The next phase of the internet or a flash in the pan? Cryptocurrency has been making waves recently with Bitcoin’s price back up to around $60,000 inciting a fresh round of scrutiny from governments and regulators alike. This bears the question – are we witnessing extreme levels of speculation or is real value being created?
I take the stance that if someone can’t explain something in simple and clear language then they don’t fully understand the concept. So, with this in mind – I will attempt to explain Bitcoin in simple terms and leave you to be the judge as to whether or not I know my stuff.
Bitcoin has been around for 11 years now, and it has proven that it can do its job. This job is actually very simple, despite the narrative most people push. Essentially, with internet money whether it is pounds, dollars, or Bitcoin – every time the money is spent, someone has to verify the payment and confirm it has been received.
Traditionally, this confirmation was carried out by a bank i.e. I buy something in a shop with my debit card, the card machine sends the signal to a central computer in my bank’s headquarters, a deduction is made from my account and an addition is made to the shops account.
Bitcoin is simply designed to remove the bank. Rather than there being one central computer in a bank’s headquarters – with Bitcoin the network is supported by lots of independent people who operate their own computers all over the world. The more people involved, the greater the support, speed and security of the network.
Bitcoin was never meant to be worth $60,000 dollars a coin. It was purely designed for person A to send money to person B without needing a bank. With limited supply and rapidly increasing demand – the result is huge increases in price.
The fact is, there is a quantifiable value in banking. Banks are/have been incredibly profitable institutions from which we have built much of the corporate world. In the age of the internet, banks are fighting to modernise, and it wouldn’t be a stretch to suggest that only the largest and most innovative will survive the next 50 years.
Removing banks and/or some of their power clearly has some quantifiable value as well.
Cryptocurrencies are extremely speculative, unregulated assets that have provided both eye-watering gains as well as losses. Many of the projects do provide real quantifiable value but in times of boom, the prices often stray a very very long way from this value. On average, Bitcoin falls 85% from boom to bust. So, whilst there are some attractive articles about overnight millionaires – it is more important than ever to think about attitude to risk and capacity for loss.