So what’s with this bitcoin business?
Cryptocurrency, miners, block chain tech ... our columnist dives deep into the murky waters of virtual money.
AFTER the recent news, I couldn’t hold out any longer, so I finally did it. I finally read up on bitcoin.
And it was as confusing as I’d expected it to be.
To recap, what made me finally look into the cryptocurrency – a digital currency that uses encryption rather than a central organisation to regulate and verify transfers of funds – is that bitcoin hit new highs this week. It made news at US$11,000 (RM45,000) per coin, but currently sits at US$12,000+ (RM49,000+).
The Internet is rife with stories of the guy who bought 500 bucks of bitcoin at its inception and can now own his own planet, but sadly, I’m not one of them. When it comes to cryptocurrencies, I never understood them and thus steered clear entirely of using them as an investment thing.
And after reading dozens of articles, watching one documentary, and dragging myself through numerous online forums, I’ve reached a personal conclusion about bitcoin.
But first, I’ll explain – from my own understanding – just what bitcoin is and why it’s special.
Bitcoin seeks to decentralise our money and make transactions more efficient by using block chain technology – basically, the tech acts as a way to verify and store data about every transaction. Every time a transaction is made in bitcoin, the block chain is altered and must be verified by anonymous computers called miners that are rewarded with bitcoin for continually running the calculations to keep bitcoin functioning.
That’s me trying to make this sound simple. Yes, I know it still sounds complex, but that’s because it is.
Proponents of bitcoin say that because all the data about bitcoin is stored in ledgers on the anonymous miners, the system is essentially de-centralised and thus free of the nefarious hands of governments and regulators who have the power to run our traditional currencies into the ground. Frequently cited is Zimbabwe where the government literally just printed money to pay its debts causing hyperinflation and devaluing people’s life savings. Yeah, that’s not a good look.
The other plus to bitcoin is the block chain technology that can ensure trust in the system by making it impossible to cheat, and also could provide ways to make transactions faster and smoother. This is because the block chain can store all the data but can also be encoded with snippets of code to create smart contracts that could automate much of our bill payments, investments – basically anything currency related.
It’s easy to see why people are excited about bitcoin.
Though we should note that bitcoin’s value at the start of the year was only around US$985 (RM4,000) per coin. And to reiterate, it current US $12,000 ly stands at just under (RM49,000). That’s a 1,000% increase in a year. And yes, that makes me want to buy bitcoin.
Well, this kind of rapid gain has made lots of people want to buy bitcoin. Bitcoin as an investment has been great. But the thing is, bitcoin is ultimately supposed to be a currency, and it’s estimated that only 10% to 20% of people buying bitcoin use it as currency – its actual intended use – while the other 80%-90% hold it like an investment. But maybe it’s not their fault they do that because, currently, there are only around 90 venues – most of them online – that accept bitcoin as payment. (There are probably more than this number but this is a list of the more well-known spots.)
The other problem with bitcoin as a currency is that price fluctuations that make it a great investment, make it a really crappy type of money. Imagine if the ringgit you carried in your pocket went up 1,000% in value. You’d probably cheer. You’re rich! Except the prices of everything at the stores would also increase 1,000%. To be a currency, whatever we use must be stable, and bitcoin is anything but stable at this point.
The second problem with bitcoin as a currency is its block chain technology. The tech is actually a great idea; for most tech and financial experts, it’s the block chain that bitcoin uses that gives it the greatest potential. The problem for bitcoin is, it has no proprietary rights to the block chain, meaning banks, govern whoever ments, can implement the same technology within existing systems nullifying the need for bitcoin.
The other problem with the block chain tech as it stands right now is that even with the limited number of transactions currently carried out, the bitcoin miners (remember, they must verify the block chain, a chain of calculations that grows ever longer with every transaction) are said to use more power than 159 countries.
Each bitcoin transaction is said to use the same amount of power that would run nine homes in the United States for a day. That is the definition of unsustainable. And it means that the miners can only continue running verifications, mining bitcoin, because the value of bitcoin continues to increase. If it drops, mining will become unsustainable, miners will stop, and theoretically the time it takes to transact anything in bitcoin becomes a crawl.
Am I saying bitcoin is a bubble? Yeah. Probably. Am I saying bitcoin is useless? Far from it. Bitcoin has changed the game with block chain technology and I’m sure this will persist into the future. But like so many new technologies that break new ground, rather than betting on bitcoin, I’m betting that another cryptocurrency comes up and supplants it. We’ll have to wait and see.
Avid writer Jason Godfrey – who once was told to give the camera a ‘big smile, no teeth’ – has worked internationally for two decades in fashion and continues to work in dramas, documentaries, and lifestyle programming. Write to him at star2@thestar.com.my.