Despite receiving MASSIVE amounts of news coverage (due to its astronomical performance against the dollar), Bitcoin is NOT the core reason why technologists and traders are so excited about the future of “crypto”.
The real reason is the technology behind it all – blockchain.
This **could** change the entire fabric of the modern commercial world. If adopted, the barriers to entry for MANY small business people will be broken down, as banks and central financial institutions lose their monopoly over the transfer of “money”. If you’re interested in Bitcoin, either from a technological perspective, or from a monetary angle, this tutorial should allay many of the questions you have about it.
To be clear – I have ACTIVE positions with Bitcoin and am a live trader on the London markets. I have around 5 years’ experience with several software startups, so I have a broad scope of knowledge pertaining to both the financial and technical aspects of the new “blockchain” technology. Whilst this article will be objective, I will attempt to separate the hype from reality as best as possible…
‘Blockchain’ Is The Key
The primary thing to say about crypto is that it’s part of the blockchain technology.
Blockchain first emerged in 2008 and is a decentralized database, used to store data as “blocks”. Each time a piece of data is updated or appended, a new “block” is added to the chain with an encrypted “hash” used to not only identify the block, but also update any of the other blockchains in the network.
It’s best to think about Blockchain as a telephone directory which actually keeps its numbers up to date by referencing other databases. The difference, however, is the directory is password protected, and ALL of the listings inside it are encrypted as well.
It’s this ‘cryptography’ which makes the technology so appealing, especially to the financial world. The decentralized nature of the data gives the ability for individual users to maintain large amounts of data without the reliance on a central processing provider (typically a bank), and allows for that data to be completely hidden from anybody who doesn’t have the correct decryption hash (secure).
The problem, however, is being able to attribute this level of interaction with real world value. As mentioned, the “bitcoins” themselves hold no actual value. They are a form of ledger, which basically means they’re able to record particular transactions.
Whilst this may seem someone questionable in the West, the TRUE value of blockchain exists in the “developing” world, where corruption, hyperinflation and lack of financial accessibility have prevented many people from benefiting from the systems the West has enjoyed for decades…
Russia, some of the eastern European countries and China have been cited as being some of the biggest beneficiaries of the technology. Without the need for “government approval” to accept payments, the idea of being able to set up shop “with a smartphone” is pretty much the main driver of the craze. However, this promise doesn’t seem to be translating into fundamental financial returns (which is what most “investors” have a problem with).
Crypto Currency Are Financial Transactions Stored In The Blockchain
The whole point of crypto currency is to provide a way to store financial transactions in blockchains (they are known as public transaction ledgers for blockchain). This is why “Bitcoin” is not the only “coin” to exist in the network… Ethereum, Litecoin and Dash are all other popular forms of the same idea.
The problem most people don’t seem to grasp is that Bitcoin et al are simply algorithms designed to create certain encryption hashes for storing new “blocks” in their various blockchains. The “Bitcoin” blockchain file – for example – is now over 100 Gigabytes in size, which has raised concerns about its validity as a large scale transaction mechanism due to ALL the various blockchain servers in its network having to update this file constantly (speed issues).
Because of the limited nature of Bitcoin’s algorithm (only 21 million keys will EVER be available), people have attributed a “value” to each one. This is what sparked the whole Bitcoin craze, which has really gone beyond where it should have.
The main problem with crpyo currency is they are not actual “coins” nor do they hold any intrinsic value, as a fiat currency would. Fiat currencies – for all their woes – are backed by governments, which have military force, raw materials and their populations to guarantee the value of the currency. Bitcoin has none of that.
This is where most of the contention has arisen , with many institutional investors – most notably including the likes of JPMorgan’s Jamie Dimon – stating that Bitcoin’s current price being driven mainly be speculative trading rather than core investment fundamentals.
The core thing to remember is that blockchain / Bitcoin will not CHANGE the core fabric of commerce – trade. It will likely facilitate more trade from a wider catchment of individuals (as the Internet has done over the past 2 decades), but ultimately it will complement the current financial infrastructure rather than change it as everybody seems hell-bent on doing.
The Future Of Blockchain Lies In Instability
The main reason people have began backing BitCoin is down to the promise of blockchain in the wider world. Instead of having a bank control the flow of money in an economy, the ideal pushing Bitcoin etc is to have a truly decentralized digital currency, which does not rely on any interference from a “higher power”.
Considering WARS have been fought over this ideal in the past, the promise is a bold one, which many people are hoping to come to fruition. However, you must be aware that it’s NOT a replacement for fiat currency, and shouldn’t be treated as such. If anything, Bitcoin is a means of transaction, rather than a transaction in itself.
From a financial perspective, the idea is simple. You’re able to note down who transacted which product to which other person in a public, decentralized ledger. You don’t have to “pay” for the transaction (as you would a bank), and are publicly accountable to its fulfilment. The idea of “trade” has not changed – the only difference lies in the method through which those trades are facilitated.
The big benefit Blockchain-based transactions will likely provide is the ability to send/receive money from REAL people in other countries. At the moment, transacting money with people outside the realms of where your bank would want to do business is nigh impossible. Try getting a PayPal account in Ukraine for example.
The idea of a decentralized banking infrastructure makes doing business MUCH more stable. This is the main draw of Bitcoin, and is why it’s seen its highest price spikes in the likes of Zimbabwe and Venezuela, mirroring Gold. The idea that even if some catastrophic event happened, you’d still have purchasing power regardless of which country you are in is very appealing to a large number of people.
My Bitcoin Experience
I bought several Bitcoins when they were $500.
Now trading at ~$7,000, many of my trader friends have congratulated me on how “successful” the transaction was. However, my technical friends have pointed out that the “value” attributed to each “bitcoin” is negligible and not worth anywhere near what people are asking on the markets.
My answer is simple. In a capitalistic society, a profit is a profit. However, you also have to be realistic and appreciate the truth about “blockchain”. It’s not going to be as transformative as “the Internet” – whilst a number of services will rise to the fore (such as they did with the web), the majority of use-cases will be negligible.
The most common line I see from “investors” in Bitcoin is the same as you would get from an as-yet profitable Tesla… it’s all about the idea behind the technology. Whilst amicable, the reality is that
Ultimately, it’s your choice as to whether you want to trade Bitcoin or the plethora of other Blockchain encryption algorithms. I have traded some, but the core essence of the idea lies in how you’re able to use the technology to develop your own life.
The basis of all capitalistic societies is that everything has a value.
This value is determined by the price someone is willing to pay for a particular item/resource – meaning that if you’re able to invest your own value into a resource, you can actually turn a profit. That’s how a free market is meant to work.
Of course, we all know that when left unrestricted, a “free” market typically morphs into a consumption-driven beast… its hunger for superlative and commodity fueled by credit. It’s my opinion that the latest “Bitcoin” trend is just that – a frenzy fed by fast profits and gullible rookie traders who measure an asset’s success by its charting performance.
For every upside, there is a very real downside. The Bitcoin bull won’t last forever – it’s important to ensure you appreciate this before making any investment decisions.