|If you’re new to 5 Minute Finance, we’d suggest you read these two articles first (if you’ve got the time). It will help what comes next make a lot more sense
Bitcoin – Part 1 can be found here
Bitcoin – The Second can be found here
We received a lot of emails in response to yesterdays note, all of which were along the same lines. That being:
“OK, so I get what bitcoin is now, but I still don’t understand why people are using it instead of actual money. The technology seems smart, but it’s still not an real currency right?”
It’s a great question and we’ll try and answer it today. As always though, we’ve only got you for 5 Minutes, so we’ll be brief. But if you want us to go deeper on anything, let us know. #friendshiphugs
So? Why Bitcoin?
People interested in Bitcoin fall into one of four main groups. Libertarians, the Chinese, criminals, and those believing Bitcoin will lead to lower payment processing fees. There are also the speculators, but we wont really discuss them here.
1: The Libertarians: Libertarians LOVE Bitcoin. They are anti-government and anti-centralised power, and Bitcoin ticks those boxes. Whereas Australian dollars are owned and controlled by Australia’s central bank (the RBA), Bitcoin is owned by the people, sitting outside the governments control. It is the underlying philosophy of the Blockchain which draws libertarians to Bitcoins as well as the other cryptocurrencies.
2. Lower payment processing fees: Merchants who accept Visa or Mastercard, pay them a processing fee to VERIFY and AUTHENTICATE each of their transactions. A lot of times, you as the consumer will see this cost passed on to you, via an additional “credit card surcharge”. This isn’t small either, usually between 1 and 3%. Fees for transactions with Bitcoin however are significantly lower.
As we discussed yesterday, transactions get added to the blockchain in blocks, after a “watermark” has been added to verify the blocks’ authenticity. This process is actually analogous to what Visa, Mastercard, Paypal and other payment processors do when they verify and authenticate transactions. However, processing a block of transactions with Bitcoin is a lot cheaper. Rather than paying 1-3% per transaction, Bitcoin transactions can cost less than 0.1%. That’s a big saving to the consumer and the merchant. And it is one of the reasons we believe the technology behind Bitcoin is so powerful. Bitcoin however, not so much.
3. Criminals: Remember when you set-up your savings account with the bank? Yeah? And how you had to provide your drivers license, utility bill, passport and Medicare card? All of that was to prove you are who you say you are. Well, Bitcoin doesn’t require any of that. Setting up a Bitcoin account in some instances can be as simple as just providing an email address. Yep, an email address gets you a Bitcoin account and then you’re good to start moving money around as you see fit.
In this sense, Bitcoin provides you with anonymity. Or for the pedants among you, pseudonymity. You have a unique identifier for your Bitcoin account (your pseudonym) and every transaction you’re involved with will include that. However, there is no link between you and your pseudonym. So you’re not quite anonymous, but pretty close to it.
Here’s the best example we can give, that Bitcoin is the currency of crime. There was a website called Silk Road (see here), which was recently shutdown. On it, you were able to buy all things illegal. Yep, you could get anything from Mary-Jane (that’s marijuana Mum) to Heroin, Cocaine, counterfeit watches and even hitmen (and women). How did people pay for this? They used Bitcoin. In fact, that was the only currency accepted. And why Bitcoin? Because of the anonymity protection provided by it. And when you’re dealing in crime, anonymity is key.
Do you remember the WannaCry attack (see here)? Essentially it was a computer virus which locked entire organisations (including FedEx, Nissan and the UK National Health Service) out of their computers. The only way to regain access to them was to pay the hackers a fee. And how did they accept their fee? Via Bitcoin of course.
4. The Chinese: Relax. We are not being Ray-Ray. It’s the truth. While we don’t have enough time to get into capital controls here, in short, China has put in place a number of restrictions, which prevents people from taking large amounts of Yuan (the Chinese currency) out of the country. People are always looking for ways to get around this, and Bitcoin provides the perfect vehicle to do so.
And that’s what’s happening. The Chinese exchange their Yuan for Bitcoin. They then exchange their Bitcoin for another currency, say USD. Boom. They have now moved their money out of China. Well, that was easy.
Estimates put the percentage of trading in Bitcoin which occurs in China upwards of 70% (See here).
So Bitcoin is attractive to a number of different groups, all for very different reasons. We’re getting close now, but we’re not quite done. Here’s a chart for tomorrow…
For now that’s 5 minutes. Hope it helped