Friday, 11 August 2017

Bitcoin and other cryptocurrencies - how may these impact the individuals, the businesses and the financial sectors (fintech) ?

The value of bitcoin depends on:

1.  The number of transactions using bitcoin.
2.  Currency crisis or stability.
3.  Its storage of value as digital gold.


What is bitcoin?

The idea for bitcoin was first aired around 2009 in a white paper detailing the proof of concept written under the pseudonym Satoshi Nakamoto, whose real identity or identities have never been revealed.

The protocol and software underlying bitcoin are published openly, allowing any developer to review the code.

Just as no one owns the technology behind email, the bitcoin network has no owner or overall controller.

The emergence of bitcoin has given rise to a number of other online coins, commonly referred to as "cryptocurrencies", where encryption is used to regulate the number of units of the currency that can be created and to verify transactions.

The underlying technology supporting bitcoin, the blockchain, is also being made use of in a number of industries, from asset management to property registration.

The rise of bitcoin

Since launch in 2009, the price of a bitcoin has varied dramatically.  It hit a peak of around
US$ 1,120 in 2013, before fluctuating between $230 and $500 until 2016.

But the cryptocurrency has been on a tear over the past year, reaching an all-time high.

In early June it was US$ 3,018.55.

Some may worry that this bears the warning signs of a bubble, but so long as users continue to demand bitcoins and a growing number of endorse accept them as payment, then the value found in bitcoin could be here to stay.

While gold may be one of the most familiar alternative assets to an everyday investor, bitcoin is likely to be new territory.

But those who purchase gold as a way to store value outside of a mainstream bank could also find bitcoin of interest.

For those who think that nearly US$ 3,000 for a digital currency looks expensive, it is also possible to buy portions of bitcoin.  

These smaller units are dubbed "satoshis", named after bitcoin's illusive founder, and are to a bitcoin what pence is to the pound sterling.

Users can trade satoshis down to the one hundred millionth of a bitcoin.

Why buy bitcoins?

Bitcoin has positioned itself as a currency without fuss.  

No banks or fees are involved and users can reside anywhere in the world.

Just like any other currency or commodity, the price of bitcoin is led by supply and demand.  

But unlike government backed fiat currencies such as the dollar or sterling, there is a limit to how many bitcoins can exist.  

No more than 21m coins can ever be created, but the market is not likely to hit this limit for many years to come.

Just over 16m have been mined so far, but those worrying that this looks close to the cap should remember that mining becomes progressively more difficult over time.

There will never be an option to have the cryptocurrency version of quantitative easing and simply create more bitcoins, but since they can be broken down to the one hundred millionth through satoshis, it is unlikely they should become untraceable at any point.

Bitcoin remains a relatively small market for the time being, and so it does not take much to swing the price quite drastically in either direction, making it still very volatile.  

The value should stabilise in time with scale as more individuals use the cryptocurrency and more businesses accept it as payment.

The more people who adopt bitcoin and the more vendors who choose to accept it as payment, the more value will be added over time.

In order to accept bitcoin, online retailers need to join forces with a payment processor that has the means to complete the transaction.

In order to address the volatility of the price of bitcoin, users will have 10 minutes to complete the booking, after which time the price will be updated again.

Bitcoin payments are not confined only to purchases made online.

Each bitcoin wallet will generate a unique QP code that can be scanned for in-person payments or transfers.

Users can also head to one of the more than 1,200 bitcoin ATMs, which exchange bitcoins for cash or vice versa, scattered across 55 countries, most of which are in Europe or North America.

It is also possible to trade bitcoin on some well-established platforms.  

Bitcoin can be used to buy goods and services, and proponents of the coin would like to see it one day pose as a serious rival to traditional currencies.  

The anonymity of bitcoin has also raised questions about whether it could be a tool for criminal activity.

But unlike cash, bitcoin transactions can never be truly invisible because all trades are broadcast on the blockchain, although the identities of those involved are not known.

Developers claim that it is impossible to counterfeit, and that users are in complete control of their payments and cannot receive unapproved charges.

What about other cryptocurrencies?

With a current market cap of US$ 42.5 bn, bitcoin is by far the largest cryptocurrency on the market, but not the only one.

After bitcoin launched eight years ago a number of others sprang up to compete.

Website Coin Market Cap shows that there are 877 coins in existence with a total market cap of close to $110bn.

By market cap, bitcoin's two largest competitors are Ethereum and Ripple.  

Unlike other cryptocurrencies that work to eliminate the need for a bank, Ripple is working with banks to create an easier and more efficient way to send money around the world, allowing real-time payments across networks.

Banks can save back-office costs by using Ripple to process and settle international payments.

The blockchain in action

While blockchain has proved itself for bitcoin, it is still in the relatively early stages for most other anticipated applications.  

Blockchain has started to make headway in finance as a way to cut costs and reduce transaction times (fintech revolution).

In its 2016-17 business plan, the Financial Conduct Authority (FCA) acknowledged the potential uses of blockchain in financial services, calling it an "alternative approach to safe storage of information", such as custody, execution, and clearing and settlement, that can provide secure, transparent and immediate confirmation of information and can be distributed without the need for a central record-keeping authority.  

While the regulator did note that this alternative approach could have its upsides, it added that challenges related to data privacy, defect corrections and trust could arise.

Those companies currently testing applications will have to demonstrate to their peers that blockchain is a workable and worthwhile solution before there is industry-wide adoption.

The widespread adoption could be one of the biggest challenges facing industry-wide acceptance.

One of the benefits of blockchain is that is is distributed, so the more members you have the more secure it becomes.

If done properly, blockchain has the potential to speed up transactions, allow for international transfers, cut costs, ease regulatory burdens, mediate disputes and improve transparency across a number of industries.  

Additional article:

Tuesday, August 1, 2017

The Crypto Currency Debate: Future of Money or Speculative Hype?

If you believe that bitcoin will eventually get wide acceptance as a digital currency, you may be able to justify that price, especially because there is a hard cap on bitcoin, but if you don't believe that bitcoin will ever acquire wide acceptance in transactions, it is time that you were honest with yourself and recognized that is just a lucrative, but dangerous, pricing game with no good ending.
Crypto currencies, with bitcoin and ether leading the pack, have succeeded in financial markets by attracting investors, and in the public discourse by garnering attention, but they have not succeeded (yet) as currencies. I believe that there will be one or more digital currencies competing with fiat currencies for transactions, sooner rather than later, but I am hard pressed to find a winner on the current list, right now, but that could change if the proponents and designers of one of the currencies starts thinking less about it as a speculative asset and more as a transaction medium, and acting accordingly. If that does not happen, we will have to wait for a fresh entrant and the most enduring part of this phase in markets may be the block chain and not the currencies themselves.

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