Blockchain And Cryptocurrency Can Be Complex, So We Broke It Down For You In This Q&A
I may be literate, but I’m definitely not the most financially literate person in the room.
While I’m pretty confident in the English language, I can safely say that I am hopeless when it comes to C++. Put these two together, and it becomes a foreign topic to me altogether.
But I simply cannot afford to lag behind when FinTech is on the rise and rapidly becoming the force behind Singapore’s drive towards a cashless society.
We had the opportunity to speak with Zcoin‘s Community & Communications Manager, Reuben Yap, who gave us a quick introduction to blockchain and cryptocurrency for beginners – in simple, layman terms.
First and foremost, what is Bitcoin and how does it work?
Bitcoin is a cryptocurrency (a type of digital currency) that uses rules of cryptography for regulation and generation of units of currency.Unlike other forms of digital currency, cryptocurrencies like Bitcoin do not have a central authority that governs its issuance or supply. Its supply schedule and total supply is set from the inception of the coin.Bitcoins are virtual coins designed to be ‘self-contained’ for their value, with no need for banks to move and store the money.
Once you own bitcoins, they behave like physical gold coins: they possess value and trade as if they’re pocket-sized gold.
Bitcoins can be used to purchase goods and services online, or they can be tucked away and hope that their value increases over the years.Bitcoins can also be traded from one personal ‘wallet’ to another. This ‘wallet’ refers to a small personal database that you store on your computer drive, on your smartphone, on your tablet, or somewhere in the cloud.And in the world of Bitcoin, every single transaction is recorded in a permanent ledger that is called the blockchain. This ledger is maintained by thousands of computers and by anyone.Its security is maintained by miners who dedicate computing power to this end who receive new coins and transaction fees in return for their work.
So Bitcoins are essentially “pocket-sized gold”. How does one even acquire Bitcoins, and how do you go about mining it?
The easiest way to acquire Bitcoins is through a cryptocurrency exchange. In Malaysia, the primary exchange is Luno, which is run by a Singapore entity. But with the upcoming regulations for cryptocurrencies, Malaysians hope that the legal situation will be clearer for them to launch more exchanges.Mining is another way of getting Bitcoins although it is a much more involved process.In theory, you will need computing power to secure the Bitcoin network, where you’ll get a chance to earn new coins. Coins are being generated with every block (called a block reward).In reality, you’ll need to buy specialised machines called ASICS (Application Specific Integrated Circuit), which mine Bitcoin thousands of times faster than an average computer can.The profitability of mining for small owners have dropped considerably with the emergence of large mining companies that own dedicated facilities, and have the economies of scale and subsidised power rates to make it economical.
I would only recommend this as a hobby rather than a revenue-generating channel unless you have a source of cheap electricity and the space to do it.
What are the advantages of Bitcoin, and how does it stand to benefit businesses?
Bitcoin’s primary benefit is that it can transfer value or money globally, and in a matter of minutes. Compare this to a telegraphic transfer, which takes a couple of working days to clear, costs a few percent in fees and conversions, and requires a very long form to fill up.Given that you can transact with anyone directly, this also can cut out payment processors and their merchant fees as well.This also means you don’t need a bank account to hold Bitcoin, allowing anyone to create a Bitcoin address. So, it has the potential to serve the unbanked.Perhaps the primary advantage of Bitcoin is that you don’t need a central issuer of money and it’s instead a global network of computers that jointly manages the database that records Bitcoin transactions.This means that it cannot be easily controlled, and that you don’t have to worry about central governments forfeiting your money such as in Cyprus, or restricting your use of your money.
On the flipside, what are some disadvantages of Bitcoin?
As a new currency with a relatively small market cap of US$120 billion, Bitcoin’s volatility is a real issue.In 2017, the standard deviation of daily returns is around 4-5%. Gold in comparison has a standard deviation of 1.2%, while major currencies average between 0.5% and 1.0%.Another big disadvantage of Bitcoin is that it takes 10 minutes for a transaction to process, making it inconvenient for over-the-counter transactions. But for smaller amounts, this may not be as prevalent, so vendors may still be confident in accepting zero confirmed transactions. Currently, there is a big debate on how scalable Bitcoin is – right now, it handles less than 10 transactions per second as compared to Visa, which can handle over 20,000 transactions per second.However, there is ongoing research on how to improve this further, such as the Lightning Network and extension blocks.Another biggest challenge for Bitcoin is actually government regulation. If governments lock down on adoption, Bitcoin may remain as a fringe type of currency unless the general public loses trust in the financial system.It is also currently not as user-friendly as say Paypal, which allows you to restore your account if you lose your password. In Bitcoin, there is no ‘forgot password’ option so your funds will be lost.In other words, if you lose Bitcoin, it is akin to losing cash. No one can help you to ‘remember your password’, so it’s very important to keep proper backups.
But can we fully trust bitcoin? Is it secure?
The technology of Bitcoin is secure but where it tends to fail is not in its software but rather in the exchanges, online wallets, or the computers we keep them in, which may have vulnerabilities.Almost all the hacks you hear on the news is not on Bitcoin itself.
What determines the price of a bitcoin? Can its value become worthless over time?
If you treat Bitcoin as a commodity, it boils down to basic economics. Supply, demand, utility and scarcity.There are currently 16.2 million Bitcoin in circulation with an absolute maximum of 21 million. Therefore, Bitcoin is scarce.It has utility as well as a form of transfer of value that facilitates global payments, and everyone can verify payments.Bitcoin’s blockchain also has many other uses. For example, it allows other people to use it as a notary service, or to provide proof of existence that a certain digital document existed at a particular time.Its utility also leads to demand in the form of people who want to buy Bitcoin.The price of Bitcoin is determined by the market in which it trades: by means of supply and demand.This is the same way the price of your secondhand car, a bag of apples in the supermarket, an ounce of gold and just about everything else is determined.However, some people do buy Bitcoin in the hopes that it will be worth more in the future, as it’s a new technology whose full potential hasn’t come to maturity yet. This also has an effect of prices beyond its current value.
How are Bitcoin and blockchain different? How did blockchain make the original jump from cryptocurrency to full-fledged technology?
Blockchain is the technology that underpins Bitcoin.Another way to look at it is, Bitcoin is the FIRST blockchain.Bitcoin only uses blockchain as a means of recording transactions and a transfer of value, basically a decentralised accounts ledger. However, there are many other uses of blockchain as well.Beyond the above, the most exciting application of blockchain technology is through the use of smart contracts.A self-executing code that once uploaded onto the blockchain, cannot be modified and will self-execute upon certain predefined events happening.You can even code a digitally autonomous organisation where its constitution, voting powers are all enshrined and automatically enforced in code.Some applications and uses of blockchain technology are:
Insurance claims processing
Cross border payments
Land title system
What are some of its issues and limitations?
Currently, the main issue of blockchain technology is its scalability. In its current form, in return of it being decentralised, it cannot handle large amounts of transaction volumes. Its decentralised nature also makes some situations harder to deal with. For example, if a bank is hacked, you can possibly reverse the transaction; but with a blockchain, it is very difficult.
How do you see the future of cryptocurrency?
The future of cryptocurrencies to me greatly depends on its usefulness in real life. Right now, many coins are purely speculative vehicles with limited liquidity. Every year, there are massive changes in the market capitalisation rankings of cryptocurrencies with former top 10 coins falling out of the top 100 after just a year. Eventually, I believe only the serious projects that are solving real problems will remain.One of the most unhealthy things right now are ICOs (Initial Coin Offerings), which are like a Kickstarter for coins or projects that haven’t been launched. These projects raised hundreds of millions of dollars in a very short time, with very little promises and nice marketing. Many of these are showing signs of cracking or non-delivery of their promises; and governments have also taken action against ICOs. Next year, I foresee many of these projects failing. In fact, we are already seeing the first wave of this with the recent Tezos case.
Rub Shoulders With Blockchain Experts
Reuben Yap will be speaking at the upcoming Blockchain World Conference 2017, which will be hosted at the Grand Hyatt Erawan Bangkok in Thailand on 4 December 2017.
For one day only, the brightest minds in the blockchain and cryptocurrency industry will gather together to discuss the future and evolution of blockchain technology.
This inaugural event will feature a diverse lineup of over 20 international speakers engaging with over 1,000 attendees from more than 30 countries.
These speakers will talk about a broad range of blockchain-related topics, such as why you should bank on blockchain and the disruption and impact of crypto.
Besides hearing directly from the industries’ biggest influencers and thought leaders about the future of blockchain technology, attendees will also get the opportunity to meet, greet and network with other blockchain enthusiasts.
If you are keen to join the event, you can get your tickets here and use promo code ‘BWCVULCAN‘ for 20% off!
Featured Image Credit: Singapore Business Review