Bitcoin/Blockchain Simplified

Peter Katevatis - Jan 19, 2018
It is extremely difficult to avoid the bombardment of information regarding Bitcoin, other crypto currencies, and the technology that supports it all, the Blockchain.  The problem most people have with this bombardment is that they have absolutely no

It is extremely difficult to avoid the bombardment of information regarding Bitcoin, other crypto currencies, and the technology that supports it all, the Blockchain.  The problem most people have with this bombardment is that they have absolutely no idea what everyone is talking about.  Although I will simplify the concept for you, it can still be complex to understand.  Please do not hesitate to reach out with any questions you may have.

 

With almost all of the world’s computers connected via the internet there are a lot of untruths out there, like pyramids on the moon anyone?  The great benefit of Bitcoin mining and the underlying technology called the blockchain is that you now have a trusted distributed ledger.  The worldwide network acknowledges additions to the ledger and all the connected computers verify that this ledger is correct and trustworthy.  Think about it as a process that only moves forward, no back dating allowed.

 

If your bank used blockchain technology to verify the balance in your chequing account, there would be a concrete record of the transactions.  If the bank accidentally deposited $100 into your account because the teller made a human error (the 5 looked like an 8) they would currently cancel the previous deposit and you would be none the wiser.  However, using blockchain technology the deposit could never be removed so they would need to process a new entry correcting your temporary $100 windfall (sorry, you don’t get to keep the cash).  In the end there is no difference but the blockchain system is more trustworthy.  This becomes even more crucial when you have dealings between suppliers, transfers overseas, or no government oversight.

 

This entire system is backed by the verifiers of the ledger, also known as Bitcoin miners.  Bitcoin miners are connected computers that use their processing power to solve a mathematical equation which also verifies the network at the same time.  They do this with the hope that by solving the problem they will be rewarded with a couple of Bitcoins.  As the price of bitcoin has risen, this has created a massive increase in the number of miners but has also strengthened the system.

 

With approximately 5,000 nodes and 100,000 miners that verify the ledger, if someone was to change one entry (changes the balance if your bank account) the rest of the network would view that as a false entry.  That entry would be flagged and would be further investigated.

 

Pile of fake bitcoin

 

The biggest leap of faith that has people stumped is the term “virtual currency”.  With these miners holding Bitcoin a trusted and de-centralized medium of exchange grew.  By having a de-centralized anonymous way of transferring value, the early days of Bitcoin was a hayday for payment in the dark web like Silk Road.  This is the realm of illegal drugs, prostitution, weapons, etc... and a way to avoid the money laundering laws the world is trying to enforce.  Canadian banks were particularly suspicious of all entities dealing in Bitcoin as recently as 2015.

 

The term coin and the fake photos like the one above make people think this is the same as a US Dollar.  In reality, there are no physical Bitcoins.  This might change over time but currently Bitcoin (or Ethereum, Ripple, Dash, Litecoin, Monero, etc) is not a currency.  There is no government backing or support that it will continue to be accepted as a medium of exchange.  The biggest risks ahead for digital currencies are probably government intervention as they want to stay in control of the monetary system but have no idea how to implement it. 

 

This is an evolving story and Canaccord Genuity Wealth Management continues to evolve with it.  We are hosting a Blockchain Investor Day on Jan 23rd so feel free to contact me after that to get my notes and opinion on the presentations.