What is Bitcoin?
If you pose this question randomly to Kenyans, you are guaranteed to get some hilarious meme-worthy answers.
The world of cryptocurrencies is a mysterious and slightly suspect world for most Kenyans. Some are convinced it is a scam; others cannot stop singing praises, others complain it is impossible to understand while the rest can’t figure what the hype is all about.
Kofi Annan said, “knowledge is power, information is liberation, education is the premise of progress in every society, in every family.”
With that in mind, even if you fall under the category of Kenyans who want nothing to do with cryptocurrencies, having the information is always a plus. Think about this. Currently, 1 bitcoin is worth 6,739 U.S Dollars. Who knows what the future holds? Maybe cryptocurrencies are the future of commerce on the internet.
Commerce On the Internet
Before delving deeper into cryptocurrencies, it is crucial, first to understand commerce on the internet. It was the rise in internet commerce that led to the invention of cryptocurrencies.
Commerce on the internet means the exchange of goods and services over the internet. That means you can order shoes on Kilimall, pay via Mpesa and Kilimall will deliver the shoes to the location you have specified.
Before the advent of cryptocurrencies, commerce on the internet solely relied on third-party financial institutions. It is mostly so even now.
What does this mean?
It means that any online transaction must go through a third party, for example, a bank or credit card company.
For instance, you decide to purchase a book on Amazon. Since you cannot pay in cash, you will have to use either a Visa card or Master card. On the payment portal, you will be asked to give your information—your name, your card’s expiry date, and the three-digit security code.
In the background before your payment is approved, Amazon will capture the information and send it to their bank. Amazon’s bank via an intermediary known as an acquirer will then request the funds from your bank.
If everything looks legit and okay your bank will authorize the money transfer from your account to Amazon’s bank account.
In this case, the bank and the acquirer are the third-party financial institutions. Institutions through which your online transaction must go through. However, there are weaknesses in this kind of transaction.
Weaknesses of Third Party Transactions and The Beginning of Cryptocurrencies.
In 2007, an anonymous programmer and tech whiz, known as Satoshi Nakamoto, having recognized the weaknesses of using third-party financial institutions started thinking of a way to completely cut out the third party so that internet commerce would solely be between the two parties involved.
That means if Jane is selling a dress, and Mary is buying the dress, then the exchange of money is entirely between the two of them with no bank or credit card company involved.
Some of the weaknesses Satoshi Nakamoto identified included,
- Non-reversible transactions. For example, in case of a complaint, whether legitimate or not, the bank can always reverse the transaction.
- High transactions costs for both buyer and seller. Transactions costs typically range between 1% to 5%.
- Risk of personal information. There is no way around it, to complete a card transaction, personal information must be provided.
The World’s First Successful Cryptocurrency—Bitcoin
In 2009, having taken two years to come up with a solution, Satoshi introduced a digital currency that would solve all the weaknesses he had identified—the Bitcoin.
Bitcoin is a decentralized digital currency. That means, there is no centralized organization charged with monitoring:
- How many Bitcoins to produce.
- When to make more Bitcoins.
- Where the Bitcoins are.
You are now probably wondering how this is possible? How can a currency lack a regulatory body?
Let us take a moment and think about it. In each country, there is a central authority responsible for that country’s currency. In the U.S. it is the U.S. Treasury and in Kenya, the CBK. The CBK is responsible for printing notes, minting coins, tracking transactions, ensuring stability and economic growth.
Built into Bitcoin technology is the ability to do everything a regulatory body does.
Here is an excellent example that further explains Bitcoin;
Before 1999, the Euro did not exist. However, the relevant people decided that a common currency amongst member states of the European Union would increase trade and make it easier. On 1 January 1999, the Euro made its debut on the financial markets.
Similarly, Bitcoin was introduced to enhance trade over the internet, and make buying and selling goods over the internet more secure and more accessible. It is the currency of the Internet.
How the Technology Works
One would wonder, if Bitcoin is a digital currency why can’t someone just counterfeit a bunch of Bitcoins and become super rich?
Because a Bitcoin is not a file or strings of data that can be replicated, instead it is an entry into a vast network known as a Blockchain. The Blockchain records every Bitcoin transaction that has ever happened.
So when two people exchange Bitcoins, there is an entry into the Blockchain. For instance, “Martha sends Sam 10 Bitcoins.” The Blockchain is thus akin to a ledger, or a central record.
So, if the Blockchain is a central record, and there is no official body in charge, who updates the Blockchain?
The technology works because anyone can volunteer to keep track and update the Blockchain. Therefore, at any given time, thousands of volunteers are keeping track of the same transactions, and this ensures accuracy.
Imagine that you and your three friends are seated at a table playing a game dependent on money as the reward for the winner. For each game, you place fifty shillings on the table, and the winner takes the two hundred shillings.
Unfortunately, your friends have forgotten their money at home. So because money is sensitive and you do not trust each other when it comes to money, you all volunteer to record the game’s progress on a piece of paper. At the end of the game, you will compare the results to eliminate discrepancies and determine the correct amount everyone should get.
Similarly, thousands of people are separately tracking Bitcoin transactions and maintaining the copies of Bitcoin Blockchain.
But then how are all these Blockchains maintained by different people kept in sync?
Once again, imagine the Bitcoin network is a circular table and everybody using Bitcoins seats around the table. Some people are just sending and receiving money, but others are keeping track.
Anytime Mary wants to send Bitcoins to John; she announces to the table her account number, John’s account number and the number of Bitcoins she wants to send. The volunteers maintaining the Blockchain then add the information to their Blockchains.
The information announced remains secure because of a technology that is known as cryptography (and hence cryptocurrency). It means that the information announced to the network is signed or encrypted with a private key and a public key.
In cryptography, due to some complicated mathematical algorithms, if the public key works, then it proves that the private key attached signed the transaction and that the trade is legitimate.
Volunteering to Maintain the Blockchain Seems Like a Lot of Work, Why Do People Bother?
Because Bitcoin has a built-in system to reward the volunteers.
How does this work?
It is not only essential to keep track of who sends and who receives but also when the transaction occurs. That way, no one can take advantage of time discrepancies and spend the same money multiple times because there is no record of when the transaction happened.
Bitcoin solves this by automatically checking previous transactions to make sure you have enough Bitcoins.
The issue with timing arises because multiple people are keeping copies of the Blockchain, network delays guarantee that transactions requests by the different volunteers are not always in the same order although none of them are wrong.
That means there are some volunteers whose Blockchains differ slightly. Bitcoin solves this by using mathematical problems. To add a block of the transaction to the chain, each volunteer must solve a unique mathematical problem created by a cryptographic Hash function.
The volunteer who solves the problem fastest gets to add his/her block of transactions to the central Blockchain, and Bitcoin automatically awards 12.5 Bitcoins.
12.5 Bitcoins are currently worth 84, 237 U.S Dollars. That is enough motivation to attract as many volunteers as possible 😊
The volunteers are often known by another name, “miners.” Miners invest in powerful computers that can solve Hash functions and make money out of maintaining the Blockchain.
How to Buy Bitcoins
Since Bitcoin is a digital currency, it means you cannot hold it physically, but you can have it electronically. Once you have a Bitcoin, you can then use it to buy shoes, clothes, pizza and anything else just as long as the merchant you are buying from accepts Bitcoins as payment.
In the same way, if you have Kenya Shillings, you can buy U.S Dollars to use in the U.S or Nigerian Naira to use when in Nigeria, you can also buy Bitcoin to use during your online transactions.
One can buy Bitcoin directly from other people via online markets or use a digital currency exchange broker.
The first step to buying a Bitcoin is setting up a wallet. The wallet will store your private and public key, and it is where you will also save your digital currency. The wallet can either be a software (an application) or hardware (flash-disk-like device), and the best way to set up the wallet is through a third party, for example Coinbase.
You can link a wallet to a bank account, and once you visit an exchange broker of your choice, you can then buy the Bitcoins which will be stored in your wallet. It is also possible to use cash to buy the Bitcoins.
How to Invest in Bitcoins.
Whether to invest in Bitcoins or not is one of the most hotly debated topics in Kenya. Ultimately it is a personal choice but here are the basics behind it.
We mentioned above that at the moment, 1 bitcoin is worth 6,739 U.S Dollars. Let us assume John buys 5 Bitcoins at this price today. 3 months from now, it happens that he has not spent these Bitcoins on any purchases, but because the market is always fluctuating, 1 Bitcoin is now worth 8,000 U.S Dollars.
If someone looking to purchase Bitcoins buys from John, then John makes a profit 1261 U.S Dollars per Bitcoin. Similarly, if the Bitcoin falls in the market, then John makes a loss. It works the same way the forex exchange does.
Bitcoin is just one of the many cryptocurrencies available. However, it was the first and is the most successful. When deciding whether to invest in it or not, one should always remember that Bitcoin is very volatile. Unlike other currencies, and the foreign exchange, it does not boast stability.
Before Christmas last year, the Bitcoin peaked at $11,000. It has now fallen to $6000. In the same way, it can appreciate tremendously overnight. It is good to do in-depth research and consider all factors when making the decision.