Friday , July 30 2021

Bitcoin, What you Want to know about the Cryptocurrency

The Bitcoin surpassed this week, for the first time in history, the price of one million pesos per unit; this thanks to the announcement of Elon Musk – who bought 1.5 billion dollars of this cryptocurrency through Tesla. The volatility of this asset is very high, but its popularity has allowed more and more people to be attracted to invest or, at least, to find out what it is about.

The idea of   this series of columns is to talk, in simple language, about what Bitcoin is, how it came about, why it is so controversial and revolutionary, and what is the reason for its extremely high volatility.


Bitcoin overview

Bitcoin was launched in 2009 by a person under the pseudonym Satoshi Nakamoto; It is presumed that it is a pseudonym, because although there are people with that name who have claimed the authorship of the paper that gave life to Bitcoin, the identity of the author is not entirely clear.

By definition of the Bitcoin system, there are only 21 million Bitcoins; this amount is not controlled by any central authority, no central bank, no government. From the beginning, it was determined that that was the amount of Bitcoins that could be.

Bitcoins are created through the solution of complex mathematical calculations, carried out by computers, and the system is designed to make it increasingly difficult to solve them. This activity is called mining and its purpose is to give a value to the currency emanating from the scarcity of the asset, as well as the work necessary to obtain it. Bitcoins mined can be bought and sold on the market and fractions or whole units can be obtained. The smallest unit is called satoshi – in honor of its founder. 100 million satoshis are equal to 1 Bitcoin.

Bitcoin is supported by a decentralized system of computers that can be connected directly. That is, there is not a single place where all the operations carried out with Bitcoins (mining or exchange) are registered. In contrast, the issuance or exchange operations of the Mexican peso are reconciled and registered by the Bank of Mexico. In the case of Bitcoin, this action is carried out simultaneously by all the participants of the system.

This record of operations is public, every time a change is made – no matter how small – it is recorded in a chain of operations, which can be reviewed by anyone. This chain of operations is not stored in one place, but simultaneously by the members of the system. Information processing is the same as mining and for each transaction that is mined / processed, a percentage of that transaction is received.

These characteristics allow the Bitcoin system to be sustainable and virtually immune to cyber attacks. To hack the Bitcoin protocol, more than 50% of the system participants should be attacked; to do so it would be necessary to run a new mining process. This would be extremely expensive, so much so that it would be more profitable to use that computational power to mine. These characteristics make Bitcoin very attractive to exchange value.


Bitcoin as a unit of value safeguard

The aforementioned would not make sense if the people who are part of the system do not believe that there is value in that asset. For what miners, for what complex calculations if there is no one to use it.

Bitcoin began to be popular, first among criminals, and hence part of the fame it has gained as a system that favors crime. The Silk Road, was an internet site, which operated on the dark web, which facilitated the exchange of weapons and drugs, allowed to hire hit men and endless other operations; their exchange currency was Bitcoin. When the FBI dismantled the site and arrested the operators, it seized computers that contained about 150,000 Bitcoins – which today equates to $ 7.5 billion.

The use and potential of Bitcoin began to spread in less dark operations, thanks to the fact that it facilitated the exchange of different Fiat currencies, that is, those issued by central banks.

For example, to make an operation between the United States and Spain, you should change from dollars to euros. Nowadays doing this type of operation can take several days if it is done by conventional methods. Using Bitcoin, on the contrary, the person who sent the money changed dollars to Bitcoins, sent them, and whoever received them exchanged them for euros, all digitally. This propagated the use of cryptocurrency exchanges like Bitso (in Mexico).


The volatility of Bitcoin

Although the number of people who believe that Bitcoin is a medium of exchange, there are few (but noisy) who believe that it really works as a unit of value. This is due to the very high volatility of the asset.

Imagine that you are going to buy a Tesla Model 3 , and the price is 1 Bitcoin. 2 months ago that Bitcoin was equivalent to approximately 600,000 pesos; today it is worth more than 1 million; however, in a couple of months it could be worth 200,000 or $ 2 million pesos.

The problem is that the cost and income structure of whoever buys and who sells is not based on Bitcoins but on Fiat, and at least in my opinion it will be extremely difficult for this to change due to a sovereignty issue. But I’ll talk about this in the next column.

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