With the price of bitcoin skyrocketing in 2017 and falling in 2018, it’s a hot topic on everyone’s lips. Bitcoin is a type of digital currency, known as cryptocurrency, that’s creating considerable hype amongst everyday investors. It can be used to book travel, buy a new computer, even order a pizza! But most of the buzz is about people getting rich by trading it. If you’re sitting back baffled about the whole idea of it, here is a brief introduction, in simple terms.
Cryptocurrency 101
Let’s break it down. Money is an accounting system; it gives clear proof of who owns what and who owes what. Cryptocurrency is also an accounting system; recording transactions and authorizing value transfers. Traditionally, internet commerce has relied on a third party to action and validate transfers of value. The big difference with cryptocurrency, is that this system takes away the third party repository system and automates it. What is the outcome? A value transfer arrangement which eliminates fees, inefficiencies and a collective consensus system where everyone participating controls it!
The beauty of cryptocurrency reveals itself through the anonymous and direct nature of trade. The key factor behind this beauty is not the digital currency itself, but rather the operations behind it – the blockchain. The blockchain is a global digital ledger, constantly monitoring transactions and tracking movement in the crypto realm. It is not controlled by one institution and does not have one central server, making it possible for thousands of transactions to be occurring at once without the risk of being hacked or corrupted. This digital ledger is widely accessible, verifiable and most importantly extremely difficult to tamper with – giving bitcoin investors the security to move funds from one account to another at minimal risk.
Still confused?
If this has stretched your imagination a bit further than you would have hoped, here’s an explanation that may help you finally reach your “a ha” moment.
It’s a lovely day, we’re sitting at the beach. I have one ripe banana in my hands, and I give it to you. I have zero bananas and you have one. We both know the transaction happened, I have no more bananas to give you and we didn’t need a third person to help us make the trade. Now you have full control over the banana, you can give it to your mum who gives it to your dad then your dad’s friend and so on. Simple!
Say we now have an electronic banana. How do we know I didn’t send it as an email attachment to someone else before you? Or maybe I made a thousand copies or uploaded it onto the internet? Here we see where digital exchange gets tricky, and this is where the blockchain (the ledger) comes in. Obviously someone needs to be in charge of this electronic banana trade, to oversee and legitimise each transaction – let’s call this omnipotent authority Mr Monopoly. To avoid Mr Monopoly corrupting the system, imagining and recording trades as he pleases, what if the ledger was given to absolutely everyone? Everyone has the banana ledger living on their computer, every banana transaction can be viewed and the ownership of each banana can be easily tracked.
If we bring this back to reality, we can see the simplicity of the crypto world. The no border nature of electronic ‘banana’ trade opens up commerce to people who are currently excluded from it. In doing so, it revolutionises the way people move funds across international boundaries. Irreversible and anonymous trades, which are globally accessible and built to be secure.
So, should I invest?
The key to investing is how you view the currency. It’s either a “means of exchange” or it’s a “store of value”. A means of exchange is just another way of moving your funds around and if it becomes commonplace, it will lose its luster. However if people treat it as a “store of value”, then much like gold, it has the chance to hold its value. Either way, it’s very early days. At the end of 2017, there were 21 million users of cryptocurrency. This may sound like a large number, but given that the world’s population is 7.6 billion people, it’s a tiny fraction of the potential users and has a long way to go to develop into something truly global and widely accepted. Whether you view it as an opportunity for innovation, or just another bubble waiting to burst, at least you’re now ready to take on that crypto conversation at your next barbeque.
Consistently ranked one of Sydney’s top financial planners (Adviser Ratings), Brenton helps his clients life a great life by making the most of their money. Read his full bio here.
