Cryptocurrency 101 (Part 1)

 

If you had 100,000 pesos in around February of 2011 and decided to buy bitcoin then (which was priced at around $1 each), and then just left it alone, you would be richer today by around 300 million pesos.

Now, before you get that urge to hit your head on the wall again and again (like me), you have to realize that you would have had to fight off the urge to cash in after its value had risen and fallen again and again. You would have had to fight off the urge to get rid of it after some major setbacks like the fall of famed bitcoin exchange Mt Gox, or China prohibiting its financial institutions from dealing in bitcoin in 2013, or the multiple times “experts” had pronounced that bitcoin was dead or dying.

Bitcoin prices have swung wildly from $1 in February, 2011 to $31 a mere 6 months later in July, and then back to $2 in December of that same year. By December 2012, it was back up to $13. By December 2013, it peaked at at $1000. In March 2014, it went down to around $600 and slowly decreased until March 2015 when it reached a low of $200. Then it began picking up again to around $500 by the end of 2015. By December of 2016, it was around $800. Since then, it has reached an all-time high of $2,800 as of this writing.

I learned about bitcoin in 2013 but didn’t really take it seriously because I couldn’t understand it and the few articles I found about it then connected it to the black market website, The Silk Road, where one could use bitcoin to buy all sorts of things including illegal items like fake driver’s licenses and illegal drugs which comprised roughly 70% of its offerings, and it could do this because bitcoin provided a certain amount of anonymity. Anyway, The Silk Road was shut down shortly after by the FBI. I decided then that I didn’t want anything to do with bitcoin because I thought it was only useful for buying illegal stuff.

It was 2 years later in 2015 when I had a chance to reconnect with the acquaintance (and now my good friend) who had introduced me to bitcoin and our conversation revolved around that and I learned more about it that shattered my previous misconceptions.

So what is bitcoin and why is it such a hot item today?

The short answer is that bitcoin is a form of digital currency (the generic term for it is cryptocurrency) that uses computer networks and high-level cryptography to secure its transactions and records. It was released as open source software in 2009. Interestingly, the inventor(s) of bitcoin remains anonymous until today as the technology was released under a pseudonym, Satoshi Nakamoto.

Over the years, despite numerous controversies surrounding it, it has slowly gained acceptance as more and more people understood what it was and what it can do. To put it simply, it allows two people to exchange value (the coin) across borders without any need to trust an intermediary or 3rd party. At first glance, this may not seem to be a big deal because some of us have gotten so used to internet transactions with credit cards and online banking.

Let me illustrate the difference. In the traditional way, in order to buy an item from another country, I have to go through a bank or use my credit card (which still boils down to a bank). In the process, I pay transaction fees for the transmission, as well as conversion fees (from PHP to USD, for example). And then, I have to implicitly trust the bank to successfully transmit my money to the seller. The seller also has to trust the bank to send my money to their account.

This need to trust a third party is removed in bitcoin as it is the protocol itself which ensures that the money is sent and received by whoever is supposed to receive it. The result is that we can transact anywhere in the world (that has internet) for a much lower transaction fee than banks or other financial institutions may charge.

So this idea of trustless transactions is a key concept in cryptocurrency, which removes the need for a central authority. Most cryptocurrency is designed around this concept and is said to be decentralized.

More on this next week.

Originally published in Sunstar Davao.

Email me at andy@freethinking.me. View previous articles at www.freethinking.me.