viewCryptocurrency and Blockchain

Here are five things everyone needs to understand about Bitcoin

Make sure you read this gentle introduction to Bitcoin. We will now go through five important facets of Bitcoin that investors should understand before dipping toes in the cryptocurrency market

Bitcoin and dollars
At near US$7,700 a Bitcoin there's still plenty of interest in cryptos

You have, I am sure, heard the term 'Bitcoin' bandied about an awful lot in recent months, but, as is the case for many traditional private investors you've possibly been put off from opening the ‘cryptocurrency’ can of worms just yet.

Now, nobody is calling anybody a luddite - but, it is fair to say that there is a sizeable portion of the traditional investment community that’s behind the curve when it comes to bitcoin, blockchain and cryptocurrency.

Admittedly, like many matters originating in computer science, there’s a heft of deeply embedded jargon that likely intimidates more mainstream minds.

Honestly, though, it is not as complicated you may fear.

You don't need to understand the inner workings of a blockchain algorithm to invest in cryptocurrency, any more than a GlaxoSmithKline shareholder needs to hold a doctorate.

The good news is that at the top level, at least, the concepts and processes of cryptocurrency are actually quite simple.

1: There are no bankers standing over the decentralised system

Arguably, the most important characteristic of a cryptocurrency is that it is decentralised.

There are no institutional controls, no bankers, and no middlemen.The network that facilitates and underpins the cryptocurrency is maintained by coders and enthusiasts. Importantly is run via an open network of computers globally.

Technically, there is no one version of the blockchain ledger powering Bitcoin. Instead, many multiple versions of the ledger exist to be updated simultaneously and synchronously.

It means that no singular record exists, and, in theory, that creates security and safeguards against corruption.

This is a point that is particularly attractive for certain Bitcoin proponents; those with a distrust of banks or government institutions.

For Bitcoin, the integrity is maintained inherently across the network and as such the integrity of transactions is not owned by any single entity in the system.

2: Controlled supply, with a maximum cap

Central bankers overseeing the world's largest economies make changes to the real-world money supply by committee. This is one of a number of reasons why the markets and wider financial services industry constantly watch and second-guess the Bank of England, Central Bank and Federal Reserve.

Technically the supply of real-world money is unlimited by the system, so long as it can be altered by those supervising it. That leaves traditional currency systems open to the impact of manipulation or incompetence, and, of course, vulnerable to the whims of politics.

The supply of Bitcoin is essentially fixed in the algorithm, and so it is more predictable.

New Bitcoin units are created through the same processes that validate the ledger. This process is known as ‘Bitcoin mining’. Essentially, the maintenance of the system results in a small number of new bitcoins being generated each hour, but, there is a maximum issue which will be set at 21mln.

A fixed circulation means that, all other things being equal, the value of each Bitcoin will increase as demand increases.

3: There are no refunds and no returns

There isn’t any institution standing over the system, and, as the ledger is decentralised all Bitcoin transactions are immutable.

Real world electronic payments can be managed or disrupted by the intermediaries and arbiters that process them.

But, once Bitcoin deals are done, they can’t be reversed or amended.

4: A million Satoshis

On the face of it, at US$7,700 per unit (over US$17,000 at the late 2017 high point), one would presume that Bitcoin would be an impractical method of payment for any purchase smaller than a used car.

Bitcoin is, however, divisible. The smallest unit of a bitcoin is called a Satoshi, it is one hundred millionth of a bitcoin.

It is still an emerging part of the industry through some Bitcoin proponents predict that Satoshis will enable a new wave of micro-transactions.

5: It’s a no-name party

Whether this part is good or bad arguably depends, significantly, on your position and your point of view.

You may have heard that Bitcoin transactions are anonymous, and, that is why critics point to vulnerabilities in regards to money laundering.

It is not strictly true. Bitcoin users have pseudonymity, not anonymity.

Electronic payments in traditional currencies are identified and recorded in compliance with anti-money laundering regulations.

No such inherent identification exists in the Bitcoin system, where transactions are semi-anonymous albeit exchange operators and intermediaries are subject to whatever money handling regulations pertain to their particular locale.

System protocols validate the parties in the transaction without needing identifiable personal information, instead, it is tied to the user’s digital wallet.

Regulators and law enforcement have been quick to adapt, and, increasingly they are seeking routes to identify users and monitor participants. For example, most service providers are now required by law to perform identity checks on their customers before they are allowed to buy or sell bitcoin.

Whilst there are concerns over the pseudonymity issue, the other perspective in this debate is that - ID aside - the transaction details themselves exist in the open ledger and therefore there’s greater systematic transparency.

This, according to Bitcoin proponents, means that the digital currency is in fact not ideal for illicit endeavours.

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