I am a bit late in posting this on my blog since the trip to India and a short spell of ill health took its toll on me.
But still, since I said I would write on this topic so here we go.
I personally feel money is one of the most
fascinating things ever invented by mankind. It makes people do exceptional
things, both in a good and bad way.
Let us roll back in time. And when I say that, I
mean sometime before 2000 BC. It was a time when people used barter system to
exchange commodities or services. Of course, such a system had some limitations
but still I would love to use it even today. Eventually, human beings became
more capable and started the system where a new term was coined called
currency. Currency in a layman’s definition is the medium of exchange. At one
point in time, a standard was set against currencies. One of the most recent
standards we know was gold. Today, there is no currency in the world which has
an enforceable gold standard currency system. Thus, they are called fiat
currencies. It is a fact which few people know. This means, that the governments
have control over the circulation of their respective currencies. Now, a
currency note or coin actually itself does not hold any value. It was made ideally
made against a standard like gold which means that when you would go to the
issuing authority and return the ‘note’, the authority will give you an equal
amount of actual gold worth in return to you. You can see such a promise on an Indian
rupee note or on a British pound note or on old American dollar notes. With the
currencies breaking away from a standard, the only thing you would get in
return when you go to RBI with a Rs 100 note and ask for gold is raised
eyebrows and probably a call to the security guard. This is probably the reason
why on new American dollar notes such promise sentence is no longer printed.
You can check for yourself. (Example: “I promise to pay the bearer on demand
the sum of XYZ”)
Let me not make this post as a lecture on
currencies and share with you a new kind of currency which is talked about the
most lately. It is called Bitcoins. The reason for the entire buzz was because
some people were willing to pay 1300 dollars to own 1 Bitcoin at a point of
time in Nov 2013. In 2012 you could buy more than one for a dollar. An increase
of more than 4000%. Sweet, isn’t it?
I am sure you can find tons of information on
the internet for Bitcoins since it became a hot topic during the end of 2013. But
here I would like to explain it in completely layman’s words with absolutely
minimum technical jargons.
Bitcoin is a digital currency. This means that you
don’t possess it physically in hand. It is just a digital number. It can be held
in digital wallets online or offline. This means you need a digital machine
like a PC, laptop, tablet, smartphone to hold it and so far you use it only online
with internet to buy or sell anything.
It all started when guy with pseudo name
Satoshi Nakamoto created and released a software program (algorithm) on the
internet to make Bitcoins. Yes, Bitcoins are made by normal people by running
that software on their computing machines. The software is kind of a tough puzzle/problem
which only high end computing machines can solve and with each person
successfully solving it can create and own a Bitcoin. The software is based on
peer-to-peer technology in which all these computing machines are connected to
each other over the internet thus keeping track of every new Bitcoin produced
and avoiding creating duplicate Bitcoins. The software is made in such a way
that with each consecutive Bitcoin created, the software gets even tougher.
This means that the ease with which these Bitcoins are created gets tougher
with time. It all depends on how many people are trying to create them and the
kind of tough machines they are using. And by tough, I mean sophisticated
machined which can need a full house to keep. By latest count, around 12
million Bitcoins already created and the software is made to create about 21
million Bitcoins. The estimated time to create last set of Bitcoins would be in
the year 2140. This means that they are limited. People who cannot create their
own Bitcoins because of lack of technical knowledge to run such a program/software
or because of lack of funds to buy sophisticated machines can “buy” them from
the people who are generating them. There are many online stock exchanges
available in many countries where people can buy and sell these Bitcoins. The
maximum amount of trades recorded so far had been in US, China, Japan, Russia,
Germany.
This is a currency which is not backed by any
government and limited in number. The most fascinating aspect of this whole
story is the faith that people have put in such an online currency. It hit a
peak of around 1200 dollar per Bitcoin somewhere in Nov/Dec 2013. Today it is
being traded at around 900 dollars per Bitcoin.
The advantages, issues, concerns, questions
which I have on this topic will need another post. I have not discussed how to
buy or sell Bitcoins or how to create digital wallets etc in this post. This is
not a tutorial. I just wanted to start a discussion which I would hopefully conclude
in my next post.
Though this blog is not visited by many people
but still if anyone has any question then feel free to post your queries.
P.S: I am not a student of economics or even
professionally involved with this subject.
