? (and why you need to know!)

The problem, was money itself…

It’s perhaps fair to say that understanding Bitcoin is easier than it is to explain it! Bitcoin (and we’ll take that to mean all cryptocurrencies for the sake of this article), is a complex subject. Explaining how it works is even more complex! But then again, so is the tech behind your credit / debit card. But we use our debit and credit cards every day without thinking about the nuts and bolts that make them work. So it makes sense to walk through this subject without worrying too much about the technology that’s made this miracle of modern currency possible. I also want to keep this article ‘bitesize’ so as not to blind the readers (and bore them!) with too much unnecessary information. But first we need to understand a little about why there’s a need for a new form of electronic currency and to do that, we need to step back in time a few years…

In September 2009, the illusion that governments and central banks could successfully operate economies was abruptly shattered. The financial crisis that dominated the news throughout that year, proliferated the greatest number of bankruptcies, home repossessions, evictions,, foreclosures and general financial chaos since the Great Depression of the 1930s. Thanks largely to the corrupt and ethically questionable practices of some of the worlds largest and longest established financial institutions, many millions of people lost their homes, their savings and their businesses. The crisis created a legacy of fear and financial uncertainty that persists to this day. The problem, it was said, was money itself. Many critics of the existing system, steered blame towards the fact that central banks and governments have complete control over our financial system. They have the power to actually create money out of thin air. At first glance this may seem like the appropriate response to having too little money in circulation, but the inevitable result of ‘printing’ more money, is that it consequently has less value. It’s probably important to mention here, that all “fiat” money is effectively “borrowed” into existence – meaning that every dollar bill created has an intrinsic debt attached to it. Another inevitable result of these practices, is that it’s fantastically profitable for the few who run the institutions, but frequently ruinous for the rest of us. Whilst inequality is inevitable and indeed necessary to any capitalist system, this a system that actively creates inequality. A new and foolproof monetary system was urgently needed.

On August 18th 2008, a domain named bitcoin.org was registered. The event went unnoticed and to this day, no one knows who registered the name. Shortly after, a “white paper” was published on the net outlining “Bitcoin, a peer to peer electronic cash system”. The author’s name was Satoshi Nakamoto. Then on Saturday January 3rd 2009, the same day the British chancellor, Allastair Darling announced a second round of cash bail outs for British banks, the first fifty Bitcoins were created.

Twelve years later, still no one knows who Satoshi Nakamoto really is. The name could well be a pseudonym for a single genius programmer, or the cover name for a secret collective of computer experts. Either way, the white paper proposed a system where by money can be transferred from person to person electronically, without the involvement of a third party mediator. In the same way an email can be sent, so can Bitcoin currency. In the age of ‘PayPal’ and electronic banking systems, this may not at first seem significant, but the ramifications of a reliable, robust electronic cash system – beyond the reach of governments and in some cases, beyond even IRS and Inland Revenue interference, are so far reaching, it can hardly be overstated. If Bitcoin were to be universally adopted over fiat money, transfer fees would be much lower, there would be no bank charges and no limits on transfer amounts or even the threat of your account ever being frozen. Economic freedom would be available to the 2.5 billion (World Bank figures) people on the planet who do not have and cannot ever hope to have a bank account. But these effects are only the tip of an enormous digital iceberg. For example, it’s been suggested that governments would no longer be able to finance unpopular or illegal wars without the express financial backing of the population – simply put, central banks and governments would no longer be able to create money whenever it so suited them. Additionally, since income tax is collected at source, payment would become almost impossible to enforce. Many believe that the eventual effect would force governments to collect more tax revenues from owners of property and assets. This presumably would mean targeting the more well off over poorer individuals, which might be every socialists dream, but every business owner and entrepreneur’s nightmare. On the other hand, it may just result in the drastic shrinking of governments to a point where authoritarian interference into the affairs of individuals and institutions as a whole would be reduced almost, if not entirely to zero. This raises an inevitable question: Could the market itself take the place of governments?

So, what is a Bitcoin?

OK, so this is a bit techie, so feel free to skip to the next paragraph if you’re not into this kind of thing! A Bitcoin is a cryptocurrency – a digital currency which exists only in the form of a string of unique online code. That code represents a monetary value. The value of a Bitcoin is determined by the number of people / organisations who recognise and accept it as having a monetary value – pretty much like any other currency. After all, the vast majority of pounds and dollars exist only on computers, rather than in the form of physical money any way, and since the gold reserves that our traditional currencies used to represent have long since been sold off, the value of the pound and dollar, only exists in a similar fashion. When pounds and dollars are created by banks and governments, it has the effect of de-valuing that currency through inflation, simply because there is consequently more of it now in existence. The difference with bitcoin is that there is an inbuilt limit on how many Bitcoins will eventually exist. This is because Bitcoins are generated, or “mined,” through a sequence of complex mathematical formulas run through computers – it’s kind of like having thousands of computers all trying to guess the next lottery numbers, and when they guess correctly, another Bitcoin is created (mined). The anonymous creator(s) of Bitcoin set a cap on total Bitcoin volume to counteract the effects of inflation. Once that number of Bitcoins hits 21 million, no more can be generated. These digital coins can then be bought or sold with other currencies and used as an investment or money to buy goods from any sellers who accept them. The mining of Bitcoins becomes increasingly difficult as more and more are discovered. Couple this with the periodic “halving” when the algorithm solution required to create a new bitcoin increases in difficulty by 50%. The very last bitcoins are expected to be ‘mined’ around the year 2140.

So, how does it work?

Bitcoin can be transfered to anyone or to any organisation internationally that accepts it. It works in a similar way to email but with one vital difference. When you send an email you’re using a piece of technology called ‘Hypertext Transfer Protocol’ (http). We’ve all seen this abbreviation in our address bar right? Well, when you send an email you’re actually sending a copy of the email you created – not the original. Have a look in your “Sent” folder and you’ll see the original is still there. With digital currencies such as Bitcoin, this does not happen. The reason is simple. Imagine you have $20 and you want to pay that $20 to a friend. If you sent it using traditional http email technology, you’d be sending a copy of the $20 – not the original. This means that you could spend that same $20 over and over again without ever parting with it. Whilst this sounds like a great idea at first, its practical use in the real world would be limited to say the least, and in no time at all, the dollar would be worth absolutely nothing!

Cryptocurrencies are transferred over the internet using a technology called Blockchain. Before Bitcoin was created, this technology was the Holy Grail for making digital currencies possible. This is because when you send or receive Bitcoin, or any other digital currency, you are sending the original – not a copy, so therefore it can only be spent once (unlike our hypothetical emailed $20). Every single cryptocurrency transaction is recorded and is freely accessible to anyone who wants to see it on the blockchain. It is like an open ledger for all to see – a transparent record of all cryptocurrency transactions ever made. It is the open and transparent nature of the blockchain which affords it its legitimacy. It is limited only by the number of people and organisations who adopt it as a currency. Currently (May 2020), the world market cap of Bitcoin (the total US Dollar value of Bitcoin supply in circulation) is over $162 Billion (it was around $16Billion on January 1st 2017!) This figure signifies the now vast number of people who accept Bitcoin as a legitimate currency, with its own intrinsic value. The more this number increases, the more the value of Bitcoin will increase (at least, that’s the theory!).

So, how do you join the Bitcoin revolution?

Well, you identify yourself as another person who accepts that Bitcoin is a legitimate monetary currency – and you do that by buying some! This is done online on your computer or smart phone. A list of the most reputable purchase sites are listed below, just click on the Logos. You will have to create a ‘crypto wallet’ to keep your Bitcoins and other digital currencies in. This is basically a secure digital storage space from which you can spend or trade your currencies. This can be an online wallet or better still, a physical wallet. Physical wallets are regarded as more secure because they exist separately from the internet and so are far less susceptible to hacking. You can even create a paper wallet for even greater security. Information on all of these can be found HERE. For beginners, we recommend taking a look at www.coinbase.com. It’s user friendly and 100% of your crypto holdings on coinbase are insured. Whilst it may not be the cheapest, it is the world’s largest Bitcoin exchange and perhaps the most trusted as a result. You will need several forms of ID before you can buy your first cryptocurrency, and registration can take some time to complete. This can be frustrating, but you have to remember that these safeguards are there to protect you and your investment, so do bare this in mind and be patient! If you prefer a UK exchange then check put www.bittylicious.com

Make no mistake, digital currency is very big news, with far reaching implications that will effect us all in the future. The Blockchain technology will change many other aspects of our lives too. Contracts, property deeds etc can all now be exchanged using Blockchain technology. Many believe that the emergence of Bitcoin has marked the beginning of a financial revolution on a scale as significant as the birth of the internet. But be aware, Bitcoin is not the only digital currency out there. There are now literally thousands of others. Ehtereum, Litecoin and Ripple are just three contending for the top spot. But it was Bitcoin that got in there first, and it’s Bitcoin that seems to be way ahead of the other digital currencies out there, in terms of its market domination and record breaking climb in value. For many people who got in on the ground floor, Bitcoin has made them vast fortunes. To fully put this into perspective, there is the true story of a computer programmer called Laszlo Hanyecz who, in 2010 bought two Papa John’s pizzas from a fellow programmer for 10,000 Bitcoins. At the time that equated to around $25. At today’s Bitcoin exchange rate (May 2020), that would make the pizzas worth over $44 Million – EACH!! But don’t dispare, there’s still time to invest and potentially make significant gains. But don’t leave it too long – and remember to do your research and choose wisely! You’re strongly advised to do your own research on each one before choosing. There are no guarantees and this article is in no way intended to be financial advice! So, as with all investments the old adage abides; don’t invest more than you can afford to lose!!