In our previous blog we looked at the history of money and how money is created, a system that was established at The Bretton Woods Conference of 1944 (post World War II). It was it at this conference in New Hampshire where a new Monetary System was created by World War II allies initiating a new World Order which established the US dollar as global reserve currency abolishing the gold standard. The creation of the World Bank and International Monetary Fund were two other key outcomes of this conference. The video below illustrates just how well entrenched the dollar is in the global financial system today.
The global financial system today built around stock and bond markets has three main sources of money:
- Central bank notes and coins
- Money created by private commercial banks, through a system called fractional reserve banking (constitutes 97% of all money in circulation)!
- Quantitative Easing (QE) – monetary policy by which Central banks inject additional currency into the monetary system to stimulate economic activity!
Fractional-reserve banking, the most common form of banking practised by commercial banks worldwide, involves banks accepting deposits from customers and making loans to borrowers while holding in reserve an amount equal to only a fraction of the bank’s deposit liabilities. – source Wikipedia
QE has been overused by these authorities since the 2008 financial crisis and when minimum reserve requirements for depository institutions were removed by the Federal Reserve on March 26th, 2020 the printing of currency has continued unabated at an accelerated rate.
The consequences of this endless printing of money is inflation, which means the purchasing power of $1 is diminished everyday. According to the Bureau of Labor Statistics consumer price index, today’s prices in 2020 are 2,517.18% higher than average prices since 1913. The U.S. dollar experienced an average inflation rate 3.10% per year during this period, causing the real value of a dollar to decrease.
In other words, $1 in 1913 is equivalent in purchasing power to about $26.17 in 2020, a difference of $25.17 over 107 years. The future of fiat currency does not look very bright and may be led by the demise of the almighty dollar.
Fiat money is currency established as money, often by government regulation, but that does not have intrinsic value, Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value – source Wikipedia
Bitcoin is an innovative payment network and a new kind of money!
A potential solution to the what appears to be the slow demise of fiat currency led by the US dollar is Bitcoin! Bitcoin is inherently built to be anti-inflationary with a finite or limited supply of 21 million Bitcoins written into the blockchain code by the founder Satoshi Nakamoto. This means that no more Bitcoin can be created beyond the mining of the 21 millionth coin which will occur in the year 2140.
The Bitcoin design was deliberate to eliminate any tendencies to create more Bitcoin, having the reverse effect to what has been going on in the financial markets described above. Over time with wider scale adoption by institutions and individuals, Bitcoin will become more valuable due to its scarcity, an attribute which has earned it the tag ‘digital gold’. At the time of writing one Bitcoin costs $11 859. Therefore unlike fiat currency, crypto currencies led by Bitcoin are designed to be a store of value, among other uses within their ecosystems!
Through out time gold has been seen as a good store of value and in times of crisis investors have sort refuge in it by increasing their exposure to the precious metal in their investment portfolios. Bitcoin prices have been extremely volatile since its establishment, particularly between 2016 and 2020 confounding enthusiasts and investors as it is not demonstrating attributes of gold, which tends to have a more stable price.
The Bitcoin story!
Bitcoin was created in 2008 by an anonymous person or group of people referred to as Satoshi Nakamoto, who no one knows or has ever seen. Bitcoin is an open source software described in a 9-page white paper freely available to anyone on https://bitcoin.org/bitcoin.pdf . In the abstract to this white paper Satoshi Nakamoto simply describes Bitcoin as….
‘A purely peer-to-peer version of electronic cash which allows online payments to be sent directly from one party to the another without going through a financial institution’. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is required to prevent double spending….
What is Bitcoin? – by Rea Savla
Cryptocurrency is a completely digital, formless currency, tied together using computer science, cryptography and economics. Bitcoin is the first and most widely used cryptocurrency.
Bitcoin is inspired by the Cypherpunk Movement in the 1980s, which advocated for protection of privacy from external entities using cryptography. Satoshi Nakamoto first outlined and created Bitcoin in 2008 and 2009.
Bitcoin aims to be pseudonymous, trustless, decentralized, and immutable. In addition, anyone with a computer and internet connection can join the Bitcoin network. Each computer is a node in the Bitcoin network, and each node may verify and audit the transaction history of their own funds. In Bitcoin, the minting and distribution of bitcoins is determined through mining; since anyone can mine and win bitcoins, this process also aims to be decentralized.
Some of the challenges Bitcoin addresses are:
- The difficulty to ensure every Bitcoin node holds a consistent version of the transaction history
- The difficulty to identify malicious actors
These conditions may normally allow a node to conduct a Double Spend Attack, in which the one spends the same funds more than once by tricking parts of the network to believe different versions of the transaction history. However, Satoshi overcame this problem using blockchain and Proof-of-Work.
Bitcoin is robust because it serves the same functions as a bank:
- Account management; the Bitcoin protocol gives users a way to create and manage their own identities (account)
- Legitimacy; It ensures we are legitimate owners and accessors of our accounts
- Record-keeping; It honestly records account balances at each transactions.
Unlike a bank, Bitcoin is decentralized and ensures a high degree of privacy and trust.
Trust is built on the blockchain due to a high level of transparency: blockchain is a publicly verifiable ledger, not owned by any entity, and it prevents any single point of failure.
To maintain this trust, we need identity in Bitcoin for authentication and assigning blame. Bitcoin uses public keys to send funds and private keys to prove ownership of the public key and redeem the sent funds. Each individual is responsible for creating and managing their own private and public keys. Public keys are generated from Private keys and are used to send/receive funds. Private keys are randomly generated and used to prove ownership of the public key. The chances of guessing the same private key are very low.
In addition to proof of ownership, in order to be considered valid, transactions must also have enough available funds to spend from and guarantee that no other transaction uses the same funds. Bitcoin uses the Unspent Transaction Output (UTXO), in which users spend directly from transactions made to them.
Instead of storing transactions individually, Bitcoin batches them into “blocks,” built off of their previous blocks, thus forming the tamper-evident, blockchain data structure.
Users on the blockchain must come to a consensus on which updates and blocks to add to the blockchain. Doing so also prevents Double Spend Attacks. Bitcoin uses a form of peer validation to build a shared transaction history; everyone on the network casts votes on the validity of a transaction. To prevent a Sybil Attack, where users create multiple identities for malicious purposes, Bitcoin employs Proof of Work, where voting power is based on computational power, to make voting expensive.
The essence of how Bitcoin works is explained in the video below (non-technical version):
How to get started with buying, selling or investing in Crypto currencies
Getting started with buying and selling crypto-currencies may seem daunting at first as it is a highly technical and a specialized area. It is crucial when setting up an account on a crypto currency exchange to take all the necessary precautions to safe guard personal information. Some of the well established exchanges which I have used before include, Crypto.com, Gemini, Coinbase, Binance, Bittrex, and Luno. At the time of writing Binance is the most liquid, and has the widest variety of crypto available, supports the widest range of FIAT currency deposits with very low comparative trading fees.
When choosing which cryptocurrency exchange to use things to look out for include trading volume (liquidity) of the exchange, trading fees, customer support and whether the exchange is supported in your territory for FIAT currency deposits/withdrawals and last but not least how secure the exchange is. Always keep hard copy back-ups of digital keys, and passwords and never to save this information online where it can be hacked or stolen by cyber criminals.
There are also many scams online where cyber thieves will use well known personalities images or videos with fake free Bitcoin giveaway offers which require you first to send your Bitcoin under the guise of doubling what you send. Don’t do it! You will not get your money back let alone the extra currency promised! In addition to this, never send any money to so called traders who claim that they will generate a profit for you by investing your money for you in crypto-currencies or binary options – you will never see your money again if you fall for these scams!
There are many free resources that can be found online for how to get started in crypto currencies, and when I got started a little while ago I followed Crypto Casey who is very knowledgeable in the technical aspects of Digital and crypto-currencies and has a great series of You Tube videos users can follow starting with the video below:
Digital Wallets and how you can store Crypto currencies
Once you have bought your crypto on an exchange it is also not safe to just keep your currency on the digital wallet you have set up on that exchange, as sometimes these exchanges can go down or even get hacked. It is advisable to transfer and store your crypto on a digital hardware wallet in cold storage (i.e. in a Ledger Nano X wallet) or on a mobile digital wallet (an app on your smart mobile device as illustrated below in the Trust Wallet):
The benefits of using crypto-currencies for peer to peer transactions are clear for all to see given the convenience, accessibility and significantly lower transaction costs. This technology hits at the heart of the current financial system managed through third party intermediaries (banks and other financial institutions).
The ability to send and receive money globally 24 hours a day, 7 days a week with near instant fulfillment cannot be matched by the current system, which is set to be completely replaced in the near future especially when company to company, customer to company (& vice versa) transactions on the blockchain become mainstream!
For Africa this kind of emerging technology is set to completely accelerate financial inclusion and break down the barriers to entry as all that is needed to participate is a smart mobile device with an internet connection. As mobile penetration and smart phone adoption grows on the continent more and more Africans can send and receive funds to/from anyone in the World!