With the price of “Bitcoin” skyrocketing, many people are left scratching their heads as to whether it’s something they should be “investing” into.
On one hand, you have seasoned investors such as JPMorgan CEO Jamie Dimon claiming that Bitcoin is nothing more than a “bubble”, and on the other you have mavericks who are eager to push the world to a new “cashless” society.
Whilst both opinions are extreme, the main question people have is whether “Bitcoin” is a “scam”. Having a wealth of knowledge & experience with both the technological & economic aspects of the new “currency”, we’re in the best place to explain where it sits on the spectrum of trust – providing you with an overview of how the system works & what it’s actually able to do…
What Is Bitcoin?
Bitcoin is a new type of technology known as “cryptocurrency”.
Cryptocurrency is a type of financial ledger built around a type of technology called Blockchain. Blockchain is basically a piece of software which acts as a decentralized database, allowing users to access the most up-to-date versions of particular data (known as “blocks”) from a myriad of 100’s or 1,000’s of potential sources.
This is important as today, data (in the form of files or text) is generally ONLY accessible from central providers (be it government or businesses). These providers may exist as businesses (and are thus mostly reliable), but they still control the data and determine who has access to it.
Whilst this means relatively little to the end user, it is actually very important, especially considering the way in which some viruses have begun attacking the data integrity of entire NETWORKS now (Wannacry).
The way in which your data is stored, used and SOLD (!!) is highly concerning to many people, and as such a “decentralized” data structure was developed by a group of software developers in 2008. Christened “blockchain”, it’s based on the idea that each “block” of data (file) can be added to a “chain”. If you imagine each “chain” as being the equivalent of an email conversation and each “block” being the messages inside the conversation, you should begin to see the value of this idea.
The simplest way to describe Blockchain is to say that it has the potential to make data “3D”. Instead of just saving “naked” files (with no accountability), it allows files to be added to the “blockchain” (as “blocks”) and then for other people to edit and manage said files. Answers to questions can be found here.
It means that if you have a “work” blockchain on your own PC, you’re able to save as many files as you want into it (all the files will be treated as a “block”). You’re then able to push this latest version to the blockchain network, from which you’ll be able to download it to your work’s computer, giving you access to the latest versions of your files.
Whilst this is quite a simple explanation of the process, it should give an idea as to how the “decentralized” nature of the technology will provide users with the ability to determine the type & version of the data stored on their systems. It also means a new type of data can be created, which people have labelled as “cryptocurrency”…
Blockchain’s Use As A “Currency”
Whilst Blockchain can be used for a number of different applications, the most popular right now is “cryptocurrency” (of which Bitcoin has received the lion’s share of attention).
To explain cryptocurrency, we need to first appreciate what “currency” actually is.
Currency is a means of measuring “value”. Value can be anything from the use value of a product (IE burning a chair for firewood) to social value (buying a $50,000 watch to look good). In all cases of human commerce, the idea of a transfer of value has existed… where it used be a simple trade of corn for oats, it soon developed into using a central means of value (initially gold or other precious metals) which could be “traded” for all different items.
The core of currency comes from our adoption of farming. Before farming, we only hunted what we needed. After farming (known as the “agricultural revolution“), suddenly certain people had too much of particular products. These could be traded with other people, who also found they had a surplus (someone may have too much meat, and may trade it for fur). Learn about the Canadian Bitcoin Trade here.
As the development of human settlements began to thrive (villages became towns etc), and ‘economies’ became more dispersed, it became apparent that the value of a fur in one area was not going to be the same as another. As such, to offset this difference in price, and to make sure that people could “buy” products in a wider array of areas, certain tribes / governments began issuing coinage to provide a central way to “measure” and “store” value. This meant that you could sell your furs in the North and use the coins to buy fish in the South.
The coins were initially from gold and other precious metals (as these had a direct value). As time moved on, they started to use less precious metals and eventually began issuing paper receipts (the origin of our paper bills today).
As the world has developed, and the introduction of new technology & products has meant that the need for new ways to store & transfer value have arisen. Most notably with Paypal in the 90’s and electronic bank transfers today, MUCH of the world’s currency transactions are now handled digitally. Even the Daily Beast found this interesting and we’re not surprised. To this end, the group of developers who developed “blockchain” also started looking at a way to make a “digital” currency. This is where cryptocurrencies came from.
Cryptocurrencies are files. Like paper currency, they have no real “value” in the world apart from being a way to issue and store “value“. The difference, however, is that they are protected by particular “encryption” algorithms which both limit the supply of their files, but also ensure the files are unable to be replicated / tampered with.
The various “coins” on the market today are encryption algorithms (hence their term “crypto” – cryptographic), used to encrypt the various financial transactions used on the coin. They use particular hash codes to encrypt their data, thus making their access highly personalized (to people who own the “coin”) and unable to be tampered with.
Does It Actually Hold Value?
This is where the contention around Bitcoin / other cryptocurrencies has arisen. The premise of their currency lies in the level of service that can be bought with it, NOT in the underlying resources required to back it up.
What many people will allude to is the “gold standard“, which is a means of measuring the value of a currency based on the amount of gold its government could provide to back it up.
Today, the gold standard seems to have been replaced by the “trust” standard… in that someone who has access to particular money can rely on its ability to “purchase” certain services or products. This is what gives the currency its value.
In the same way, “Bitcoin” has been touted as a way to access a “digital” economy. Many of the strongest proponents of the system have said that it’s not a “competitor” or even threat to fiat currency (you still need USD/GBP/EUR to “buy” a Bitcoin) — moreso, it’s a means of storing the value of those currencies whilst transacting with people, especially overseas.
Many people have likened cryptographic currency (such as Bitcoin) to the likes of gold – seeing a similar pattern in its price/trading. The reason for this is that gold is still seen as a “safetynet” in case of Nuclear armageddon. Gold itself isn’t valuable, but the idea that it will be accepted by anybody makes it so. The same appears to be the case for Bitcoin.
The big thing to appreciate is the difference between cryptocurrencies and anything before is that the whole network is decentralized (thanks to blockchain). This means that governments / banks cannot regulate, change or even view the Bitcoins themselves. The system is completely self sustained.
As such, you need to appreciate that the value of a Bitcoin lies in the trust it has with others. How much the currency is “worth” depends on what someone is willing to pay for it.
So It’s A Scam?
It’s not a “scam” per se, but the way it’s being traded at the moment is fueled by rampant speculation. Much akin to the Tulip bubble of the 1630’s, the majority of “investors” in Bitcion are only interested in finding a “greater fool” to buy it off them. Here’s what The Independent had to say about it. There is absolutely NO justification to the current price of Bitcoin, apart from greed.
The ONLY thing that can justify the price of Bitcoin are the services you’ll be able to buy with it. This will be its saving grace.
The main way that “Bitcoin” will work is to facilitate cross border transactions. Without the need to go through a centrally regulated bank, you’ll be able to purchase “Bitcoin” in your local currency, send the encrypted file to a trading partner overseas (or even travel there yourself) and then “sell” the Bitcoin for the local currency.
The problem that people will have is how each “coin” is going to hold its value. This is where the idea of a “scam” may originate… but there’s already a way to combat this.
Every time a product or service is purchased, the user of that product or service is meant to have provided a comparable service elsewhere (that’s how they were able to get access to particular currency). The currency itself just means that the work they invested one day can be “stored” for a future transaction. The buyer will still have to buy another product/service to make that money worth something. If there are no services, it’s not worth anything.
With Bitcoin/other cryptocurrency, it appears that the more services appear to support it, the more valuable it ends up becoming. In this sense, the idea that at some point, a new array of digital-only services powered by cryptographic (digital) currency from providers around the world.
To be clear – the current prices of crypto currencies are likely speculative bubbles. If a new coin comes along, it could wipe out the current offerings overnight. So if you’re looking for an “investment”, I would leave Bitcoin alone. Instead, I would focus on the services it can facilitate.