By Francois Lombard
Today’s financial landscape can be a daunting and complex world of mathematical formulas and wild acronyms like CDO’s, EBIT and HELOC. I am however amazed just how educated people have become about economics and it is often when friends get together that this is best illustrated. When the South African Reserve Bank increased rates last month I had very interesting conversations with friends. Nowadays everyone knows whether inflation is high or low. Will interest rates increase in the near future? What is the political climate like in the country? And it is during these conversations that a new word has popped up more and more.
Bitcoin and Crypto currencies?! What is Bitcoin? In the next few paragraphs I will try and attempt answering this question without looking like I have two heads. The content will be very broad and I will attempt to KISS (Keep It Simple Stupid). This is simply because Bitcoin and the way it works is still very complex with terms like “mining” and “open source” often being thrown around. Some people argue that Crypto currencies are the future of finance; others say it is a fad, but I say that regardless of the outcome, you should at least be aware of the movement.
Whenever I am doing exploratory research I am other reminded of the following quotes and this puts things into perspective and reminds me that it is generally a bad idea to say something can’t or won’t be done, especially in the realm of science and technology.
- “Television won’t be able to hold on to any market it captures after the first six months. People will soon get tired of staring at a plywood box every night.” – Darryl Zanuck, executive at 20th Century Fox, 1946
- “I think there is a world market for maybe five computers.” – Thomas Watson, president of IBM, 1943
- “Almost all of the many predictions now being made about 1996 hinge on the Internet’s continuing exponential growth. But I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse.” – Robert Metcalfe, founder of 3Com, 1995
- Computers in the future may have only 1,000 vacuum tubes and weigh only 1.5 tons.” – Popular Mechanics, 1949
What is Bitcoin?
Bitcoin is a digital currency (also called Crypto currency), an online-only alternative form of cash that relies on mathematics and technology to function. The Internet is technically the system that backs up this currency, and we all know that the Internet is a daily part of our lives and it’s safe to say that it isn’t going anywhere, thus a currency system dependent on it should be a safe bet. The currency are both decentralized, meaning that unlike traditional fiat currency, they are not created, controlled or regulated by a central regulatory body. Because there is no central regulatory body, two people anywhere in the world can transact freely, with no fees and no bank account, instantaneously. They can’t be censored or have their money confiscated or controlled, which has happened in some unstable countries. Last year in Cyprus, ordinary people had to give / donate some of their savings to bail out the European Union. Needless to say the Cypriot citizens panicked because they couldn’t access their money. And to make matters worse all the banks were closed because of the very real possibility that everyone will descend on the banks all at once in order to withdraw every last cent. Cypriot banks didn’t have enough liquid cash to cover everyone’s assets. No bank on the planet does.
Freedom from government intervention means the rules of Bitcoin are set by the market participants (you and I), without political interference. Most modern paper currencies are fiat currencies; these include the South African Rand and the US Dollar. The value of fiat currency is derived from the relationship between supply and demand, rather than the value of the material that the money is made of. As we have recently witnessed through quantitative easing, if a country hits hard times it can simply print more money. Unlike other fiat currencies, only 21 million Bitcoins can ever be created. However, these coins can be divided into smaller parts (the smallest divisible amount is one hundred millionth of a Bitcoin and is called a “Satoshi”, after the founder of Bitcoin). Therefore, the Bitcoin network will eventually contain approximately 2.1 quadrillion units of value. This is to prevent inflation. After the year 2140, no more Bitcoins will be created.
In future articles I will dive a bit deeper into the technical working of Bitcoin.
The next article will be about the issue of double spending. Many commentators agree that the solving of the double spending problem will when we look back in time be one of the greatest inventions and will stand next to inventions like the wheel.
We’d love to hear your thoughts and questions on Bitcoin.
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Disclaimer: The opinions expressed here are the personal opinions of the author and this article should not be viewed as an endorsement or considered personalized investment advice of Bitcoin or Crypto Currencies.