In the past several months, there are few terms that have grown in popularity as much as ‘Bitcoin’ and ‘Blockchain’ have. With furore and frenzy growing with each major price movement – and believers and naysayers amassing, accordingly – it can be difficult to ascertain exactly what these new technologies are.
Chiefly, a common argument is that Bitcoin is little more than a scam designed to rob everyone of money – just like a ponzi scheme – before collapsing like a monetary dark star. Yet, this isn’t the case.
To answer an age old question – while scams using Bitcoin are certainly possible, Bitcoin itself is not fraudulent, nor a scam. Given the fact that you’ll likely need more proof than that, here’s why.
So, firstly, what is Bitcoin?
If you were to hold out your hand and lay a $20 note – or whatever currency you prefer – and ask yourself what gave it value, what would your answer be?
You might reply that it is backed by a government, that millions of people or use it, or it is authentic because you can hold it in your hand. All of these answers have merit – but the real underlying principle is that money has value because you believe it does.
If, tomorrow, everyone in the world suddenly thought that the Dollar was useless and is worthless in trade against something as simple as a bottle of soda, the Dollar would be without value – simply, it would have no acceptance, wouldn’t store any meaningful value, and certainly wouldn’t be redeemable for anything else.
Put simply, we can take from this a simple lesson: money is a language which we use to exchange value.
Bitcoin is a radical new idea for a global currency system that does without the need for a central bank or administrator, and it is often this idea that terrifies those who are new to cryptocurrencies. Bitcoin principally uses a new kind of technology – called a blockchain – to authenticate trust between traders and to verify transactions all without needing to pass through an intermediary.
Since no single administrator is responsible for the maintenance or backing of Bitcoin, transactions issued in Bitcoin are verified and recorded in a public distributed ledger. This public ledger is called a Blockchain.
CoinInsider explains that a blockchain is essentially a public ledger that is distributed and maintained by computers all around the world through the internet. The Blockchain draws its name from its underlying data structure that consists of 1-megabyte files called ‘Blocks’, which are essentially ledgers themselves. Blocks are ‘Chained’ together through a complex mathematical proof.
The Blockchain is a form of ledger that – rather than being kept by a bank – is instead shared between Bitcoin ‘miners’ and ‘nodes’ around the world. All network nodes (computers running Bitcoin software) have the potential to access the Blockchain and view authenticated transactions without barriers that prevent access (such as a bank charging for its services in maintaining a transaction history).
The process of authenticating pending transactions and collecting them into a block to include in the Blockchain is called “Mining”. This process is performed by members of the Bitcoin community who are called “Miners”. Miners are computer users with incredibly powerful hardware that solve complex mathematical problems to cryptographically verify a block of transactions, and then connect them to all previous transactions in the Bitcoin network.
Bitcoin, as a financial system, is designed to self-regulate. A malicious transaction requires so much computation (and thus electricity) that in almost all cases it is more profitable to use that same compute power to secure the network instead and collect the block reward. This is what prevents actors from attacking the network and preserves the Blockchain from recording malicious or fraudulent entries.
So, why isn’t it a scam?
Given that Bitcoin relies on fundamentally new technology and does without a central administrator, many have decried that the technology is not secured by trust and is merely a scheme through which many can invest and inflate its value – leading to a time when the proverbial ‘bubble’ will ‘burst’.
Blockchain technology – through cryptography – essentially provides a way to scale trust between a worldwide network of transacting parties. Where thousands of years ago one person might have traded with another face-to-face, expanding markets and globalisation meant that we required trusted institutions to record entries in ledgers and verify transactions as they take place.
Blockchain technology essentially reverts trade to a period where peer-to-peer parties can again trust each other despite their distance, and obviates the need for a central authority.
While Bitcoin isn’t a scam, that will not stop anyone from using the cryptocurrency to conduct scams in the near future – similar to how the US Dollar might be viewed as a legitimate currency, but is also used for fraudulent activity.
Hold up. What about its volatile price?
No doubt one of Bitcoin’s most prominent characteristics is its volatile price. Put simply, this is due to the reason that because Bitcoin is such a new technology that interested parties invest – and divest – money all the time.
To return to our earlier analogy about the US Dollar, participants all around the world are still determining as to whether Bitcoin – as a currency and a network – holds any value. Bitcoin’s future, and its future value, will be determined by how people around the world accept and use it.
Arguably, at present, Bitcoin has become a form of ‘digital gold’ through which investors have stored their money. In the near future, should merchants around the world accept Bitcoin as tender for goods or services, we may be able to see the cryptocurrency become a more active means of exchange similar to how a ‘traditional’ currency operates.
This can lead to ‘runaway’ markets, where participants can easily become excited by soaring prices, and terrified by plummets in value – further giving Bitcoin an uneasy presence in the media.
So, should I invest in Bitcoin?
Bitcoin is fundamentally a new technology and a new paradigm in how we perceive value. While experts continue to voice contradictory opinions on where the price of the cryptocurrency could head, it is hard not to notice that the price of Bitcoin has soared from as little as $1c per coin to more than $10,000.
For interested investors looking to buy cryptocurrency, Bitcoin is a fascinating, fast-moving, and unparalleled financial system which might well define how we transact in the near future that has thus far offered sizeable returns to committed investors.