Dilshad writes for Wealth-Forum ezine on How Internet enabled disintermediation is causing disruptions in many established business and economic models around the world – and has now reached the very foundations of modern financial markets – money. Imagine a world where no Governments print currency, no banks enable transfer of money, no currency wars between nations – where there’s just one universal currency, which is created electronically and transacted electronically between any two people anywhere in the world – instantly. Dilshad, a leading RIA from Bangalore, takes you into the fascinating world of bitcoins, which has the potential to cause huge disruptions in financial markets across the globe. Read on to find out more on this whole new thing from one of the experts.
In this piece, we will journey into the very beginnings of this medium of exchange, how it evolved and its current workings and institutions that are associated with it; banks. But we know all this stuff since this is our bread and butter! So i’m going to up the ante, and try and predict the future of money, too! Hop on! It’s going to be an exciting ride of discovery!
As man started settling down from his wanderings around the vast plains and regions of the earth, he started agriculture and invented the barter system of trade. All was well, until he realized a few things about his barter system:
The problem of a common medium of exchange: What he had to offer others by way of barter was not necessarily what they wanted in exchange of what they had to offer.
The problem of Portability: Portability(specially in the case of livestock used for barter) were a huge problem. He couldn’t quickly move his livestock to another place and it often took days to reach a market.
The problem of durability: Livestock were prone to disease and would eventually die, leading to an “erosion” of assets.
The problem of divisibility: The least count for a livestock was 1. It was very difficult to divide livestock into half and expect it to have the same value as a full (read: alive) one.
These problems got him thinking and eventually after going through a myriad of trinkets and cowrie shells, he settled on gold as the medium of exchange.
Gold, he found, countered the above problems. But now a new problem arose. He had to keep track of the number of gold pieces he had set as a value for the items he wanted to exchange. Keeping track of this was difficult and this gave birth to banks. Banks started keeping and maintaining ledgers.
Over time, banks would have more work on their shoulders. They started issuing promissory notes on behalf of him to others, informing them of the fact that the note itself was akin to a transfer of the actual gold.
Money, as we know it today, was born.
A typical financial transaction between two parties is between 1-3 days. Certain high value transactions get affected within a day through RTGS, NEFT and IMPS.
The Future: Enter Bitcoin
Bitcoins are generally defined as a type of virtual currency, brought to life by the Internet, very powerful computers and the willingness of lot of people looking to embrace new forms of monetary exchange.It is a decentralised currency.
Bitcoin uses peer-to-peer technology to operate with no central authority. Transaction management and money issuance are carried out collectively by the “Bitcoin network”.
So, let’s just break down that definition and understand it’s implications.
“Decentralized Digital Currency”: There is no one government, person, region, or association that can control and/or regulate this currency. So, If there is a war in region A, typically the aftermath of the war has a negative impact on the fiat currency of that region. There is usually localized hyperinflation. Not so with Bitcoin. Since the latter is decentralized and not tied to a particular region, it’s inherent value remains relatively unchanged.
“Instant Payments”: The mean time between transactions initiation and transaction completion is about 10.5 minutes. Considering the highly complex mathematical computations that have to be done for each individual transaction, this is quasi instantaneous. Compare this to 2-3 Calendar days in the traditional system involving fiat money!
“To anyone who has access to the internet”: This method does not route the financial transactions to a centralized clearing house (a.k.a. bank). The money goes directly from A to B (assuming that is the direction it was intended to). Banks are out of the equation.
“Peer-to-peer technology”: as mentioned above. From person to person direct.
When was Bitcoin started? The first recorded public transaction of Bitcoin that got the ball rolling, so to speak, was around the year 2001.
Who invented Bitcoin? Bitcoin was invented by Satoshi Nakamoto. While he has put a lot of thought into the creation of bitcoin with a lot of inbuilt gating and throttling mechanism to ensure free and fair transactions automatically, he has chosen to remain anonymous and away from public spotlight.
Is bitcoin currently in use? Absolutely! Bitcoin is being traded actively on many exchanges around the world, just like trading in stocks and shares and precious metals. Not only this, but Bitcoin is a reality in many establishments in Europe and U.S. Many coffee shops, eateries, and other classes of business accept both Bitcoins and their local currency.
Even Governments are opening up to Bitcoins. Recently, the Swiss city of Zug, which is a financial hub has started allowing local citizens to pay for usage of public utilities using Bitcoins. This service is scheduled to go live in Zug on the 1st of July 2016. This will be a pilot project and the very first of its kind.
How can I get Bitcoins? Firstly, you need to set up a secure Bitcoin “wallet”. It’s free and straightforward. It is nothing more than the representation of your physical wallet that you use to transact with fiat money (cash). But unlike your physical wallet, a Bitcoin wallet has high encryption, and you can have as many wallets as you wish! Did i mention it’s free?
There isn’t a central computer hub running all of the bitcoin-related processes. Instead, each Bitcoin user’s computer is part of the network, collectively sharing the computing burden of generating bitcoins and logging their transactions. It’s this decentralized nature that makes Bitcoin impervious (so far) to government meddling, free of regulation and monitoring.
So, Bitcoins can be had in 3 ways:
You can accept payments in Bitcoin as compensation for (or remuneration) of goods and services rendered by you.
You can buy bitcoins with your fiat money. That is, just like you buy gold, stocks, shares, you can pay a person money who will provide you an equivalent amount of bitcoins. (Note: Current exchange rate in INR is about 30200 for 1 Bitcoin). You can buy fractions of bitcoins too. But you need to check with the seller, as sometimes, they stipulate a minimum amount of payment against which they will provide you bitcoins.
You can “mine” bitcoins, just as you mine for gold:) This requires specialized hardware. More often than not, you need to do a full financial calculation of the cost in order to see if you are in the red or black at the end of your bitcoin mining time frame.
Where does the value of Bitcoin stem from? Bitcoin’s value stems from the fact that unlike fiat money whose volume of circulation can be altered by Centralized authority, Bitcoins are scarce and only limited in number.
They are, however, not backed by any commodity (like gold). When we say that a currency is backed by gold, we mean that every country in the world will need to hold gold equivalent to the currency in circulation in their country, because without gold what does guareentee the value of money. Bitcoins, like dollars and euros, are not backed by anything except the variety of merchants that accept them. As we all know, US took away the Government backing of the dollar with actual gold supply (known as leaving the gold standard in the year 1971 and every major international currency followed suit.
Because there are no national regulations for bitcoins, you can transfer them into or out of any country and dodge the steep fees that other such services charge. And because the system has no governing authority, your account has no limits and can never be frozen.
It’s at this point that many people wonder about the legitimacy of bitcoins. How can a currency just appear overnight on the Internet and have actual value? Economists might offer a long, philosophical explanation about the history of money, but the short answer is this: All currencies have value only because people believe that they have value.
Bitcoin is no different in that regard. It’s been embraced by libertarian-minded activists, financial speculators and people who simply no longer trust government-backed banking systems. These people trust the mathematics and encryption of the Bitcoin system, and their trust has been contagious, lending even more legitimacy to this virtual currency.
Dilshad Billimoria CFP
Director- Dilzer Consultants Pvt Ltd- ISO 9001 (2008) Certified Company
SEBI Registered Investment Advisor
The author acknowledges the information to be attributed to various References taken from various search engines as well as the Bitcoin Wiki.
“Bitcoin is one of many cryptocurrencies that are around. Ethereum is another one.
Please make efforts to educate yourself before investing in this and any other forms of financial investments.”
The author is in no way trying to suggest the use of bitcoins over fiat money.