The ABC of bitcoin
While interest in bitcoin is now greater than ever, this disruptive and innovative payment system still baffles many of us. Sonya Kuhnel, Founder and Managing Director of the Blockchain Academy, explains the basics of bitcoin.
What is bitcoin and what affects its price?
A bar of gold is considered an object of value. Why is this? Is it because it has a limited supply or because it is hard to counterfeit?
Bitcoin has both these qualities. And more.
Bitcoin is a cryptocurrency that is 100% digital, so it isn’t printed like rands or euros. This digital currency lets you transfer money to anyone, anywhere in the world – without a bank! So bitcoins are decentralised because they aren’t issued by any central authority.
The more people transact with bitcoin, the more valuable it becomes. This means its monetary value depends entirely on the supply and demand of the market. Bitcoin is becoming ever more popular and has triggered the launch of other cryptocurrencies, or ‘altcoins’.
Who created it and how does it work?
It all started with the mysterious Satoshi Nakamoto (true identity still unknown), who developed the Bitcoin protocol in 2009. Satoshi had become disillusioned with the financial system during the financial crisis and was determined to develop a form of money that was immune to interference or manipulation.
The Bitcoin protocol, the rules that make bitcoin work, say that only 21 million bitcoins can ever be created by ‘miners’ (people who run software programs on computers that solve complicated mathematical algorithms to create bitcoins). But bitcoins can be divided into smaller parts where the smallest divisible amount is one hundred millionth of a bitcoin.
The ‘miners’ verify bitcoin transactions, which are then stored in a block on the blockchain, a shared public ledger on which the entire Bitcoin network relies.
Each block consists of numerous transactions. When a block is ‘completed’, it goes into the blockchain in a linear, chronological order as a permanent record of transactions that cannot be altered or removed.
Each bitcoin transaction uses a public and private key. The public key is a random number of alphanumeric characters that is used as the bitcoin address and is publicly shared. The private key is used to sign the transaction digitally and, together with the public key, creates an unforgeable message signature.
How do you get it?
- At an online bitcoin exchange: You can buy and sell bitcoins at an online Bitcoin exchange. Luno (www.luno.com) is a good example of a Bitcoin exchange in SA. Once you’ve registered on the website, you can send bitcoin to and receive bitcoin from anyone, at any time. If you want to buy and sell bitcoin on the exchange, you need to verify your mobile number and upload your proof of identity. For full verification on the Luno exchange you also need to upload your proof of address. In order to buy bitcoin, you need to deposit money from your own bank account into Luno’s bank account. Once they receive the funds, you will be able to go onto their exchange and buy bitcoin.
- By mining bitcoin.
- By accepting bitcoin as payment of products and services.
How can you use it?
- Invest in bitcoin by buying some on a bitcoin exchange Trade with bitcoin on a bitcoin exchange
- Pay with bitcoin: Merchants such as Microsoft, Expedia, Dell, Virgin Galactic, WordPress, Overstock.com and Takealot.com are accepting bitcoin
- Send and receive bitcoin: Send bitcoin to friends and family locally or internationally. Remittance companies, such as BitPesa based in Kenya, are using bitcoin to enable people to send remittances from various countries to Kenya, Tanzania, Ghana and Nigeria.
Should I invest in it?
Bitcoin is a high-risk investment as it is notoriously volatile. But it has given very good returns to some investors. According to MarketWatch, if you’d invested $1 000 in 2010, it would be worth $35 million today!
What are the benefits?
- You do not need a trusted third party or intermediary to facilitate the payment Bitcoin is a global, borderless, peer-to-peer payment platform: you can send bitcoin to anyone, anywhere in the world, at any time.
- You can make electronic payments without a bank account
- It increases financial inclusion
- You can make payments across borders cheaply and quickly
- You can make safer payments because you don’t provide your personal credit card information
- Your payment information cannot be stolen, as is the case with personal credit card information
- As a merchant, there’s no fraud risk if you accept a payment with at least two confirmations
- As a merchant, you are not exposed to the risk of charge-backs as you are with credit cards; once the transaction is confirmed, it cannot be reversed
- Bitcoin is difficult to counterfeit because of its security feature known as cryptography
- The Bitcoin network is extremely secure because of its distributed nature. There is no single point of failure as many versions of the blockchain exist.
What are the risks?
- Volatility
- Not regulated in South Africa
- Not legal tender
What are the regulators such as the South African Reserve Bank (SARB) saying about cryptocurrencies?
In its February 2014 ‘Position Paper on Virtual Currencies’, the SARB said: ‘DCVCs [decentralised convertible virtual currencies] are not legal tender in RSA and should not be used as payment for the discharge of any obligation in a manner that suggests they are perfect substitute of legal tender.’
In 2017, the SARB’s governor, Lesetja Kganyago, publicly expressed the bank’s ‘openness’ towards blockchain technologies that underlie bitcoin and other cryptocurrencies.
‘As a central bank, we are open to innovations despite the different opinions of regulators on matters such as cryptocurrencies. We are willing to consider the merits and risks of blockchain technology and other distributed ledgers.’
To conclude, embracing Bitcoin now means you won’t be left behind in the future.
As John McAfee, founder of McAfee, said: ‘You can’t stop things like Bitcoin. It will be everywhere and the world will have to readjust. World governments will have to readjust.’
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