What exactly is bitcoin and how can you know if you can trust it?
WHAT IS BITCOIN?
Bitcoin is the world’s first decentralised digital currency. It was invented in 2008, and released to the world in 2009 as open source software, to be a system of peer-to-peer electronic cash by its anonymous creator, known only as Satoshi Nakamoto.
Bitcoin is open-source software, so there is no single person or company in charge, and no servers or website that can be hacked or shut down. The system is entirely online. The system is decentralised and so there is no central point of failure – this makes it extremely robust. The inventor no longer has any power or control of the system. Changes are made by consensus.
Bitcoin is finite, and there will only ever be 21 million of them. This makes bitcoin a deflationary currency, and it becomes rarer and rarer over time. As time goes on there is less available, and combined with the influx of new users and uses for bitcoin, the demand increases. As supply has decreased, and demand has increased, the value has increased dramatically. This is the opposite of regular currency, where there is inflation of the money supply, making your Rand less valuable every year, and your purchasing power less and less over time.
HOW DOES BITCOIN WORK?
We can send pictures and messages instantly on the web, so why not money? A bitcoin transaction is data being sent, just like a message or a picture upload. Sending bitcoin to someone as a payment is similar to sending an email: you send from your wallet direct to the recipient’s wallet.
Anyone can have a bitcoin wallet regardless of their age, or where they live in the world. You don’t need to provide proof of residence or funds. It is completely borderless. Anyone can transact at any time with anyone else, without any person or company being able to stop or interfere with their transaction. There is no company in the middle, like a bank that puts a delay on your funds for 24-48 hours. No-one can stop a payment, freeze your account, blacklist you, or reverse a transaction.
The cost to send a bitcoin transaction is minimal and extremely cheap compared to regular methods of sending money. Since the transaction is data, the cost per transaction is based on the amount of data sent, not the amount of value being sent. If you send R10 million worth of bitcoin to someone, or R1 000 worth of bitcoin, the cost will be similar and around a few rand to send. So if you send a small transaction, the fees could look like a lot percentage wise, but on a large transaction, it can be a very small percentage.
WHERE DO YOU START?
If you want to use bit coin, you first actually need to own some bitcoin. The safest and quickest way to get bitcoin is on a bitcoin exchange, as they make sure that nobody gets cheated: if you deposit money, you get your bitcoin. Exchanges normally have the best prices for bitcoin, although each exchange will have its own rules about who can open an account, and how much you can transact.
To use bitcoin you need a digital wallet to store them in, which can easily be installed on your computer or mobile phone, or you can use a web-based or physical-hardware wallet. Deposit Rand on the exchange, swap it for bitcoin, and withdraw your bitcoin to your wallet. If you have bitcoin and want Rand, you reverse this procedure. Deposit your bitcoin on the bitcoin exchange website, exchange it for rand, and withdraw rand to your bank account.
HOW HARD IS IT TO BE SUCCESSFUL?
Being successful with bitcoin is like being successful with any currency. Don’t “invest” in get-rich-quick schemes and anything that seems too good to be true. If you are investing in some bitcoin, treat it as an investment and be rational. A good way to invest is to set aside an amount of money you want to invest on a monthly basis, and buy bitcoin on a set date, regardless of the price. Some days you may get it cheaper, sometimes it will be more expensive, but you will be spreading the risk over time and get an average price for your bitcoin. But please remember, bitcoin is considered a high-risk investment, so don’t use your life savings to invest in it.