To Bitcoin or not to Bitcoin

A friend of mine told me that he bought a Bitcoin and made a bit of money.  They say it is a bad idea to take investment advice from a family member or friend, but I went ahead and bought a Bitcoin anyway.  Actually, I bought a tiny piece of a Bitcoin (called a Satoshi after the Bitcoin developer).  I am risk averse and didn’t want to spend too much, but wanted in on the action.

Technology is constantly changing and I don’t want to be left behind, and if I make a bit of extra cash along the way, great!

What is Bitcoin?

Bitcoin is a cryptocurrency created by Satoshi Nakamoto in 2008.  His intention was to create a decentralized electronic cash system.

What is a cryptocurrency you ask?  A cryptocurrency is a virtual currency or digital money, and is used for payments (you can pay for your cup of coffee, some people even get paid in Bitcoin) and to buy and sell Bitcoin.

Cryptocurrencies are legitimate, honest ways to store and grow your money, just as you would in a financial institution.

They have been in existence for years – I am annoyed that I am only learning about them now – if I had bought Bitcoin in 2009 I could have done so many things with that profit…  Bitcoin has grown 140% this year alone.

And there are hundreds of cryptocurrencies out there, including Litecoin, Ethereum, Zcash, Ripple, Monero – there were more than 900 cryptocurrencies out there when this was written.

Mr Robot

I first heard about Bitcoin on Mr Robot, an American drama series about cyber security and hacking. I was fascinated by the idea of managing money in what seemed like a dark and secretive manner, and thought it was inconsequential, that it was made up as part of the storyline.

It seemed so farfetched for a layperson like me who banks and invests in the traditional way.  Online banking is as close to the future as I get.  This made me wonder what the future of investing and banking holds – I think cryptocurrency is it.

Security concerns

Cryptocurrencies are decentralized – that means there is no central bank or government controlling it.

Who controls it then?  That is the interesting part – it is monitored by an open source peer-to-peer internet protocol/network.  Every peer on the network has a complete history of all transactions, and a balance of every account.  This does seem a bit ‘out there’ to me, but I guess if I was a programmer I could visualise it and understand it better than I do now.

Cryptocurrencies are encrypted by strings of data and a hash to signify one unit of currency.  These currencies are secured by a both a public key and a private key cryptography system that is impossible to counterfeit.

Blockgeeks.com says that cryptocurrencies are ‘not secured by people or by trust, but by math.  It is more probable that an asteroid falls on your house than that a bitcoin address is compromised.’

So it is secure.  See more on blockchains and cryptography in the next section.

New terminology

Diving into this new technology (for me) requires learning some new terminology.

  • One of the main terms to understand is blockchain.Every time someone transacts with Bitcoin, the details of the transaction are stored as a new block on the blockchain (or digital ledger), thus creating a trail of the transaction (for all to see).  The blocks (or hashes) in the chain are continually growing as new transactions are processed, which includes the very first transaction.  This makes it practically impossible to hack.This technology stops the same Bitcoin being spent more than once.
  • Cryptography is another important term to be aware of. This is basically the scrambling of text, ensuring it is unreadable and therefore protected.  Public and private keys are used between senders and receivers to encrypt and decrypt a transaction.  Keys are used to authenticate transactions by encrypting the transaction with a public key, and decrypting it with a private key.  The private key is known only to the user, and is used to verify the transaction against the public key.The blocks in the blockchain are protected by cryptography.
  • Satoshi is another term you will come across.This cute sounding word is what makes up a Bitcoin, in fact there are 100 000 000 Satoshi in one Bitcoin.
  • Mining is how Bitcoins are generated. In a nutshell miners using computers with large processing power generate new Bitcoins by solving complex math problems, cryptographic puzzles.  Just know that this happens – I am not going to try to explain it.

Getting started on Bitcoin

There are three main steps to follow to get in on the Bitcoin action.

  1. The first thing you need to do is open a wallet, actually download a wallet – this is the part that is so profound for me and my traditional/old school banking ways.You need a wallet, with a wallet address, to send and receive bitcoin, and it is from this wallet you can check your balance, track transactions and watch the share price.There are many wallets available, you just need to do a bit of research on which wallet works for you.
  1. Transfer money from your bank account into the wallet.Now you are ready to buy bitcoin.
  2. Click on the Buy button to purchase your cryptocurrency to pay for goods online, buy that cup of coffee, or save it for the future.

You can use the money you transferred into your wallet, but you can also purchase cryptocurrency with your credit card if you like.

Unlike a traditional bank account, you don’t require anyone’s permission to send and receive Bitcoins or other cryptocurrencies, there is no waiting period or minimum balance required, no forms to fill out or id documents and proof of residence to produce.

The future is now

Banks should seriously start considering investing in cryptocurrencies, as suggested by the IMF, because of advances in digital technology that are transforming the financial services landscape.  They, members of the IMF, reckon such transformations generate new opportunities for consumers as well as service providers and regulators.

Other prominent business people predict that cryptocurrencies will soon become legitimate practice in business transactions, micropayments and remittances.

It is a whole new world of which I want to be a part of.  I feel like I am a part of the future and don’t want to be left behind.

Sources

Wikipedia

Blockgeeks

Investopedia

Bitcoin.com

Images from Unsplash.com