Future Of Digital Money - Part 1

Believe me until sometime back I didn’t knew much or rather I had no good reason to understand as to what’s happening around us in the dynamic world of Bitcoin, unless a paid online subscription gave me a payment option only through Bitcoin.

And with not much choice, I looked around to acquire Bitcoin (or rather only a fraction of it, as the recent USD rate for one Bitcoin is $740), and that made me curious to know bit more about Bitcoin. The deeper I went, more interesting it got. I was super amazed to discover the exciting journey of Bitcoin that makes me share some of these interesting facts with you, in case you get into similar situation like this (although I think that, the way Bitcoin is fast changing the way we transact today, you may soon be encountering your first experience with Bitcoin, if you have already not!!)

Though Bitcoin had not been much alien to me, but I only knew so much as it gets published once in a while in some of the newspaper articles, especially during the controversy of Craig Wright claiming to be Satoshi Nakamoto which surfaced sometime earlier this year.

Bitcoin concept is a “cryptocurrency” independent of governments, banks and the manipulative players running both – it dates back to nearly a century by great Inventor Thomas Edison who created such great innovations as the electric light bulb and the phonograph. He envisioned a currency backed by a much broader basket of commodities – one diverse enough to “cast the variable out of money” – and proposed setting up a network of “commodity banks” across the country.


So what is a Bitcoin?

In a very simple term, Bitcoin is a digital (Crypto) currency which has a certain value & can be used to buy & sell stuff over internet or even offline. It is as easy & simple to transact as you make payments through your Paytm wallet.

Then what makes it so special!!

I think, it is the way Bitcoin is transacted, managed or controlled over internet, makes it special (rather Bitspecial).Bitcoin was invented in October 2008 (still not known, it is only known that person/ group of persons used the alias Satoshi Nakamoto) & the very first Bitcoins were “mined” in Jan’2009, when Satoshi Nakomoto released the open source code of Bitcoin on internet for public.

Yes, I used the right word “mined”, because no government, central bank, company, or person owns or controls Bitcoin generation and its value.

It’s basically the people like you & me, act as a peer to peer (P2P) through internet network to manage Bitcoin production & transactions. It is not hosted on any centralized server, actually if we combine all the decentralized computers on P2P network it will have 8 times the power of  top 500 super computers in the world. That is why it is also called a decentralized currency.

To own a Bitcoin, either you can buy it through a Bitcoin exchange (I used localbitcoin to buy it in India) or you can earn it by selling some of your stuff online or you can just mine it.

Mining, what’s that!! How does the Bitcoin Mining Works, can I actually mine it & own it and make a fortune!!
Theoretically Yes, you can mine it with your desktop or lap top and make good money (which probably was the way people mined it initially in the early years of it in 2009 & 2010).Basically, mining of Bitcoin is similar to mining of Gold, with a difference that instead of using your shovels out in the field, you have to use your computer sitting in your room.

So how does computer mines Bitcoins!!  
Basically, every Bitcoin works on a Proof of Work (POW), and POW is nothing but a complex mathematical problems attached to every Bitcoin which once solved releases a new Bitcoin in block chain. Every miner solving these complex problems, gets a reward in the form of Bitcoins from the block chain. And that’s how new Bitcoins come into existence.

And there are only 21 million Bitcoins which can be generated into the system, of which more than 15.5 Million Bitcoins have already been released & are in circulation (though some of them might have got lost in the early days), like when one guy threw his old hard disc in garbage in 2009 which actually contained 7500 BTC, as they were worth only few pennies at that time, but today it would be worth $5.5 Mn.

It is widely believed that the first real-world bitcoin transaction took place on May 21st, 2010. Laszlo Hanyecz, a programmer living in Florida, sent 10,000 bitcoin (BTC), the online-only open source cryptocurrency, to a volunteer in England, who then spent about $25 to order Hanyecz two Papa John's Pizzas, (he actually had one the costliest Pizzas on this earth, valuing today for more than $7.4m).

Market cap of these 15.5 Mn BTC is $11.4 billion, at the current market price of $740 for each, which although touched a high of $1242 in Nov’13. The total value of digital Bitcoins now surpasses that of 20 national currencies.So if you are thinking of mining your first Bitcoin with your laptop/ desktop then just stop thinking about it, as I mentioned above is only theoretically possible, practically it will take you more than 2 million years to mine your first Bitcoin even with your i7 laptop.

At the present difficulty level, the mining is possible with only super specially designed hardware computers, used by BTC Miners in their BTC rigs which keep on running 24X7X365 days in search of new Bitcoins (and if you still want to own one, you can probably think of taking a small power online (in Tera, Giga or Kilo hashes) from these mines on lease).

At the current level of Block chain difficulty, 25 Bitcoins gets mined in one block in every 10 minutes (heartbeat of the network) which will get halved in 2017 & continue to get halved after every four years, that is how software is designed and it will eventually finish producing new Bitcoins by the end of 2033 after reaching 21 million BTC.

And because Bitcoins have a limited supply, it becomes an inflation proof currency when being compared to fiat currencies like USD, Euros etc. which gets printed to any value at the wishes of any government/ central bank.

While the fundamentals of Bitcoin as a currency are rock solid, the value could continue to see some wild swings and volatility based on the same concepts that create pricing movements in any market – supply, demand, performance data, news reports, surprise catalysts, investor emotions (such as fear and greed), and of course speculation.

Keep watching this space for concluding Part-2, for what makes Bitcoin so ingenious, how is it getting accepted worldwide and how it is changing "the world".

Amit Bhuttan is a Lead CFO of CFO Ladder LLP, a business consulting firm that helps early-stage, small and middle-market businesses grow through design and execution of sound business strategies.