In the era of technological innovation, it is difficult to have not heard of Bitcoin. Although popular publications such as the WSJ, The Economist, and Reuters have covered the topic, Bitcoin is very difficult to understand – especially its relation to the “blockchain.” I hope to dispel some of the myths of the crypto-currency and the reasons high-profile journalists, political leaders, and executives are considering this technology to innovate the future.
Bitcoin is a digital currency that is generated by solving complex encryption techniques associated with the verifying of transactions. It was created by a person under the alias of “Satoshi Nakamoto,” who constructed a code to generate a currency that was free of bureaucracy, controlled by people, and had a public history. In a way, Bitcoin is not the revolutionary technology; it is simply the financial incentive of it. The revolutionary technology is actually the blockchain as it furthers the agenda of the internet, which is to be liberating for people.
The blockchain is a public database containing the entire transaction history of a particular product in use, thus making that product into a digital currency. Although it seem like a chicken-and-egg scenario, it is easiest to understand the blockchain within the concepts of trading the Bitcoin in which it creates.
Think of the blockchain as a book. When a new page is filled with transactions of Bitcoin, for example, a “block” is made. Coders will verify the transactions, called mining, and add the page to the entire book, or the “blockchain.” The blockchain will cross-check the coders work with the coding language it was founded on, almost like spell-checking, to see if the transactions were verified correctly. If so, then the page is accepted and the coders are actually compensated by equally splitting 25 Bitcoins. Bitcoin has taken a market of its own exactly as Nakamoto had dreamed. One Bitcoin is currently priced at $322.24, and is easy to liquidate into actual dollars once transactions are made, verified, and updated to the chain.
Feb 23rd 2013 to Nov 21st 2015, Bitcoin-USD Exchange Rate
Having explained the Bitcoin-blockchain relation in generic terms (I encourage you to look deeper into the topic to gain a better understanding of its complexity to see how near impossible it is to hack), we can have a better sense of how it can be used by emerging and developed markets.
Emerging Markets: Nakamoto designed the program so if many coders pool together their software, a new block can have its transactions verified in 10 minutes. Transactions are free since the software itself generates the currency for the miners who did the work. This means the creation of same-day transaction settlements and the elimination of commission fees, as banks confirm credit and cash transactions. The result is increased speed and purchasing power of capital so emerging markets can develop faster and more transparently. In current use, The Government of Honduras has partnered with Texas-based blockchain company Factom Inc. to implement an automated land registry blockchain to combat fraudulent land title ownership and rid the real estate industry of bureaucracy.
Developed Markets: China’s slowdowns in demand of raw materials and their regulations on capital have hurt producers who are seeking to increase their global revenue. As a result, it is no coincidence that Europe looks to quantitative easing to stimulate growth in the weakened economy and Euro, while also categorizing Bitcoin as an official currency instead of commodity for tax purposes in October 2015. That is, as the currency becomes more regulated by governments it stabilizes more in value, and could become a legitimate alternative as geographical currencies like the Euro fluctuate. In addition, Santander InnoVentures commented that the blockchain could save banks 20 billion dollars by 2022 in infrastructural cost if firms continue to adapt the technology.
As revolutionary as the Bitcoin-blockchain technology can be, the simple fact that many people do not understand the software makes its use for some unsafe. We understand that to protect our tangible assets, we can put them in a real-life bank account or hide them in a safe. With Bitcoin or whatever product is used to represent the crypto-currency, if we do not know the secure “bank account” or “safe” equivalent while trading on the platform, we can expose ourselves to robbery and the liquidation of our accounts before we can make a secure transaction.
Additionally, as miners verify blocks and receive non-taxable revenue via Bitcoin, governments could potentially crack down on the creators of the coin. Also, since miners can horde coins and saturate the market whenever they wish, we see in the Bitcoin-USD chart that the currency is too volatile to be an alternative to major reserve currencies. Although, as institutions like Santander and the Honduras Government continually support the blockchain technology, we may solve the problems of security and ultimately have Nakamoto’s dream of a financial sector as liberating as the internet.
Economist: The Trust Machine - How the Technology behind Bitcoin Could Change the World
Reuters: The EU clamps Down on Bitcoin, Anonymous Payments
Satoshi Nakamoto “Bitcoin: A Peer-to-Peer Electronic Cash System”
WSJ: Why Blockchains Could Transform How the Economy Works, EU Rules Bitcoin Is a Currency, Not a Commodity—Virtually