Almost everyone by now has heard of Bitcoin and the various other Cryptocurrencies, often referred to as “alt coins”. But what is Bitcoin and the thousands of digital currencies all about, and why have they become so popular in the thirteen years since the Bitcoin white paper was published in October of 2008?
The Great Financial Crisis or GFC of 2008 led to many people questioning the Central Banking system and its unbacked fiat currency (or petrodollar system). People really started looking at the nature of money and what currencies actually were. So the GFC led to an awakening and the launch of Bitcoin launch, in hindsight, is not surprising.
According to Wikipedia: “Bitcoin (₿) is a decentralised digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer Bitcoin network without the need for intermediaries. Transactions are verified by network nodes through Cryptography and recorded in a public distributed ledger called a blockchain. The Cryptocurrency was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. The currency began use in 2009 when its implementation was released as open-source software“.
The goal behind Bitcoin is to replace Central Banks and fiat currencies and become a form of digital gold.
How is Bitcoin created and how does it derive its value? The creation of Bitcoin is called mining and it is basically done through solving complex mathematical problems that were set up in the white paper. These mathematical problems become harder to solve with time as more Bitcoins are “minted” or created. The other factor that has led to the rising value of Bitcoin from less than $1 to a present level of about $60,000 is that the supply of Bitcoin is limited to 21,000,000 coins and can never be increased or changed. This limited supply is one of its strongest selling points as it is diametrically opposed to the inflationary nature of the fiat currency regime that we have had since 1971.
So what are the alt coins or other digital currencies all about? They evolved from the Bitcoin idea. The tech savvy software developers took the idea of Bitcoin and tried to improve on it and give these alt coins more than just a monetary and transfer of value function. They have, and continue to, create Crypto currencies with smart contracts and building open-source applications based on the blockchain. The blockchain is essentially a combination of all the blocks that have ever been mined or created and they are always linked to each other and present in the open ledger – so everyone can see what has gone on since the inception of all Crypto currencies. Unlike Central Bankers’ secretive actions, Bitcoin and Crypto currencies are open and transparent and the worldwide community of coders, miners and participants have evolved into a natural policing mechanism.
Thousands of white papers and alt coins have popped since the creation of Bitcoin and the great majority of them have been a failure as they have been unable to create the network effect and therefore not delivering what they promised. The general marketing idea of these alt coin projects is that they will transform an old business or industry by helping it decentralize and become more transparent by using the blockchain. The most successful of the alt coins so far is Ethereum and the basic idea behind this digital currency is that it evolves a step further than Bitcoin by allowing its users to build smart contracts on its network or blockchain. A lot of the alt coin projects such as e-sports, online gaming, Airbnb type apps, have used the Ethereum blockchain to build their projects.
So what are the pitfalls or drawbacks of Bitcoin and digital currencies? We would say that the fact that it is a decentralised system with no controlling authority makes it as close to a free market as possible but on the other hand gives it also a Wild West Environment of lawlessness. Despite the fact that Bitcoin and most alt coins are transparent and technically incorruptible, the eco system of exchanges, banks and projects that have mushroomed around it is rife with greed, dishonesty and all other negative human traits that permeate in all other sectors of society and the economy.
My advice to novices and those looking to get involved in Crypto currencies is to start from the basics and learn all about the digital wallets, the exchanges and the particular currencies you are interested in. Most alt coins worth their salt will have a white paper open to the public so there is no excuse for not doing your due diligence. It is imperative, in my opinion, that one should be prepared for huge price swings or volatility so leveraging or borrowing money to buy Cryptos is a double-edged sword. Earlier this year Bitcoin traded to around $64,000 only to drop below $30,000 a few months later in July. Likewise by the time you read this article, it may well have soared to $100,000.
A good source to start learning about Bitcoin and Cryptocurrencies: https://coinmarketcap.com/