What you need to know about Bitcoin

2016-03-31 16:52
Post a comment 0
Bitcoin

Bitcoin. (AFP)

RELATED ARTICLES

Piece written by Michael Stannard Director at Paper Plane Exponential Technology Strategy, a company specialising in Technology Advisory.

With the speed at which new innovations become worldwide hits, the budding entrepreneur in us who fantasises about getting rich quick always has the same lament: “If only I’d known about it earlier, I could have made a killing!”

The problem with that expression of angst is that a lot of the time, we did know about it, but like the sensible, risk averse people we are, we always want to wait for confirmation before we dive into anything. Confirmation may be good if you are a technical trader shorting the NASDAQ, but it’s not good if you want to list on the NASDAQ. This is because that confirmation of a trend catching on, is the same reason you missed the boat: someone else did it before you and the market loved it.

So Bitcoin and blockchain. Chances are you’ve heard of Bitcoin by now. Chances are you probably haven’t heard about blockchain. Yet. If we’re honest, as a nation we are a bit behind in South Africa when it comes to tech. Bitcoin and blockchain came about in 2009. Bitcoin is a digital currency which derives its value from what everyone thinks its worth. It’s not backed by anything (government, gold, the Monopoly Man). This makes it unique because its value is not tied to an entity; it is simply tied to the market for Bitcoin. Bitcoin is not the only digital currency, and no one is certain if it will be adopted in earnest. (Microsoft just dropped Bitcoin use from its app store.) But as the glacier of the world melts ever faster into the sea of technology, you can be sure that a digital currency will achieve mass adoption.

The uncertainty around Bitcoin is the reason it’s not the feature of this article. What we are certain about, is the technology that makes Bitcoin possible. If Bitcoin is Dollars, blockchain is the bank. In order for a digital currency to work, you need it to be secure. Safe from hackers, bugs and system crashes. You need a record of all transactions so that you know how much money you have and how much you’ve spent. How on earth do you do that without a company or entity, charging you to do so and potential controlling all the money and distorting the value. The answer: you get everyone to do it.

Blockchain is a distributed ledger. Millions of people allow their computers to be used to process and record transactions. Imagine you photocopied your general ledger and gave it to a million different people to file, constantly. That’s a lot of versions proving the true balance in those accounts to anyone trying to fudge the numbers.  When you trade Bitcoins, the record of your transaction is kept on millions of different computers. If a transaction occurs that the entire blockchain network doesn’t agree with (a fraudulent transaction) then the transaction will not be processed. In a very simplistic explanation of cryptography, when a transaction occurs, a combination of your own password (private key) a public password (public key) and some other unique numbers create a maths problem so difficult, that it requires millions of computers working together to crack it. Therein lies the security of blockchain. No single malevolent entity has even close to the computing power to crack that code before the collective does. It is almost mathematically impossible in our world. There is much more to it than that, but a full description in writing gets a bit textbooky. Watch this fantastic video for a proper explanation: https://www.youtube.com/watch?v=Lx9zgZCMqXE.

A question which pops to mind is why all these strangers allow their computers to be used to run the blockchain? As with all sensible capitalists, they receive something in return. By allowing their computers to process transactions, they get Bitcoins in return. This is how Bitcoins come to be “printed” as it were. The total amount of Bitcoins issued will be capped at 21million. From that point on, a fee will be levied on each transaction. The process of allowing your computer hardware to process transactions in return for Bitcoins is called “mining”. Your capital equipment cost is your computer, your variable cost is electricity, and your output is Bitcoin. The margins are so tight that you need to keep your costs extremely low to make a profit. This system creates efficiency and encourages participation. Perfect leveraging of the crowd.

So if you don’t have time to watch the video, humour me and take my word for it that blockchain is a fraud proof (Yes I know, nothings perfect but that’s what I meant by “humour me”), online record of transactions. These transactions are processed at a dramatically lower cost than typical processing fees because the processors don’t have massive overheads. (High street offices, corporate jets, projects which run over budget etc.) Hmmm… which types of companies process transactions, have massive overheads, and charge fees that we hate? Can I get a “Ripe for disruption”?

But it’s not just banks that could be up-ended. Anyone that currently charges high fees to maintain a safe record of transactions is in grave peril. Your house, your car, your shares, your loans, your bonds. All of these currently require paying a trusted entity to keep a record of these things. But if blockchain removed the need for trust, you would no longer need to pay these inefficient behemoths. If you could be sure that your assets would be accurately recorded and stored for a small fee, without the possibility of fraud, you would not need big safe houses to validate your buying and selling. A wonderful example of the power of blockchain is Lorien Gamaroff’s (Founder of Bankymoon and one of the leading experts in Bitcoin and blockchain) smart electricity meter. Gamaroff set up an electricity meter in a school in Soweto that is paid for by Bitcoins donated by donors at MIT. This is an insight into the power of donations through the blockchain. Since every transaction is accounted for, you can see how those funds have been spent and indeed, purpose funds for only one thing (like an electricity meter). Imagine the reduction of lost aid through corruption in a system governed this way?

When you apply your mind to it, the possibilities are endless. There are already, hundreds of small companies working on solutions and this is where I get back to my initial point. Blockchain application is still in its infancy. We have the benefit of knowing about something that is going to change the world significantly, before anyone has really adopted it. So for entrepreneurs and executives alike, there is still time to embrace this incredible feat of engineering and bend it to your will. Don’t waste time sitting on the fence, whilst the likes of Zuckerberg, Kalanick and Chesky race on by in the Hyperloop whilst Kodak, Blackberry and Blockbuster die in the quicksand of inaction.  

Read more about: currency  |  bitcoin