Just three weeks ago you would have been hard pressed to find anyone in our office talking about bitcoin. And if you did, the conversation would have been very short and along these lines:

  • “Have you seen this bitcoin price, what’s going on?”
  • “I have no idea, I’m not smart enough to understand it”. End of conversation.

But this week, everyone has been talking about it and the conversation has evolved somewhat – “it’s a bubble waiting to burst” – ‘it’s a money making opportunity” – “it’s just another Ponzi” – “what is block chain?”

I imagine these kinds of conversations are happening all over the world, and people are becoming a lot more familiar with the concept of crypto currencies in general, and bitcoin in particular!

So for now, let’s try and delve into these questions. Please understand – I am by no means even close to an expert on the concept. In terms of my ‘education’ I am a complete novice – not even in grade one yet - and there are far more reputable sources of information if you have the energy to trawl the interweb. But here goes…

What is bitcoin?
Bitcoin is a crypto currency that is exchangeable for goods and services via transactions on the internet.

Who regulates bitcoin? Is it legal?
No single body, it is regulated by software – that is its major attraction. It is not issued by governments or central banks, although increasingly the regulators are becoming more involved in trying to understand the crypto world in order to regulate it.

It is legal in most parts of the world, including South Africa. Well, maybe a better way of saying this is: it’s not illegal.

How are bitcoin created?

Bitcoin mining is the process of adding transaction records to bitcoin's public ledger of past transactions or block chain. This ledger of past transactions is called the block chain as it is a chain of blocks. The block chain serves to confirm transactions to the rest of the network as having taken place. The miner is paid in bitcoin.

Everything you need to know about bitcoin mining: https://www.bitcoinmining.com/

Are Bitcoin tradable?
Yes – for goods, services, other currencies, and other commodities. This is done on bitcoin exchanges and via internet transactions.

How many bitcoin are in service – or what is the money supply of bitcoin?
There are currently around 16.5 million bitcoins in service and 12.5 new bitcoins are mined every 10 minutes. There will however be a finite amount of bitcoin in circulation one day. 21 million bitcoin is the final amount that will ever be ‘produced’ probably by 2140; however, bitcoin is dividable up to 100 million, so 0.00000001, which is called a Satoshi. The current market cap of bitcoin in circulation is roughly USD75 billion.

What is the current price of a single bitcoin?
The current price of a single bitcoin is about USD4 750, up from USD600 a year ago. It cost +-10 U.S. cents just seven years ago – that’s what we call a rampant bull market.

Is bitcoin a bubble waiting to burst?
The thing about bubbles is that they are easy to spot once they have burst. Travel back in time and ask the Dutch why they spent multiple years of salary on tulip bulbs and they would tell you that everyone else was doing it. Then once the bubble burst, everyone said it was clear that things would end in tears.

Bitcoin has risen in value from almost 0 to USD4 750 in just seven years, and the last two years have seen an almost parabolic rise in price – often an early sign of pain to come.

The thing is, though, that bitcoin is only now becoming in vogue and reaching some kind of critical mass, evidenced by the number of conversations going on about it.

The difference between tulips and bitcoin is this: the only thing you could do with a tulip bulb is grow tulips and make your garden pretty. Bitcoin, however, is fully tradable and exchangeable. Although some would argue that tulips were also a kind of currency exchangeable for goods and services.

Guessing game
And so I don’t have the answer to this question – my best assessment is that bitcoin is here to stay as technology makes global transactions so much easier and almost impervious to fraud and theft. What the price will be in a year’s time is anyone’s guess – 10 cents, 100 dollars, 10 000 dollars or even R1 million – no one knows.

The value of money
I have to ask: what gives the R10 or USD1 in your pocket its intrinsic value? It’s only paper, yet you know you can buy R10 worth of stuff with it. It may look like the value of your R10 never changes; it’s always green, and it always buys you R10 worth of stuff. It’s guaranteed by the government.

The reality is that it changes in value continuously – you could buy more stuff with R10 last year than you can today, and all the government really promises is to give you, in exchange for R10, is a different R10.

Bitcoin has reached this tipping point. You know what you can buy with it and it is completely trusted (for now). Its value will definitely fluctuate, but I think it’s here to stay.

Is bitcoin the only crypto currency out there?
No – at last count there were almost 800 such things out there. More cryptos exist than sovereign currencies. They all seem to be based on the same block chain technology. And it seems to me that they are all competing to be the winner for the currency that controls the global transactional ledger. This is the end game in my estimation.

Companies now do ICOs as opposed to IPOs. They raise money through issuing crypto currencies rather than shares. This concerns me, as in among all these ICOs there is sure to be more than one dodgy offering that will fall flat and leave investors penniless.

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