By Moritlha Madisha

Bitcoin has captured our office talk, hearts and minds due to its insane growth. On the 1st of January 2017, the price of Bitcoin was 1000 USD and peaked at 19 000 USD on the 17th of December in the same year. Unfortunately, the market has not been the same as it fell hard to a minimum low of 6 000 USD since then and the latest price as of the 20th of April 2018 was 8000 USD.

Mainstream news started reporting on Bitcoin as if it were any other currency; it has, however, received mixed reviews. Some believe that it is a bubble, while others think that it is a Ponzi scheme; still, some consider it to be the new digital gold. However, business and research believe that the underlying technology behind Bitcoin is highly valuable and has potential to revolutionize many industries in general and money in particular.

 

A Short History Of Money

Bitcoin is a fairly new technology. History can help us understand the present and thus provide us with insights to predict the future of Bitcoin. The early adopters of many technologies have usually been criminals. Armed robbers were the first to escape in getaway cars while the police chased them down on bicycles or horseback. Money and cheque forgers created counterfeit money and this lead to better measures in preventing counterfeit money. Ransomware is derived from holding a person ransom; instead of holding a person ransom, the hackers will hold your critical business data ransom and demand money in exchange for your data.

The internet provides a great simile for Bitcoin. The internet democratised information, and Bitcoin is trying to do the same with money. The early users of the internet were not only the geeks, some were pirates and others pornographers; it became a den of thieves and criminals. Bitcoin’s early users had similar sinister motives.

 

The internet provides a great simile for Bitcoin. The internet democratised information and Bitcoin is trying to do the same with money.

 

Bitcoin is the first decentralized digital currency. Before we understand this digital currency, let us ask this important question “What is money?” Before we had money, history shows that trading between people was through bartering of goods and services such as cattle, fresh produce, and precious metals. Then gold became a fairly popular form of trade due to its rarity. Gold became a good measure of value for many goods and services for thousands of years.  

Bitcoin was invented as a representation of value. Paper money was invented to be a representation of the value of gold. Paper money was an innovative technology back in the days. Imagine being used to paying with gold and then, all of a sudden, you have to pay with paper – would you trust paper? No, I don’t think so. Despite paper money being innovative and convenient – because it was easy to carry and you didn’t have to cut your gold into millions of pieces when you tipped the car guard – it battled to gain full trust. Over time, the government made itself liable for the underlying value of money. This meant that money had no underlying value backing the paper, but people trusted the government’s promise.

Ladies and gentlemen, that’s how fiat currencies were created.

 

Bitcoin was invented as a representation of value

 

Fiat is derived from a Latin word that means “by decree”; paper money has value because governments legally order it to. Thus, coins or banknotes must be accepted if offered as payment. Government involvement in the valuing of currency changed things from trusting something (gold) to trusting someone (the government).

This brought about two major challenges for fiat currencies:

  1. Centralized money system – You have a central authority that issues and governs it, i.e. The Reserve Bank
  2. Quantity is not limited – The Reserve Bank can print as much money it wants, whenever needed, and thus inflate the money supply in the market. E.g. If a country has a total of R1000 of money in circulation and I happen to have R10 of the R1000, which I burn. What happens to the value of the remaining R990 if demand remains the same? The value of each Rand appreciates because of the sudden drop in supply and the same demand.

 

The Origins of Bitcoin

In 2008, a white paper detailing a decentralized currency system, Bitcoin, was published under the pseudonym of Satoshi Nakamoto. This system promised to solve one of the biggest problems in digital currencies, the double-spend problem, without a need for a central bureau. The double-spend problem refers to when a digital currency can be spent more than once due to fraud or an inherent system flaw.

Bitcoin utilises Blockchain to solve the double money problem. Blockchain is a publicly available growing list of transactions from day one of the first transaction. This is powered by a decentralized network of computers, all working together on the same task. No one owns the system but everyone helps run it. A transaction is verified by another computer between two computers performing a transaction. A highly complex puzzle has to be solved in order for the transaction to be verified. Once a computer solves this, a record is added to the list permanently. This public list is called a distributed ledger. This ledger cannot be changed and you can only add new transactions. Fraud is nearly impossible to achieve because all the computers on the network have a record of all the transactions and balances for each computer on the network. At the centre of Bitcoin is simply a transparent anonymous ledger without a central authority.

 

 

Some consider it to be the new digital gold

When a transaction is successfully made, a small reward (a fraction of Bitcoin) is awarded to the computer that solved the puzzle. This reward is a fraction of the value of the transactions. E.g. I paid someone 1 Bitcoin (BTC) then the computer that solved the puzzle might get awarded 0.00001 BTC. This part of solving the puzzle is called mining. Miners are people/organisations running highly powerful computers that are trying to compete to solve each puzzle. This is a role usually fulfilled by institutions such as banks or government agencies but with Bitcoin, anyone can be a miner. This removes the middle man, thus resulting in smaller transaction fees.

These are the key problems Bitcoin solves:

  1. Limited quantity – There is a maximum of 21 million Bitcoins that can be mined, but, currently, only 16.9 million have been mined. The market cannot be inflated with more Bitcoins.
  2. Complete control – No government agency can confiscate your coins or freeze them.
  3. No middleman – There’s no need for a bank or a merchant to process transactions between two people.

 

To Bitcoin or not to Bitcoin? That is the question. The verdict is still out on the value, and even the future, of Bitcoin. Only time and the advancement of technology will tell. 


Moritlha Madisha is a software engineer with a passion for entrepreneurship and all things tech (Artificial Intelligence, Blockchain, and cloud computing). 

Follow him on Twitter @Moritlha