Blockchain & Bitcoin: Analysing the Substance Behind the Buzz
Bitcoin; Litecoin; Ripple; Ethereum; and Blockchain. All buzzwords which are currently occupying most people’s feeds. With Bitcoin hitting a record high of $23,700 this week, and cryptocurrency giant Coinbase filing for an IPO, the interest and buzz is only growing bigger. These buzzwords however still seem like big mysteries – whilst most are aware that cryptocurrencies are digital currencies with no governments issuing them, or banks verifying them, what does it mean to have Bitcoin?
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The covid-19 outbreak has brought with it serious economic stress, along with record levels of corporate and sovereign debt and collapsed revenues, as the globe has entered survival mode. Concerns are growing that the value of 'fiat' currency is resulting into a dilution, as the call to support asset prices is growing, along with the need to maintain an appearance of economic health. As global currency devalues, the focus has instead turned to gold and Bitcoin, serving as an escape of the system, since they have no debt against them.
Bitcoin: what is it?
Bitcoin comes under the umbrella term of ‘cryptocurrency’, which can be described as a digital representation of value. Cryptocurrency was designed as a currency, and is used as a store of value, or more often, an investment vehicle.
Since launching in 2010 at the value of less than 10 cents, Bitcoin value has soared to establish itself as the leading digital currency, often referred to as “digital-gold”. Just this year, Bitcoin has seen a rise of more than 400% since its low point of $3,600 in March. Bloomberg has declared it as “the decade’s best-performing asset”, having yielded early investors a 9,000,000% rate of return in the last decade, while Bloomberg’s Niall Ferguson has said that “Bitcoin is winning the Covid-19 Monetary Revolution”. Bitcoin’s increasing success has introduced other cryptocurrencies, including Litecoin, Ethereum, Ripple and Dash.
It has not always been sunshine and rainbows for the cryptocurrency however. Bitcoin has been suffering some volatile shifts the past few years, while there is a continuing debate over whether Bitcoin is a valueless, speculative tool, or “the new gold”. Some argue that it is an alternative way for investors and hedge funds to diversify their portfolios and smooth out risks from established asset classes.
Before launching into the pros and cons, how is Bitcoin transacted?
Blockchain: how does it work?
Bitcoin uses blockchain technology, often referred to as an “electronic cash system that is fully peer-to-peer, with no trusted third party”. Blockchain is a specific type of database, also known as a 'distributed ledger system', which stores data in blocks chained together. Each block enters new data with each new transaction, while each block is chained to each other in a chronological order.
Essentially, the system sets an irreversible and decentralised structure of blocks of data; when a block is filled, it is set in stone irreversibly. Each block then has its own timestamp, while the system is maintained by thousands of computers, with each computer existing in different geographic locations, operated by different individuals or groups of people, holding the blockchain together.
Security is ensured through the ‘timestamp’, often referred to as the ‘hash’ of the block. If one user tampers with the hash of one block, the system cross-references through its computing power to highlight the tampered information. If a hacker attempts to tamper into the system, they would have to redo all of the hash codes of the blocks, since each block would have different timestamps and hash codes after the hack. For a varied hash code to be approved, it would need to match 51% of the hash codes held by the computers holding the blockchain.
This is also where the ‘Bitcoin mining’ phrase comes from; half of Bitcoin miners’ job is to ensure that the hash key matches all copies, which takes tremendous computing power. The first computer to add a transaction to the block is awarded Bitcoin in return, thus computers 'mine' for Bitcoin.
Adding value to Bitcoin
Currencies find use if they store value, and they are relied upon to maintain a relative value over time without depreciating. Historically, commodities or metals were used as methods of payment; fast-forward to today, currencies take the form of paper money. Many global currencies are now classified as ‘fiat’, which is issued by a government and not backed by any commodity, found to be the most durable and least susceptible to deterioration or devaluation.
Instead, Bitcoin’s continued availability of more tokens to be generated has encouraged a robust mining community. Although supply of the cryptocurrency is capped at 21 Million Bitcoin to be mined, the final Bitcoin is set to be mined around the year 2140, while it is said that 18.5 Million Bitcoin has been mined in the last decade.
Bitcoin is also divisible, forming a similar concept to a cent value, but in Bitcoin called ‘satoshi’. This makes possible for tiny fractions of a single Bitcoin to be traded and incorporated in everyday transactions. Following the development of cryptocurrency exchanges, Bitcoin can be easily transferred, due to its lack of physical representation and lack of intermediary fees. This adds to Bitcoin’s durability, since there is no physical way to destroy Bitcoin.
Institutional investors are starting to view Bitcoin as a legitimate investment for the future considering the current economic stress. An analyst from investment platform eToro, has described the rise in demand as being reflected in the fact that there is a “massive influx of investors from large scale institutions, such as listed investment trusts, pension schemes and university endowment funds”. Proponents include Blackrock Fixed Income CIO, Rich Rieder, who has said that Bitcoin could replace gold in the near future, while Citigroup Research has published YE 2021 Bitcoin (BTC) Price Target as high as $318k (£235k).
Lloyd’s launched a new insurance policy to protect cryptocurrency held in online wallets last March 2020, with scope to protect against theft or other malicious hacks; the first of its kind liability policy. Following this, last October PayPal announced its allowance of customers to buy, store and spend cryptocurrencies including Bitcoin through their PayPal accounts, starting in early 2021. Bitcoin’s supply is finite, which makes it much more attractive when there are goals of preserving wealth.
This week saw the 169-year-old insurance company MassMutual invest $100 million (£74m) in Bitcoin, an event which stunned many market analysts, while MassMutual told WSJ that it was seeking a "measured yet meaningful" exposure to an increasingly digital world. Insurance companies are usually described as conservative when it comes to acquisitions, nonetheless Bitcoin has attracted activity as a way to increase yield. The company also invested $5 million (£3.8m) in an equity stake in US Digital Investments Group.
What is more, cryptocurrency giant Coinbase announced this week its confidential filing for an IPO, coming at a time where Bitcoin prices are at a record-high and trading volumes of crypto-related business are surging. Many are at the edge of their seats waiting to see what form the IPO will take, while traditional IPOs usually see banks arranging for institutions to get first dibs on the stock at a fixed price; a scenario which is not in crypto-enthusiasts’ best interests.
Instead, Coinbase co-founder has made suggestions that the company will make an attempt at going public through an offering involving digital tokens on a blockchain. It is unclear whether the Securities and Exchange Commission (SEC) will approve such an offering. The IPO will represent a milestone in the crypto-industry’s quest for legitimacy.
It may be said that the only thing underpinning Bitcoin’s price is belief, nonetheless this belief has set the record high price of $23,700, while the world’s major currencies are currently seen going through a devaluation.
As Financial Times’ Kadhim Shubber has put it, Bitcoin gives you “something to do, to think about, to talk and dream about. In a word, it’s entertaining”.