Bits and Blocks 2/2: Introducing Bitcoin and Cryptocurrencies.

In part 1 of this post, “Bits and Blocks 1/2: Let’s Talk Blockchain” I introduced the theory behind Blockchain and got a bit into the technical aspect of it while trying (key word here) to make the concept easy to grasp. Myself, I got involved in the cryptocurrency space in 2017, as described in my first post “My First Investment,” through what is known as the “retail hype.” Even though many persons who were sucked into the ‘speculative’ price explosion (from $5000 to almost $20,000 per Bitcoin) exited the crypto space after the price correction began (hitting a low of approximately $3,000 one year later), I stayed. I have always been somewhat of a technology enthusiast, and even though I majored in Chemical Engineering, it didn’t stop me from pursuing the realm of computer science on the side; but Bitcoin and Blockchain was something that hit me like a bus. I was enthralled and hungry to learn all about it!

From the onset, Bitcoin (BTC), the first known application of Blockchain technology, was aimed at solving trust issues that many persons had with traditional banking system. The confidence that many had in financial institutions that would manage their money, and also act in their best interest, was completely shattered in 2008 during the financial crisis. This marked the birth of the Bitcoin movement and though it was created as an alternative cash system, it has since evolved to serve different purposes.

Bitcoin is an example of a public Blockchain which means the Bitcoin ledger is available for anyone in the public to view, however due to the high levels of encryption that is associated with the Bitcoin ledger (as suggested by the name “Crypto – currency”), it becomes very hard to interpret this public ledger. Early adoption of Bitcoin as a currency started on the dark web (black market) as a form of untraceable payment for many illegal activities. It is for this reason, that Bitcoin has been associated with a very negative stigmatism as the “currency for criminals.” Although this was not the intended purpose of this Blockchain, like with most things it was susceptible to misuse.

You see, Bitcoin like any other currency needs to be stored in some form of wallet if you own it. Bitcoin wallets serve as a form of ID and just as your typical wallet would contain your driver’s license, bank card and money, Bitcoin wallets do all of this in one, digitally. However, unlike typical ID’s, your name is not what is used for identification, instead a unique sequence of letters and numbers known as a private key (almost like a digital signature) is used to identify you. So for example, if you make a payment with Bitcoin to buy some pizza, the transaction that is recorded on the ledger does not say “John paid Pablo’s Pizza $19.99,” instead this transaction is recorded as a combination of John’s private key (2efcun3292sm399d), Pablo’s Pizza’s private key (c2ime20ime9nc9un) and the transaction amount ($19.99). Herein lies the transparency concern of the technology. By simple viewing a copy of the Blockchain ledger (which of course is public for anyone to see), you won’t be able to tell who made what transaction, because as the name suggests, a ‘private’ key is not known by anyone except its owner. This is the basis for the misuse of Bitcoin as mentioned above.

Today Bitcoin remains the most popular and largest cryptocurrency by market cap (total amount invested i.e. price of 1 BTC x total coins in circulation), however with its introduction, came many other versions of cryptocurrencies seeking to add value through Blockchain technology in many other ways and also to force Bitcoin to pivot into a playing a different role than those discussed. Due to the growing number of transactions on the Bitcoin network, Bitcoin itself has become a bit slower and more expensive to use comparative to newer cryptocurrencies such as Litecoin (LTC) or Bitcoin Cash (BCH). Cryptocurrencies for example Monero (XMR) now offer higher levels of encryption and privacy for transactions than Bitcoin. Therefore, to a growing number of people, Bitcoin has taken a different role now, as a store of value acting like a “digital gold” or hedge to inflation and financial markets, due to it’s fixed supply (i.e. there will only be 21 million Bitcoins in existence).

Some cryptocurrencies aim to utilize blockchain for other purposes such as improving the speed and reducing the cost associated with cross-border transactions. For example, if someone based in the United Kingdom wishes to do business in the United States, they would be required to transact in USD (United States Dollars) and not in GBP (Great British Pounds). Traditional banking procedures would in some instances take a few days to a few weeks to send and convert the GBP to USD, and this would also come at a significant cost (the cost increases, the more money that is sent). Cryptocurrency projects such as Ripple (XRP) and Stellar Lumens (XLM) aim to solve this problem, working in tandem with financial services companies through the use of digital tokens and Blockchain powered platforms.

Many companies and countries at large, have also recognized the advantages of digital currencies for the aforementioned purpose and also for other aspects such, as controlling inflation and counterfeiting. For instance, within the past six months, the European Central Bank (ECB), People’s Bank of China (PBOC) and the Bank of England, have begun considering the benefits of introducing a digital currency and utilizing Blockchain technology. Taking a look at the explosion of value in companies such as Visa and Mastercard in recent years, it becomes quite easy to see why all of this interest in digital payment technologies has grown.

Another growing use of Blockchain technology is through ‘smart-contracts.’ Now this particular use is very complicated and also very vast in terms of applications, but some examples of these cryptocurrencies are Ethereum (ETH), Eos (EOS) and Tron (TRX). But what does ‘smart-contract’ really mean? Just as mentioned in Part 1 of this article, the copies of the relevant Blockchains can act as currencies (introducing the concept of cryptocurrencies) but further to this, it is also possible to build applications onto the Blockchain code, such that the transactions don’t just represent a transfer of wealth (as with Bitcoin). Instead, transactions represent the execution of a contract, but how does this all work? Smart-contracts are effectively a digital means of verifying and executing an agreement by two or more parties with specific rules without the need for a third man/facilitator.

For example, if Aman wanted to buy a lot of land from Tom, both parties would enter into a buyer/seller smart contract which would specify that the ownership of said land would be transferred to Aman once the appropriate funds were deposited into the account of Tom at a given date and time. Smart-contracts offer a fail safe against tampering of the agreement terms and conditions due to immutability nature of Blockchain. Once more in our example, if Tom tried to release the ownership deed too early, the smart contract would hold it in escrow until the agreed upon date/time to ensure the funds were deposited simultaneously. Similarly, if Aman pays the money but the ownership deed is not transferred by Tom, a refund is automatically processed to Aman. Simply put, smart contracts work according to an “IF – THEN” code structure; IF Aman transfers the money, THEN the ownership deed is transferred to Tom.

In the above example, a smart-contract offers the benefit of autonomy (in that no facilitators: lawyers, brokers, etc are required), efficiency (removing the intermediaries allows the transaction to be processed at a quicker pace), accuracy (executable code allows for the removal of human error), cost savings and also traceability (due to the use of Blockchain technology).

With the evolution of Blockchain technology over the past 12 years, many reputable players have entered the space recognizing the usefulness of the technology. Still however, a LARGE divide amongst many well-respected individuals exists as to the role cryptocurrencies play in society and particularly in the finance industry. Primarily due to the high number of scams plaguing the cryptocurrency arena, many individuals tend to have a difficult time trusting its viability. One of the greatest investors Warren Buffet, is quoted as saying “Cryptocurrencies basically have no value and they don’t produce anything;” on the flip side, one of the greatest entrepreneurs, Mark Zuckerberg and his company Facebook, spearheads the development of a new cryptocurrency called Libra. Nevertheless, one point that is agreed upon by almost all, is that the Blockchain technology is here to stay.

I hope you found this information in this two-part article digestible. I decided to do this informative post, explaining a bit about Blockchain and Cryptocurrency because it has been an area of interest for me over the past two years, and it has become clear to me how misleading this domain can be.

Anyway, in the next post I intend to move a bit away from Blockchain and cryptocurrency, and more into the realms of Personal Finance and Business, another really exciting area. Please like, share and leave a comment if you found this post interesting!

2 Comments Add yours

  1. Rob says:

    So I do have a question, after reading parts 1 and 2 of this series. You said Bitcoin was limited to 21 million of the “Bitcoins”. This hasn’t happened yet? They have not all been mined or produced yet?

    Also, if you could, write a blog post about crypto mining. I find this an interesting business idea. Thanks, keep up the great work!

    Liked by 1 person

    1. AshtakM says:

      Hey Rob! Yep so the total supply of Bitcoins is capped at 21 million, however there’s not 21 million in circulation just yet. The way new Bitcoin is introduced into the market is through mining rewards. These rewards are halved around every 4 years; the first happened in 2012 (50 – 25 BTC per block mined), the second in 2016 (25 – 12.5 BTC) and the third happens in 8 days! (12.5 – 6.25 BTC). This is because Bitcoin was created as a deflationary currency (similar to gold), meaning in time the scarcity causes price appreciation (with the new supply being cut without any change in demand).

      The last two times there was a halving, 2012 & 2016, the price of 1 BTC gained 9,200% and 2,900% respectively. This price appreciation is not to ensure no one can afford 1 BTC, but because Bitcoins have the ability to broken down into smaller and smaller fractions to be used i.e. you can transact with 0.0001 BTC (where as traditional currency has a smallest denomination of 0.01). For instance, a bottle of soda that may have cost 1 BTC eight years ago would now cost 0.001 BTC and in the next two years may cost 0.00001 BTC.

      As of today, there are only 18,360,162 Bitcoins in circulation, this number will never actually reach exactly 21 million but will tend towards it (due to the halving nature of the supply).

      Also, I’d definitely do a post on crypto mining! Thanks for the suggestion and support!

      Liked by 1 person

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