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Kayode Omosebi: What is this Bitcoin Everyone is Talking About?

Kayode Omosebi

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Bitcoin has captured the mind of some, struck fear among others and confused the heck out of the rest of us. If you are still confused, there’s no need to worry. Borrowing from the words of Warren Buffet where he says, to never invest in a business you don’t understand, I’d like to explain the the concept to you without floundering into technical details, and leave you to make your investment decisions.

First, Bitcoin is a type of cryptocurrency and is unarguably the most prominent cryptocurrency in use.  The most precise analogy for a cryptocurrency is a foreign currency that is accepted as a medium of exchange for goods and services. Like the Pound, Euro, Dollar, and Yen, the value of a cryptocurrency like the Bitcoin are solely determined by the forces of demand and supply.

So, what’s the difference? Unlike physical currencies, cryptocurrency is digital, limited in supply and not controlled by a central bank or government. Rather, cryptocurrencies use cryptography to secure transactions, control the creation of additional units and verify transfer of units.

Cryptography is the process of converting legible information into a hack-proof code to track purchases and transfers. Simply put, cryptocurrency is a digital currency that is used as a medium of exchange.

In summary, the key features of a cryptocurrency are;

Unregulated – Cryptocurrencies are not issued by any central authority, rather they are based on peer-to-peer computer networks.

Limited Supply – With paper money, a government decides when to print and distribute money. With cryptocurrency, there is a limited and finite supply that can be mined. For instance, the puzzle associated with mining Bitcoin will result in a total release of Bitcoin of approximately 21 million units.

Anonymity – Neither transactions nor accounts are connected to real-world identities. Thus, it is almost impossible to connect the real-world identity of users with those addresses.

Secure – Cryptocurrency funds are locked in a public key cryptography system. Only the owner of the private key can send cryptocurrency.

Fast and global – Transactions are initiated almost instantly in the network and are readily confirmed in a couple of minutes.

Irreversible – After confirmation, a transaction cannot be reversed. This implies that there is no safety net.

How does it work?
Now that we understand what a cryptocurrency is, the next thing is to understand how it is generated. Like gold, cryptocurrency cannot simply be created randomly. Gold must be mined out of the ground, and cryptocurrency must be mined via digital means. Cryptocurrencies are generated through a process known as mining.

Some users put their computers to work verifying transactions in the peer-to-peer network. These users are called Miners. Miners use special software to solve math problems and are issued a certain units of a cryptocurrency in exchange. This creates an incentive for more people to mine (anybody can be a miner). Therefore, Mining is a peer-to-peer computer process used to secure and verify a cryptocurrency transactions and payments from one user to another on a decentralized network. Mining involves adding the transaction data from cryptocurrency to its global public ledger of past transactions, which is called the blockchain. The blockchain is used to distinguish legitimate transactions from attempts to re-spend coins that have already been spent elsewhere.

Where do Cryptocurrencies get their value?
First, it is important to note that cryptocurrencies have no intrinsic value, apart from what the buyer is willing to pay for one coin – it is entirely market determined. Now, remember we previously mentioned that the supply of a cryptocurrency is limited, thus the effect of rising demand and limited supply drives the appreciation in its perceived value. Cryptocurrency gains its value from utility, as more companies and governments continue recognizing it as a means of payment or exchange. Also, strict capital controls in certain developing nations and foreign exchange illiquidity in certain countries like Nigeria and Zimbabwe supported the rise in the value of cryptocurrency as people seek to make international payment and preserve spending power. While no one is entirely sure how cryptocurrency will continue to spread to the larger financial world, it seems likely that a limited supply of the currency and rising demand may cause prices to continue rising.

Recent developments
In recent months, countries like Japan and Germany have accepted Bitcoin has a legal tender and form of payment. Similarly, betting firms have started offering Bitcoin in lieu of cash for winners as well as accepting Bitcoin as a method for making deposits. Some universities and schools have also begun accepting Bitcoin as a form of payment for tuition fees while several global companies including Microsoft and Bloomberg have started to accept Bitcoin as a form of payment Lastly, Liberland, the third smallest country in the world, uses Bitcoin as its national currency.

My Take
Just like any new investment or speculative venture, let me start by advising you to be cautious if you decide to invest in cryptocurrency.
Cryptocurrencies are susceptible to monumental price swings at any point in time. With no regulations, they are vulnerable to market malpractices and thus may not be an appropriate venture for risk averse investors. However, some of the significant short-comings of using cryptocurrency may be resolved soon and some exposure in them might prove profitable to risk takers. With the number of firms and countries accepting and recognizing cryptocurrency set to rise, the utility of cryptocurrency (especially Bitcoin) is expected to increase and which should result in  price appreciation. However, the upside is limited to Government’s regulation surrounding cryptocurrency. Favourable regulation will spur utility while adverse regulation may have a negative effect on the utility.

In conclusion, cryptocurrency should be perceived as a speculative investment rather than a fundamental-backed investment. If you choose to invest in a cryptocurrency, it’s prudent to have exposure you can afford to lose if the cryptocurrency goes burst. If it sustains its growth momentum, your small exposure could grow exponentially thereby diversifying your returns. Reiterating what I said earlier, a cryptocurrency has no intrinsic value apart from what the buyer is willing to pay for one coin. So, before you buy any cryptocurrency, make sure you check its acceptance as a means of payment to be ascertain the value and future demand.

Photo Credit: Pavel Shlykov | Dreamstime

Kayode is an Economist and Investment Banker with experience in investment research, corporate finance and investment banking.  He has built a sound knowledge of Sub-Saharan Africa economies and financial markets, with keen focus on Nigeria. He is passionate about the MSME field and aims to plug the funding gap hindering growth in this field. Having seen the obstacles that MSMEs often face when seeking funding to grow, Kayode is focused to link promising sustainable and viable businesses with the investments they need to get off the ground. Thus, he offers advisory and financing services to MSMEs that contributes to the growth and development of the nation. [email protected] @KayTrinity

18 Comments

  1. Just Saying

    December 24, 2017 at 3:12 pm

    “With no regulations, they are vulnerable to market malpractices and thus may not be an appropriate venture for risk averse investors. ”

    Nice One. This cited statement come across to me as “it puts the wicked Manipulative MF Central bankers out of business globally and creates the first true currency system that is based on capitalist/market princples of demand and supply. This is the Amazon.com of the global currency market” In my opinion, this is a coup that will dethrone the currencies of imperialist nations. Major disruptor in the long term. I am not saying you should buy bitcoin Oh. The price don dey peak.

    • Tony

      December 25, 2017 at 7:34 am

      I agree with your view on the risks of deregulation. It’s also very volatile so it’s important many jumping on the wagon understand the underlying technology of cryptocurrencies. Bitcoin isn’t the only one, we have litecoin, etherium, dash, Montero etc. Block chain technology will enhance lots of things and disrupt others especially the financial sector which is held captive by a league of billionaires who keep getting richer daily all in the name of centralisation.

      People interested in investing should invest wisely, use the right exchanges to buy cryptos, always use a wallet to store your crypto to avoid risks of exchanges being hacked.

      The market capitalisation of cryptocurrencies is now USD 500 Billion and counting so there is need for some checks to avoid Ponzi scheme opportunists. But I am happy this financial revolution is happening bye bye to JP Morgan Chase, Goldman Sachs & other wolves.

  2. Weezy

    December 24, 2017 at 3:46 pm

    Sounds like a great way to pay someone to assassinate your spouse or to import cocaine.

    • Biker Chic

      December 26, 2017 at 12:22 am

      You are absolutely right @Weezy. A lot of drug money/underground deals hide their money in cryptocurrencies.

  3. Dee

    December 24, 2017 at 4:57 pm

    Yeah, investing in bitcoin involves very high risk, as it’s price is extremely volatile. But so far i’ve enjoyed investing in it through a crowdfunding n investment company.

    • Anon

      December 24, 2017 at 5:07 pm

      Which company is that?

  4. Maryjane Blogazine

    December 24, 2017 at 5:26 pm

    I’m surprised this is new to Nigerians, It’s common abroad. A great investment with no guarantee lol. Nice writeup.

  5. Author Unknown

    December 24, 2017 at 7:23 pm

    “If you choose to invest in a cryptocurrency, it’s prudent to have exposure you can afford to lose if the cryptocurrency goes burst.”

    And these wise words from Kayode should be your guiding principle, as they have been mine with every investment I’ve made. I’m not going to be jumping on the cryptocurrency bandwagon, but I also realise that I may have to bite my finger in the future for having done so…or maybe not. My personal strategy is to invest some money when I believe in the future of the product (and while it’s cheaper). If it takes off (and gets more expensive), I invest some more. Now, because I already invested some while it was cheap, my book cost is on average lower than that of newcomers, so I’m ahead of them. If the product doesn’t quite take off, my loss is limited to my initial investment, which I was in any event willing to lose in a worst case scenario. Make decisions you can live with, basically.

  6. Authentic Sunshine

    December 24, 2017 at 7:44 pm

    I.must be bitcoin daft cos I still don’t get it.
    1- In layman terms how do I make ‘bitcoin’ and save it.
    2- How do you save it and what banks accept them?
    3- How do I pay with it
    4- Who can I pay with it
    5- Can I convert cash to bitcoin and vise versa
    6- How many regular money equal bitcoin?
    Pls if you choose to answer, ask yourself will a marketwoman understand my sentence (s) before leaving your response. Thanks in advance. Me too I want to bitcoin hammer.

    • Author Unknown

      December 24, 2017 at 8:14 pm

      I’ll try. My non-professional analysis. Think of it as a commodity that you’re buying (say pepper grinding machine, which is limited in supply), not so much wahalaing yourself about how to use bitcoin as a currency or mine it (how to farm pepper). A commodity that has a certain value today (N5,000), and might have a larger value tomorrow (N50,000). There might be more demand for ground pepper tomorrow, in which case the pepper grinding machine becomes more valuable. When you sell the pepper grinding machine, you make cash money. Where to buy this pepper grinding machine (Bitcoin) ? coinbase.com (Tejuoso Market).

      If my analysis is wrong, experts, feel free to correct me.

  7. Smackdown

    December 24, 2017 at 8:47 pm

    Exactly!! The bitcoin bubble is going to burst. I invested in Litecoin

  8. GYOnlineNG.COM

    December 24, 2017 at 9:09 pm

    To buy bitcoin is not hard, what you need to do is to first create your wallet through any of this platforms Blockchain.info, Coinbase.com, Luno.com or Spectrocoin.com. After registering with any of this platform, the next to do is to fund your wallet. You can do that by buying through trusted exchanger or credit card, based on the value of Bitcoin at that time.

  9. Ajikoko

    December 24, 2017 at 9:50 pm

    Mr Unknown Author….you are a fanstatic teacher- in fact a lecturer – hope you teach? I done crack my brain sote to understand bitcoin – na big big grammar-but uve broken it down – thank u

  10. Authentic Sunshine

    December 24, 2017 at 10:31 pm

    Thanks @Author Unknown . Xoxo

  11. Lol

    December 25, 2017 at 1:34 pm

    Bitcoin is the senior brother to MMM. It is an Asian Yahoo yahoo scam. Don’t even invest in it.

  12. Bitcoiner

    December 25, 2017 at 7:13 pm

    Cryptocurrency is the way of the future. It is a revolution that the whole world should encourage. Though difficult for the analogue world to understand, it will liberate the world economy. Only danger to this is the oppressive imperial powers whose stranglehold on global economy may be weakened. With cryptocurrency, your Naira-Dollar parity become a non-issue.

  13. Erm

    December 26, 2017 at 7:09 am

    Am I the only one thinking this: One global currency, antichrist, last day prophecy, end time “tins”.

    • florence

      December 27, 2017 at 9:52 pm

      NOPE!!! My brother same here oh!

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