Bitcoin – Demystifying the high-profile cryptocurrency
Bye-bye fiat currency. Welcome cryptocurrency! The virtual currency terrain offers what loaded individuals are looking for, digital gold that meets important parameters such as privacy, cost-efficiency, liquidity and enhanced transactional speed.
In the same way that Airbnb disrupted the hospitality industry and digital photography revolutionised the film-based business, a fervour of healthy optimism pervades the currency-world as digital currency continues to make unignorable strides into payment platforms. Bitcoin is indisputably recognised as primus inter pares.
In terms of market capitalisation, it tops the hierarchy of digital currency followed by rival cryptocurrencies such as Ethereum, Tether and Binance Coin. Although this article would largely confine itself to Bitcoin, the principles captured herein may equally apply to other virtual currencies.
The revolution of money as we know it started with Bitcoin as the Internet of Information was exploited to support and sustain the Internet of Money. Bitcoin has endured a lot of battering, mocked as a speculative bubble, an unsustainable gargantuan Ponzi scheme and fools’ gold.
Despite this, it is legal to use Bitcoin, not only in the world’s biggest economy, the United States, but also in South Africa, Mauritius, Singapore, Japan, Canada, El Salvador and the European Union. In fact, two-and-half weeks ago, El Salvador declared Bitcoin legal tender and is now in use alongside the country’s primary fiat currency, the US dollar.
Owing to potential link with the criminal world, especially illicit habit-forming drugs and terrorism, countries like Morocco, Algeria, China, Russia and Vietnam have banned the use of Bitcoin in environs under their sovereignty. In the article entitled, ‘Bitcoin – Africa could be the next frontier for cryptocurrency,’ Pavithra Rao writes; “the main Bitcoin countries are Botswana, Ghana, Kenya, Nigeria, South Africa and Zimbabwe.”
In 2009, a lone figure or a group of FinTech enthusiasts going by a Japanese-sounding alias, Satoshi Nakamoto, produced the white-paper on Bitcoin. This was the genesis of the development of a digital currency that would enable transactions to take place real time without the need for the inefficient and costly platform of intermediaries normally required to ward off double spending.
Owing to decentralisation, this currency is not bound to comply with unfavourable policies of any central bank and could effectively fight hyperinflation. The Bitcoin fends off inflationary pressure normally posed by the printing of more money as a quantitative easing strategy either as part of a stimulus package for the jerking up of the economy or the funding of governments’ procurement strategy.
Investors in Bitcoin need not worry about politically driven currency devaluations and unjustified freezing of bank accounts. This virtual currency is also attractive to a third of the world’s population, men and women who remain unbanked owing to structural issues now have a platform that offers them inclusion. Unlike fiat currency, perhaps the biggest advantage to Bitcoin is that it affords its owners a form of privacy that would never be available in the normal banking infrastructure, underpinned by policies of sovereign central banks and individual banking corporations.
Could there be issues with hacking, digital theft, identity theft, liquidity and fungibility, volatility and double-spending? The central principle of investment, embodied by the hackneyed cliché of yore, ‘Cut your coat according to your cloth,’ largely embraced by risk averse individuals, applies to savvy investors in the evolving landscape of digital currency.
One needs to resist the temptation to buy more than he can afford to lose. The Bitcoin uses blockchain technology for tracking and validating transactions in the form of a fraud-proof database. This huge but decentralised public log is copied to all network participants.
Since duplicates of all transactions are visible to all, it would take nothing short of a miracle to hack millions of computers, spread across the globe, at the same time. Stealing of Bitcoin is not a remote possibility. It has happened in the past.
All it takes is for one to hack into the digital exchange platform. Vigilant investors protect themselves by moving their money from such a virtual marketplace into digital wallets that have private keys to prevent intrusion by cybercriminals. The only downside to this is the possibility of losing one’s entire money if the said decryption keys are misplaced.
For any investment asset, liquidity is essential. Although empirical data suggests stocks are more liquid than the Bitcoin, it is nonetheless liquid, and can be sold in fractions. One Bitcoin is divisible into a hundred million units and each unit can be further divided into eight decimal places.
An investor can deposit his Bitcoin in a reputable exchange vehicle and cash would be deposited into his account. Due diligence would demand that investors are mindful of the magnitude of network and service fees. Some merchants accept Bitcoin.
That is how fungible this cryptocurrency is. The pièce de resistance of the blockchain technology is its efficiency in averting double-spending. A record of all transactions has been kept from the provenance of this revolutionary technology. The cryptographic protocols in place demand that whenever the universal ledger is updated, so should all digital wallets.
The Bitcoin is likely to remain volatile. This has not dissuaded investors though, because like gold, the upside of volatility always means substantial gains for them, and any downside is normally followed by a period of resilience and growth in value.
The cryptographic keys and the blockchain technology through its indelible virtual trail make it hard for hackers to steal anyone’s identity. Twelve years since its invention, Bitcoin is still here, rock-solid, unshakeable and gaining popularity. It remains a trusted cryptographic platform of digital payments. Two years after the invention of Bitcoin, sitting pretty with a million Bitcoins, and confident on the impregnability of the bitcoin, Nakamoto wrote, “I’ve moved on to other things.”
However, heavy-hitters and influencers in the financial world have spewed out negativity. Three years short of his centenarian birthday, Charlie
Munger, an American billionaire currently serving as the Vice Chairman of Berkshire Hathaway referred to Bitcoin as, “contrary to the interests of civilisation,” and further said, “Of course, I hate the bitcoin success and I don’t welcome a currency that’s useful to kidnappers and extortionists… Nor do I like shuffling out a few extra billions and billions of dollars to somebody who just invented a new financial product out of thin air.”
People who have worked hard to build stable and growing conventional financial empires seem to be eternally flummoxed by the fact that through his ingenuity and creativity, ‘Satoshi’ created his ‘giant empire’ ex nihilo. Munger’s boss Warren Buffett said, “I don’t have any Bitcoin. I don’t own any cryptocurrency, I never will.”
While Bill Gates decries the fact that the mining of Bitcoin is not environmentally friendly, the founder of Microsoft seems to be a little more accommodative. He said, “I don’t own Bitcoin, I’m not shorting it, so I take a neutral view... Moving money into a digital form and getting transaction costs down is something the Gates Foundation does in developing countries.” In the last 12 years, the value of Bitcoin spiked lickety-split from US$0.30 in 2009 to nearly US$40,000 in 2021. The growth trajectory of the Bitcoin has been distinctively impressive. Hyper-optimistic projections put its value at a half million US dollars by 2030.
What issues are there regarding Bitcoin? Due to the privacy it offers, its greatest foible is that it grants integrity impoverished individuals and organisations a credible platform for performing damnatory activities with impunity, such as, laundering money acquired from illicit activities, funding global terrorism and extorting millions of dollars from individuals and corporations through cybercrime.
Efforts expended in fighting such activities must never be stultified by loaded hardcore criminals. This is where governments come into play. Without fostering a culture of unnecessary overreach, they must develop effective ways and means of collectively regulating this vast terrain with a view to protecting the global citizenry and bona fide investors. Fiat currency will be with us for the long haul. It’s not yet time to say bye-bye to hard cash, but certainly, it is high time we gave a tardy, but rip-roaring welcome to cryptocurrency.