What’s with the buzz about Bitcoin?

This is the first in what will, hopefully, be an informative series looking at cryptocurrencies, blockchains, tangles, bubbles and other interesting concepts like mining, forks and paper wallets.

Disclaimers:
1. Neither the author nor WhaleOil are Registered or Authorised Financial Advisors and nothing written here should be construed as advice to buy or sell anything.
2. The author owns a few cryptocurrencies, so is likely to be biased.

With Bitcoin surging past $US10,000 this week, there is a bit more interest being generated on various websites about Bitcoin and some of the other cryptocurrencies (cryptos) that have experienced recent rapid price rises.

So, what’s all the fuss?  What does this mean? Where are we at?

A recent article included this interesting graph.

Those of you old enough to remember the state of the Internet in 1998 will know that, way back then, not every company had email or browsers on their computers (if they even had computers on their desks.)  And the home-user computer base was negligible with personal email addresses very few and far between.  That is where this penetration calculation currently puts us in the crypto space.  If past patterns are a guide, there is explosive growth in uptake ahead of us or, maybe, a crash and burn when the bubble pops.

But the Internet, in and of itself, doesn’t DO anything. Facebook, Snapchat, Email, the Web, Search Engines, Blogs like WhaleOil etc are the things that we interact with on a daily basis and they are enabled by the underlying technology of the Internet.

In the same way, cryptocurrencies need an underlying technology as an enabler.  This underlying technology is the Blockchain.

Most people using the Internet have no idea how it all works, what a DNS is or does, what HTTP, UDP, SMB, MX, CRC and so on even stand for, they typically do not need to, they want to sit at their computer/laptop/tablet/phone and do stuff and expect it to work.

Similarly, people using cryptocurrencies do not need to understand how the blockchain technology works, they simply expect that it will.  However, let’s have a quick peek behind the curtain to establish some basics.

What is a blockchain?

The easiest concept to think about is that of a ledger, just like your bank statements.  It is a record of transactions.  Where it differs completely from the concept of a ledger that you currently have in your mind is that it is not one ledger but thousands of identical copies of the same ledger distributed in computers all over the globe and there are over 10000 copies of the Bitcoin blockchain ledger.  So, while it may be conceivable that Jim in Accounts could fiddle with the entries in the company’s ledgers and defraud his boss if Jim made a change to his copy of the Bitcoin ledger, it would be his word against 9999 other copies in the world.  Jim is going to lose that battle.  So the crucial distinction is that blockchain is a distributed ledger technology.  

A distributed ledger system has another benefit, it cuts out the middleman.  Currently for me to send $NZ to GBP there are banks and/or forex companies involved that the parties to the transaction trust. (There are also fees!)  Transactions are based on trust and an implicit belief in the honesty of the middleman, whether it be the banks or a real estate agent taking your rental bond or a share broker buying shares for you.

In blockchain technology there is no one to trust, trust has been removed as it is an open and transparent system that anyone can examine.  The trust is in the system, not people and the system is the complex mathematics behind it all which prevents any cheating or manipulation of the blockchain.


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In solidarity with the those in the world’s most despised demographic, WH has decided to ‘come out’ as an old white male. WH enjoys exercising the white-male privilege that Whaleoil provides for him by writing the occasional post challenging climate change consensus; looking at random tech issues that tweak his interest, as a bit of a tech nerd; or generally poking the borax at anyone in public life who goes on record revealing their stupidity. WH never excelled on the sports field because his coaches never allowed him to play in his preferred position on the right-wing. WH also enjoys his MG.

To read my previous articles click on my name in blue.

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