You’ve probably heard the term “Bitcoin” thrown around a lot lately, along with related terms like “cryptocurrency” and “blockchain”. But what is it exactly, and what’s the big deal?
Let’s start with the basics: the type of money we’re used to is known as fiat currency–currency that has been issued by the government. Then there’s cryptocurrency, a kind of digital currency that isn’t backed by the government and that operates on a type of technology.
“Cryptocurrency is enabled by blockchain technology. Blockchain is essentially a new means of organising data. It works by recording and storing data in little pockets known as ‘blocks’,” says Alrick Oh, Communications and User Operations Specialist at Coinhako, a crytopcurrency wallet service provider based in Singapore.
Blockchain can be tricky to understand, but Alrick has an analogy to illustrate how it works: “Think of it as a jury in court. Just as how the group of people is asked to help pass judgment so the court can make a non-biased decision, the blockchain structure allows data to be processed across many [computers]. This increases the integrity of information stored on the network.”
What is Bitcoin?
While we’ve only started hearing about Bitcoin recently, it has actually been around for close to a decade. It’s widely recognised as the world’s first cryptocurrency and emerged in 2009, following the 2008 financial crisis.
In a nutshell, Bitcoins are pieces of computer code that represent monetary units. They’re like gold: we’ve collectively decided to accept them as a payment form. And just like gold, you can mine Bitcoin or buy it. There will only ever be 21 million Bitcoins generated and, as of today, there are about 17 million in circulation.
“Bitcoin was proposed as a solution [to the failures of the] modern economy. It was meant to allow for a more transparent mode of payment for everyone,” says Alrick. “Many people felt that a non-centralised currency and economic system were key to preventing the scandals and misconduct of financial institutions from happening again.”
As to how a non-centralised currency can help prevent scandals, Alrick explains: “The economy went down in 2008 because of the irresponsible decisions by banks, which are centralised institutions. With Bitcoin, the financial processes are now spread across millions of servers, so people believe it could help prevent similar economic failures from occurring if one institution messes up again.”
People also believe that Bitcoin can, like gold, one day be a Safe Haven Asset (something that retains or increases in monetary value in the event of an economic downturn). But it’s all just speculation for now.
“It’d be a breakthrough for blockchain and cryptocurrencies if Bitcoin [becomes a Safe Haven Asset too]. However, at this point, it’s nothing more than a hypothesis and we can’t say for sure.”
How it works
Bitcoin allows for cheaper, more direct transactions as, unlike traditional transactions, there are no middlemen (this is why it is sometimes associated with the dark web, since it’s less traceable). It’s also seen as more secure.
This is because, when you pay with your credit card, the bank has to approve the purchase before the payment provider (say, Mastercard or Visa) processes it. Since middlemen are involved, you have to pay extra fees.
“While the traditional finance industry continues to incur hundreds of billions in losses every year from bank attacks, the Bitcoin network has never been hacked,” says Alrick.
Besides Bitcoin, there are thousands of other types of cryptocurrencies. Some of the more popular ones include Ethereum, Bitcoin Cash and Ripple, but Coinhako’s CEO, Yusho Liu, recommends that all buyers tread with caution and do their own due diligence before purchasing a cryptocurrency.
Why all the hype?
But just why has Bitcoin surged in popularity over the past year?
In short, it’s because it’s been making a splash on the market exchange. Its price movements have been highly volatile, with its value rising and falling sharply over the span of days. From December 17, 2017 to the time of writing, its price fell from USD$19,876 to USD$6,700 – a 66.3 percent drop in price over seven months.
“Although its highly volatile movements have sparked a lot of controversy, those movements have also put the technology at the centre of attention in the world of finance and innovation.”
It can be kept in a “wallet”
Just like how traditional currency is kept in a wallet, Bitcoin is kept in either an offline or online Bitcoin wallet.
“Hardware wallets are the most common type of offline wallet. These are typically external drives you can transfer your cryptocurrencies into. Think of them as thumb drives that pull data out of your computer – except the data is your funds,” explains Alrick.
You can order an offline wallet off the web and have it delivered to you.Online wallets are applications that let you send, receive and manage your cryptocurrencies while connected to the Internet. To get one, you simply register for it online.
“Coinhako is one such [application]. The benefit of using a wallet service like ours is you not only get to store your cryptocurrencies, but also buy and sell them with fiat currency in either Singapore dollars or Malaysia ringgit.”
It seems like cryptocurrency is here to stay. In fact, Alrick reckons it just might become even more widespread.
“This is evident from the influx of cryptocurrency-related companies in recent months. Several renowned cryptocurrency companies are looking to move to Singapore, and Singapore is the third biggest Initial Coin Offering (ICO) market in 2018,” he says. An ICO allows for funds to be raised for a new cryptocurrency venture.
While people are currently mainly buying cryptocurrency to trade (in the way you’d trade on the foreign exchange market or stock market), they sometimes also use it to pay for stuff. A growing number of online merchants including Expedia, Rakuten and even some Etsy vendors accept Bitcoin as payment.
No one can say for sure if Bitcoin will be around for a long time, but it sure is shaking things up.