Bitcoin: wild-goose chase or reality?
Guillermo Blanco
Certified PMP | Trilingual Program & Team Manager | 20+ Years in Global Project Leadership | Expertise in Banking, Insurance, and SaaS Solutions
In a short amount of time, Bitcoin went from being perceived as a simple 'game among computer nerds' to becoming one of the main topics of discussion among governments, banks, and, in general, the major players in the financial sector worldwide. Criticized, rejected, and often demonized for its impressive increase in exchange value with respect to the dollar in recent months, more than 1,000% in just one year, or for the information in the media about its use to finance illicit businesses, or also for the million-dollar scams that have been presented, Bitcoin is a topic of conversation that does not go unnoticed.
Although many talk about Bitcoin, few really know about it. Through a series of articles, I will explain what it is, how it works, its possible uses, and above all the questions it generates. And it is that, beyond what it may represent for each of us, Bitcoin and the underlying technology are going to impact the very foundations of our society.
?1. What is Bitcoin?
Bitcoin is a virtual currency created in 2009 by a person or group of people (Satoshi Nakamoto) that was born as an experiment to demonstrate that it is possible to build a functional system for exchanging value without the need for a central entity, such as a bank or a state.
For a currency to be considered as such, it is necessary to fulfill, among others, 4 main characteristics:
From this point of view, Bitcoin can be considered a form of currency or a means of exchange and storage of value. It can be used to pay for a wide variety of goods and services.
2. How it Works?
For a value exchange system to function properly, it must be able to:
In Satoshi Nakamoto's famous article published in 2008, he explained how to construct a distributed ledger among all the participants, meaning a system without a central entity or server to control it. Cryptography is used to confirm each transaction, and all participants agree on the order and validity of each new transaction before adding it to the existing chain of transactions. Finally, the validation work is rewarded by the system. This solution, implemented in 2009, is called the Blockchain.
Due to its implications, extensive range of applications, and impacts on our society, this new technology, Blockchain, will be a revolution as important as the creation of the Internet!
To explain it simply, let's say that Alicia, Bob, and Carlos each have an electronic wallet that records the amount of Bitcoins they possess, for example, 10 Bitcoins each. If Alicia wants to send 2 Bitcoins to Bob, she will write and send a message like this: "Alicia sends 2 Bitcoins to Bob and keeps 8 Bitcoins, signed Alicia." The system retrieves the transaction and, thanks to cryptography, confirms that the message comes from Alicia and has not been altered. Each participant confirms the validity of this information, and the transaction is added to the chain of existing records (each participant has a copy of the record of all transactions made). Alicia now has 8 Bitcoins, and Bob has 2 Bitcoins, without the need for an intermediary! Since the transaction information is distributed and copied on each computer, the system is extremely robust against cyber-attacks (without going into detail, this is valid if 2/3 of the participants are honest).
3. Why is Bitcoin different from a currency like the dollar or the euro?
At present, all the currencies in the world are of the FIAT type (from the Latin "Let it be so"). This means that they do not have a tangible product or commodity backing them, such as silver or gold, but rather are issued and managed by each government or state. For instance, in the United States, the FED is responsible for creating, withdrawing, or regulating the dollar, based on complex financial models that help stabilize the American economy. Ultimately, the value of the dollar or euro is based on the trust we place in our governments, institutions, and our economic and financial system. (To understand the disastrous consequences of this model, one can look at the history of the devaluation of the Argentine peso between 2014 and 2015.)
As it has been pointed by some experts, the idea that the value of a currency is based purely on trust is oversimplified. Governments and central banks have a significant degree of control over their currencies through their monetary policies. For example, they can adjust interest rates or engage in quantitative easing to influence the value of their currency. Therefore, trust alone is not the sole determinant of a currency's value.
?In this sense, Bitcoin is not very different from a currency issued by a government or institution, as its operation is based on the trust that is given to it. However, it differs from them in that it has no institution or regulatory entity controlling factors such as speculation and volatility. Instead, it operates through a decentralized network of participants, using cryptography to ensure security and prevent fraud. This creates a level of transparency and trust that is not present in traditional currencies, making it a potentially revolutionary alternative for transactions and value storage.
4. What is the real value of Bitcoin?
As mentioned earlier, the value of a fiat currency is (oversimplifying) established by a government or financial institution. Since Bitcoin represents a means of exchange between people without going through an intermediary, its "real" value depends on the value that people attribute to it. In 2009, people recognized its value to be a few cents. By early 2017, its value had risen to $300, and by the end of the same year, it had exceeded $15,000! In 2009, Bob would not have accepted payment in Bitcoin for his book, but by early 2017, he would have been willing to sell several copies for it. By the end of the year, Bob would have sold his entire collection for the same Bitcoin!
The question is, what would Bob be willing to receive in exchange for his book tomorrow?
In conclusion, only time will tell if Bitcoin is an "economic bubble" (see the Tulip Mania crisis in Holland in 1637) or if this model is the solution to a system saturated with intermediaries, regulations, requirements, and expensive transactions.
5. What Can You Actually Buy with Bitcoin?
Today, it is possible to exchange Bitcoins directly for goods, services, or FIAT currencies. Some products can be paid for in Bitcoin, primarily in the United States (with around 40,000 businesses accepting it in 2015), as well as in Germany and England. In 2015, Panama was one of the top 20 countries with the highest Bitcoin trade volume. Among the products that can be purchased are watches, IT services, and website management. It is also possible to buy a beer, a pizza, or pay for a taxi with Bitcoin, but it is not recommended as the transaction fee exceeds the value of the product in question (at the time of writing, the transaction fee is $25).
?6. Why should I be interested in Bitcoin or blockchain technology?
Although the concept of Bitcoin as a means of exchange may generate skepticism due to its origin, its complex computer system, stories of fraud, theft, or scams committed in recent years, or the idea of it being used for illicit activities (such as arms or drug trafficking), it is a fact that the technology and its impacts are interesting and should be analyzed more closely.
Blockchain and, in general, distributed ledger technologies (DLTs) offer solutions to current problems in our society, such as:
For these and many other reasons that will be discussed in future articles, it is necessary to understand, comprehend, and form an opinion about the scope and possibilities that this technology offers to our society and each one of us. As for the future of Bitcoin, only time will tell for sure. However, it is possible to assert that the future of DLTs will be prosperous and will continue to progress by leaps and bounds.