Things to consider before jumping on the Bitcoin bandwagon
In this guest post, Mawuna Koutonin points out some key considerations to think about before investing in Bitcoin.
African people in the Diaspora and at home are heavily targeted by Bitcoin marketing, especially as the currency made headlines in recent week by hitting market highs.
I felt it was necessary to investigate the Bitcoin craze and share my opinion here, regardless.
What is Bitcoin?
Firstly, it's important to understand how digital currency works. Bitcoin is a digital notarized record of transactions between two parties or more, based on a decentralized, distributed ledger technology called block chain.
Initially, Bitcoin technology was created to solve the problem of double spending in the digital world. It purports to make sure someone doesn't use the same dollar to pay two or three times, before unhappy creditors discover that her or she doesn't have enough to pay all.
Block chain technology makes sure someone does not use the same single dollar to pay two or three merchants, by checking through if he/she has not already spent the single dollar before.
To prevent people using one dollar several times while avoiding the cost of intermediation (banks to you and me), Bitcoin uses a unique code for every dollar in the system. Every dollar in the system has a unique ID. hen you spend it, a record is generated, time stamped then shared with hundreds of servers to keep a public copy of the purchase. Every server keeping a copy is independent and is under the subordination of no third party.
In this way, it is almost impossible to spend the same dollar two times, because every time that single dollar moves across the system, a new transaction id is generated but linked to the previous transaction.
That's why it's called a block chain: a perpetual, time stamped record is kept of every move of the single dollar, and every move is linked to the previous.
Now, imagine all the money in the economy has a unique code. When it's given to a person (block genesis), the system knows that the dollar with ID xy is now attributed to person a, on date d, and h hour. That record is sent to all computers in the country.
If you'd buy chocolate with the dollar xy, from person b, in store s, on d date, at h hour, etc. The dollar is transferred to person b, and there is a link from you to b.
The main advantage of the block chain technology is that it helps introduce full transparency to social and political systems. It could be applied to many areas of life like voting, commerce, land registry, assets management- the list goes on.
Let's take for example voting. You vote for candidate c. Automatically your vote record is distributed to hundreds of servers which are not under the authority of neither the government, nor the ruling party, or anyone else. This makes almost impossible for your vote to be stolen, because data recording is secured against tampering and modifications.
Now your candidate is elected and parliament votes to raise taxes on the poor. Your candidate's vote in the legislative body for the tax rise is linked back to your vote in the block chain. You can then see within the public ledger system how your unique vote is linked to social changes. Looked at like this, block chain technology is awesome and could, in the near future, change a lot of things in our life.
Now back to Bitcoin. Bitcoin is one application among many of block chain technology to monetary transactions.
As block chain technology is decentralized, and managed by no one in authority, an incentive system is backed into the algorithm to reward people who set up servers to help find new block (new record of transactions) and spread them across the network of servers so that the records are fully distributed and easily reconciled for trust building.
These people are called 'miners'- they dig through cyberspace to find valuable 'blocks'. People who mine (setup servers to find, reconcile, and facilitate records and transactions) receive free Bitcoin. A set of Bitcoin is distributed every 10 minutes with a mathematical challenge that must be completed in order to receive it.
In total there are 21 million Bitcoin in the system, and by 2017, 16.5 million have already been mined.
The system had now reached a level of competitiveness and complexity that only few big players could afford setting a servers farm and deploy financial resources to do mining.
This means if you want to have Bitcoin today as an individual, you have to buy them from someone else. The time where individual miners could work from home had ended, because now big guys will always be first to find a new block and mine it, using powerful servers and algorithms long before you could start your home server or computer.
So, what's the problem?
A lot of people talk about Bitcoin as a currency, but it has no currency attributes. If you have Bitcoin now, you almost can't buy anything with it, or exchange it easily into another currency.
Some people think it's a value storage tool or a new kind of asset. In fact you just freeze your assets, because once it's in Bitcoin form, you cannot move it easily and hosts may charge high fees to move or exchange currency.
A rolex is an asset with direct second market. But at this stage, a Bitcoin is a kind of voucher you buy with a real currency, but there is almost no store in your city where you can use it.
A supermarket voucher is even more valuable, because you can come back to the store and buy something with it. Bitcoin has no store- and the currency's association with illegal trade (thanks to the potential for its spenders to trade anonymously, making them hard to trace ) means that even if there were, you probably wouldn't want to browse with your kids there.
Why the craze then?
I will end the post on that topic. In economy, currency goes with the economy output or production of goods and services.
If there is more money than goods, money becomes cheap and there is inflation. If there are more goods than money, there is deflation.
In the case of Bitcoin, there is a lot of money compared to the goods that can be bought with it. The currency has become the good itself. People buy money with money- this is the reason why there such a huge surge in valuation.
People buy Bitcoin, go to sleep and the next morning, they would notice that their money has doubled in value, overnight.
Such volatility and inconvertibility makes people avoid holding on to Bitcoin, unless they are speculators or the sleeping investors, who in just hold on to it.
Where it gets murky is with the current push in propaganda trying to lure naive people into the Bitcoin tulip bubble, thus helping early investors to convert their Bitcoin back into real dollars but with insane profit, while latecomers will be left with nothing.
As stated above, block chain technology is truly revolutionary, and is here to stay. If you must invest, invest in the technology and its future large-scale application either as a technology services provider, or a startup addressing a less volatile niche.
A cryptocurrency like Bitcoin might survive its current scammy setup, but for friends and family I'd recommend prudence.
Mawuna is a world peace activist who relentlessly works to empower people to express their full potential and pursue their dreams. regardless of their background. He is the Editor of SiliconAfrica.com, Founder of Goodbuzz.net, and Social Activist for Africa Renaissance. His ultimate dream is to open a world-class human potential development school in Africa. If you are interested in learning more about this venture or his other projects, you can reach him directly by emailing at email@example.com.