Popular Mechanics (South Africa)
Economies of disruption
Bitcoin for beginners
Some are calling it early adoption. Others say it’s pre-adoption. In fact, some experts have specific names for those who have already adopted it. Commentator, technologist and serial entrepreneur Andreas Antonopoulos calls its users “the lunatic fringe”.
But regardless of what its users are called, Bitcoin is gaining a steadier foothold in the world as globalisation increases, earning power decreases and more people than ever before start mistrusting traditional financial institutions.
Do we blame them? Many don’t. With average citizens having a low stake in the overall health of their country’s economies and financial wealth, understandably many reach for alternatives.
Some examples of alternative tender to ensure survival can be found in countries where political and economical instability have affected average citizens the most. Think Greece after the national debt crisis in 2011 and Zimbabwe after its economic crash, stimulated by events that included US economic sanctions. Even here, on local shores, where South Africa’s credit rating was recently downgraded to junk status and political mistrust is rife.
But what if there were a currency that slotted right into this technological age and avoided the high volatility that our daily tender offers? Bitcoin might just be the solution we need.
In money we trust Before we can understand how Bitcoin works, we must understand how money works. Money is defined as a medium of exchange that is portable, durable, divisible and interchangeable. This means that it: } Can be carried; } Is (fairly) hard-wearing; } Can be broken down into smaller units; } Holds the same value as your neighbour’s money of equal amount; and } Is accepted as tender.
The final important aspect to money: it should be scarce, meaning that whatever your money is measured against needs to have a finite quantity.
Back in the day, currency was valued against gold. This was because gold was regularly available; and it was portable, durable, divisible and interchangeable, regardless of where in the world you found yourself. As a commodity, gold was in limited supply, ensuring its value.
And this system worked well, writes economist, author and Forbes contributor Nathan Lewis in an article titled “What are our stable money alternatives?”.
“The gold standard has an awesome track record. The Netherlands ruled a global empire and became the world’s financial centre with a gold standard system. Britain ruled a global empire and became the world’s financial centre with a gold standard system. The United States ruled a sort of global empire and became the world’s financial centre with a gold standard system.”
What really gives money value, though, is faith.
Specifically, society’s collected faith, explains Farzam Ehsani, the leader of Rand Merchant Bank’s Blockchain Initiative. He told the recent Blockchain Africa conference in Johannesburg, “We are all believers, whether we like it or not. Every time you accept R100, you’re a believer in its value. Otherwise, you would not accept it.”
But today’s money is not backed by a commodity; it is instead valued by the relationship between supply and demand. Governments are capable of printing more money to meet the demand. This is known as credit creation.
Ehsani speaks to this by saying it is impossible to hold money without taking a credit risk against an institution like a bank. “…I want to hold the money without taking risk of someone defaulting on payment.”
And money is risky business, says investor and author Mike Maloney, who believes that one of the biggest risks is the ability of governments to print their own money. This can ultimately dilute the currency supply and lowers the buying power of the average citizen. Look no further than just over our northern border, at Zimbabwe.
Another flaw in our monetary system: proof of ownership, Ehsani pointed out at the conference.
“You’re not asked to prove ownership of your R100 every time you take it out of your wallet to pay the shop. And no records are kept about how it transfers in society.”
He explains cold, hard cash as a bearer instrument, as opposed to registered instruments – your property, car, digital money, bonds and equities. The latter are in physical form, or registered with a record of ownership “...and we trust an intermediary to update that ledger on our behalf.
“There is no other way in which any
“Bitcoin can only work correctly with a complete consensus among all users. Therefore, all users and developers have a strong incentive to protect this consensus.”