Thursday, February 6, 2014

New kid on the block

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.