ByTe Atlas: I bought a Bitcoin and did not mine it! – My experience with CryptoCurrency or Digital currency!

I bought a Bitcoin and did not mine it! – My experience with CryptoCurrency or Digital currency!

Folks

This has been an interesting month in my journey into the land of Mobile Payments, where got to learn the payment systems across the world, its limitations and strengths and many innovations attempting to disrupt the value chain and systems engaged in exchange of goods and services. Some of these disruptive forces attempt to provide value by lowering the costs of interchange and some claim to speed the flow of money and goods, thereby improving the economy. Many entrepreneurs draw parallel to impact of Internet on free flow of information and compare it to systems devised to attempt the same for flow to capital with no interchange fees. It has been fascinating journey with lot more to learn , understand and device new business opportunity that emerge from these disruptions. In this write up I would like to focus on CryptoCurrency or Digital currency, and my experience with Bitcoin.

What is Bitcoin:
Bitcoin is a new currency that was created in 2009 by an unknown person using the alias Satoshi Nakamoto. Transactions are made with no financial intermediaries and are completely anonymous AND there are no transaction fees (for now). Here are a few well-understood and not too well understood characteristics of Crytocurrencies:

Distributed Public Ledger – Essentially a huge network, much like bit torrent, that has a copy public ledger and tracks the movement and exchange of bitcoin or digital bits that represent the currency
Completely anonymous – The identity is completely anonymous and owners are identified by the bitcoin address much like this one 176ixDYhnaqqNcnobBHn3SW6rQuhJtdCyq. This presents advantage and several challenges, which I will discuss in my opinion section.
Elliptic Curve Digital Signature Algorithm (ECDSA) – This is the digital signature algorithm used in a complex Public-Private key exchange infrastructure that promises to preserve the integrity of the digital currency system.
Transaction chain – this is integral part of the Cryptocurrency system, which identifies the ownership using the bitcoin address. This keeps track of how ownership changes by the bitcoin address.
Block Chain – This is a critical part of the system that describes the transaction ordering, this is a very important concept that this prevent the user from spending the same bitcoin or digital currency twice taking advantage of the delay in the network or simply put avoid double spend. This is where the Cryptocurrency system gets complex, as nodes involved in this huge network driven by complex mathematical algorithms collectively are involved to compute the block chain and prevent the double spend(Essentially solving for crypto hash locks in the block). The nodes or the system involved in computing these are rewarded with bitcoins ( or fraction of it) and this is called Mining. This is how bitcoins are created or mined in the system.
Bitcoin generation – Bitcoins enter the system by mining, the core purpose of mining provides an essential function to the cryptocurrency system of verifying transaction and safeguard block chain – addressing two function of ownership validation and preventing double spend. The Nodes involved in this process are rewarded with bitcoins.
Even Bitcoins adhere to universal laws of economics – The universal laws of balance of demand and supply for maintain system stability also apply to cryptocurrency systems. There are only finite supply of bitcoin in the systems (about 42 million) that can enter the system, so we more bitcoins enter the system, the reward of bitcoin generation by solving block chain, is reduced by half every so many years, which implies that the nodes and the individuals or consortiums behind them will have to work twice as hard to earn these. Eventually when the system has exhausted it’s finite supply of the bitcoin generation, the process of mining will be rewarded with transaction fees, which is a fraction or smaller unit if a bitcoin or a “Satoshi” ( 0.00000001 BTC), and the incentive to mine degrades.

Owning Bitcoins :

People can either mine and own bitcoins , send and receive them or buy them from marketplaces called “bitcoin exchanges”. These bitcoin or cryptocurrency exchanges allow people to buy or sell bitcoins using different currencies. Some popular exchanges include Mt. Gox, ANX, Moolah, BTC China, itBit and Bitstamp to name a few. As described earlier – Bitcoins enter the system by mining, the core purpose of mining provides an essential function to the cryptocurrency system of verifying transaction and safeguard block chain – addressing two function of ownership validation and preventing double spend. The Nodes involved in this process are rewarded with bitcoins. The process with which the bitcoin enter the system itself makes it exclude a larger set of population that neither has access to technology nor understand the complex system that govern bitcoins.

Transacting with Bitcoins:

Bitcoins are stored in a “bitcoint or Digital wallet,”—which can be on a personal computer or cloud. The bitcoin wallet is a kind of virtual personal account ledger that allows users to exchange bitcoins, pay for goods and/or services. Unlike bank accounts, bitcoin wallets are not insured by the FDIC, simply because it is not a Fiat currency that is backed by full faith of a country’s economy and a government. Bit coins can be sent and received, and the ‘public ledger’ makes entry of the exchange. Which implies that the buyer and seller both need to have a bitcoin address and be a part of the bitcoin system.

Adoption Models by Banks, Retailers, Enterprise to accept Bitcoin:
While the popularity of bitcoin grows many enterprise have stepped forward to claim acceptance on bitcoin as a viable currency to exchange for the goods and services they offer. Some popular retailers include Overstock.com, Amazon, Zynga, Sunway and CVS to name a few. It is notable that use of bitcoin in online games is widespread. So what does it mean for an enterprise to accept bitcoins? At a very minimum enterprise needs the following:

A Basic understanding of the Bitcoin ecosystem
A bitcoin address/account
A Cybercurrency exchange account
Inclusion of Bitcoin as a currency in the accounting systems or some mapping in the front end to convert bitcoin into local currency
Tax disclosures – disclosing exchange costs and total bitcoin in local currency equivalent. i.e. Account and Tax reporting modifications
A process to remove an individual from handling bitcoins – to eliminate and minimize thefts. Since Bitcoin is anonymous and he owner is identified by the bitcoin address.

Opinion and Conclusion:

My personal experience with Bitcoin has been interesting, and I have spend some time understanding technology behind it, the complex mathematical system and the momentum behind it. I did buy a few – here I can claim anything and no one can verify, here in lies the problem. Our entire financial system relies on guarantees, measured risks in form of credit and traceability. This is important because the financial system that governs the exchange of financial instruments such as currencies, credit and cash needs a set of well established rules that are well understood and not misused by a few that understand the system. Traceability of the money transfer is also important to ensure fraud, Money laundering, tax evasion and monies are not used for nefarious activities. Hence over time our current financial system is constantly amended to ensure that misuse of the system, in other words the system of money transfer is maturing. And Maturity has its merits and advantages, after all we have invested a lot more ( over the years) in current system that enables a seamless exchange of Monies for good and services. Below are a few of my observations that make me a bitcoin skeptic:

AML – Anti Money Laundering - Anti-money laundering (AML) is a term mainly used in the financial and legal industries to describe the legal controls that require financial institutions and other regulated entities to prevent, detect, and report money-laundering activities.
Traceability – Though each bitcoin transaction is recorded in a public log, names of buyers and sellers are never revealed – only their wallet IDs. While that keeps bitcoin users’ transactions private, it also lets them buy or sell anything without easily tracing it back to them
Absence of Economic inclusion – Due to complexity of the Bitcoin – generation and distribution system, it is only accessible to a few with knowledge and computing resources and economic means. As a currency bitcoin fails to address the economic inclusion and simplicity of a transaction involving exchange of goods and services for a instruments such as cash.
Limited scope of Cybercurrency – At the outset there are predetermined number of bitcoins (42 Million), after which, if the currency goes mainstream will face inflationary pressures, and will face similar challenges of intermediation and interchange that it attempts to combat today. This also raises concerns over absence of economic inclusion discussed above.
Lack of Governance – Fiat currency is backed by a country’s government and economy, similar to gold standard it is backed by a collateral. While bitcoin is still in infancy and lack maturity, it needs governance to resolve dispute. As a technical platform it is robust but it matter of time till the processing power catches up with the speed or other avenues to disrupt the block chain emerges. Lack of governance can cost not just the bitcoin users but the entire bitcoin economy.
Lack of safety and Volatility – Bitcoin as a Cybercurrency as described in public ledger and the owner is identified by a bitcoin address, which is protected by password. These digital currencies can be stored on hard drive, cloud drive or even paper (QR Code), access to which is a password. Lost hard drive, replicated QR code and lost password implies lost wealth. This volatility of the currency can be problematic for large sums, and transactions.

I am a bitcoin skeptic but believe that Bitcoin itself has a lot of potential, not a currency but as a technology platform to be adopted in current financial system to ensure speed and security of money transfer.

Ref:

ByTe Atlas

Wednesday, July 30, 2014

I bought a Bitcoin and did not mine it! – My experience with CryptoCurrency or Digital currency!

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