Bitcoin has been making plenty of headlines lately. And whilst it's been shown to be on the volatile side, there's no denying that its footprint in the world, certainly the financial world, has been growing at a decent clip.
But what actually is this Bitcoin? Where did Bitcoin come from? And how come opinions are so polarized? These questions, and more, will be answered in below opinion piece.
A Bitcoin (BTC) is a type of digital currency, also known as a cryptocurrency, that people around the world use, for instance, for making online transactions. Unlike formal currencies, however, there is no government or central bank that issues Bitcoins; Bitcoin is what's known as a "decentralized" or "trustless" payment system.
Whilst the phrase "trustless" might sound a little paradoxical, what it actually pertains to is the fact that when using Bitcoin, there is no need to "trust" or entrust any third party with the processing of the transactions. There's no Visa, PayPal, Wester Union, or any financial authority that normally governs money traffic when using fiat. Nobody is the boss of Bitcoin.
This is one of the main differences between fiat money and Bitcoin. In the case of fiat money, such as dollars, euro, pounds etc, there is this central organization, usually a government, that isn't only the source of the money but also administers this money, either passively or actively. And this is where problems seem to occur.
For example, the biggest issue with most of the world's currencies these days is that most countries' national debt has ballooned out of control. Central banks try to artificially reduce this debt by means of quantitative easing; they keep their money printers going at full-bore, spawning ever-more money into circulation, ostensibly to lubricate the economy.
However, the drawback of this "helicopter money" is rampant inflation. Basically, it results in money bleeding value by 2-5% every single year quantitative easing goes on.
So the value of your savings, your nest egg, pension or any other capital you've worked hard to accrue, is actually being hollowed out by 2-5% without you even spending a single dime of it.
Bitcoin doesn't have this problem for two reasons:
1. There's no third party in control who's able or permitted to take charge unilaterally.
2. The number of Bitcoin is hard-coded to cap out at 21 million.
Essentially, Bitcoin is deflationary, rather than inflationary. And this, by extension, renders Bitcoin a suitable store of value. In fact, Bitcoin has earned itself the moniker "digital gold", for this very reason.
How does Bitcoin manage this? In a word, Blockchain. Blockchain is the heart and soul of Bitcoin and it allows Bitcoin to validate and immortalize all legitimate Bitcoin transactions ever made by documenting these into its Blockchain edger. Except this is no ordinary ledger, Blockchain is a ledger on steroids. Some experts even believe that Blockchain will ultimately revolutionize our lives.
Now, the technical details are beyond the scope of this article, but suffice to say that Bitcoin runs on an architecture that comprises a computer network, itself containing nodes and, critically, miners. Collectively, this software and hardware ensure that Bitcoin's algorithm is run as per its script. Again, without the need of a third party intermediary, resulting in monetary savings and the complete absence of any human-based bias and problems like corruption, counterfeiting and greed.
In practical terms, Bitcoin funds can be transferred at a cost of fractions of a single dollar, to anywhere in the world. And the sum sent will reach its destination within seconds. Compare this to the 5-8 work days it takes banks to clear a transfer, even if initiated by internet banking. Bank fees? Some banks charge a flat fee for processing a simple transfer, in addition to a percentage of the sum to be transferred.
In the case of different currencies, banks may additionally earn on the less than ideal exchange rate they apply. Astonishingly, in some csases, the total cost can't even be made clear until after the transfer has been completed!
Bitcoin's peer-to-peer network disintermediates banks, lowering fees, simplefying money traffic and rendering control back to the owner of the money.
To be sure, there are obstacles to be cleared by Bitcoin. Regulation issues brought about by governments surely await, along with technical upgrades of the Bitcoin software. Just because Bitcoin has never been hacked in its decade of existence doesn't mean it won't yet.
Furthermore, let's also not forget the push-back from the incumbents; the financial industry will not just roll over and be replaced without putting up some kind of fight.
In other words, we're still at least some years away from full acceptance by the market of Bitcoin.
Still, that being said, countries like Japan, Sweden and Switzerland have already welcomed Bitcoin. And several other countries, such as South Korea and Australia, are in the process of following these early adopters' lead. Singapore, particulalrly in light of its Smart Nation aspirations, in all likelihood, will not be far behind.
Clearly, Bitcoin isn't going away any time soon. Bitcoin has way too much promise of way too much utility to not burst onto the scene wholesale. Bottom line: Bitcoin is not a question of "if", Bitcoin is a question of "when".
Want the latest on Bitcoin in Singapore? Click here.
I am not an investment advisor and above article is for purely informational purposes and is not to be taken as investment advice. Investors are advised to personally undertake adequate due diligence, or to consult a financial advisor in order to determine what assets - if any - are appropriate to invest in.