Bitcoin South Africa? What is all the fuss about? This article is for the South African who would like to know what Bitcoin is all about and whether it is a viable or appropriate investment opportunity.
In this series we will be covering;
When I first heard about Bitcoin, I thought it was some type of flash-in-the-pan money making scheme. But Bitcoin didn’t disappear, it stayed and stayed. So eventually I investigated, and wow… what I discovered was like discovering the internet for the first time.
I remember back in the early nineties, when I got my first email address and sent and received my first email to my friend sitting across the room from me. We marvelled at the technology, knew it was the future of business, but weren’t quite sure how it would play out. Now my entire business is based on the internet.
The crypto-currency market is at that same early stage of its evolution before mass adoption. We are at the stage where we can marvel at the blockchain technology, and know that we are glimpsing the future.
Every new technology comes with its own language, and Bitcoin is no different. Terms like cryptocurrency, block chain, ether, wallets, ledgers, mining, blockchain ledger, hash power, peer to peer exchange etc
Fortunately for all of us, we don’t have to know understand what http, html, isp, are to be able to use the internet. Likewise we can use Bitcoin without knowing exactly how the cryptocurrency boffins make it all work. (However, where I use these new terms, I’ll provide a brief explanation.)
Simply put, Bitcoin is a unit of currency developed in 2009 (called cryptocurrency) generated by a computer algorithm and guarded by a fantastic new software development called the block chain.
Bitcoin has no physical tangible coins, and exists entirely in digital form on a worldwide computer network.
One bitcoin is divisible to eight decimal places (100 millionth of one bitcoin), and this smallest unit is referred to as a Satoshi.
The genius of crypto currency was the development of the Blockchain. The blockchain is an electronic ledger system that keeps track of every Bitcoin or part thereof that was ever created. So if I own a bitcoin and send it to you the blockchain ledger will deduct it from my personal ledger (called a wallet) and add it to your wallet.
Unlike the banking system where banks have huge computer servers to keep track of all the transactions (from whence you obtain your bank balance), the blockchain ledger is public. All over the world people, called Bitcoin miners, provide computing power to handle the millions of transactions that occur. They are paid for this service in Bitcoin, hence the term mining. Every miner therefore has a copy of the entire historical ledger.
There is a small time lag in every transaction, but every few minutes a block of transactions is confirmed and locked down and copied to everyone never to be tampered with again. This results in a chain of millions of locked down blocks of transactions existing on computers all over the world. It is theoretically possible to hack the system and duplicate a Bitcoin, but it would require so much computing power that it is simply much-much cheaper to use that same computing power to contribute to the blockchain and get paid bitcoin legitimately for your efforts.
Unlike normal currency that we use daily, Bitcoins are never printed on paper or stamped in coins. They remain digital numbers in a computer network, similar to reading your bank balance when you bank online.
Bitcoin is often referred to in the same breath as gold. Gold is primarily a store of wealth, ie it has gained worldwide acceptance as a scarce and valuable metal. Simply put, gold is worth what people are prepared to pay for it, and since we have always loved gold as a store of wealth, we are prepared to pay handsomely for the security of owning it.
Bitcoin has many of the same attributes, it is universally desired as a store of wealth that is safely and easily stored and transported. It is perceived by many to hold tremendous value bankers and economists the world over were shocked when the price of a single Bitcoin soared past the value of an ounce of gold.
Forbes.com announced, “As of press time (2 March 2017), one Bitcoin was worth $1,273 according to CoinDesk’s Bitcoin Price Index, and an ounce of gold was worth $1,244, according to precious metals retailer APMEX.”
At the time of writing this article (27 November 2017) the price of Bitcoin reached a staggering $9,771
The Bitcoin price now is as per the chart below, a live price chart streamed through Tradingview.com. Bitcoin is traded on many different exchanges around the world, the biggest cryptocurrency exchange being Bitfinex.com. In the Bitcoin price chart below the prices on the Bitfinex exchange can be accurately tracked.
This chart is known as a “candle-stick” chart. Each red or green bar, known as a candle represents trading during a specific period. (In this chart each candle represents 1 days trading.)
A green candle is used when the day closed off at a higher price than which it opened at, and conversely, a red candle would be used to represent the day’s trading if the price closes lower than it opened. The thin “wicks” on each end of the candle represent the furthest extent to which the price ranged during that trading period while the body of the candle represents the range between opening and closing prices.
Bitcoin was designed primarily as a currency, and functions very well in this regard. Sending Bitcoin to another party anywhere in the world is as simple as sending an email to the correct address. Once you have the recipients unique wallet address, you simply send the required amount of bitcoin to that address, much like sending a Whatsapp message to a friend.
The primary problem facing the use of Bitcoin as a currency is its current volatility. Its is very hard to set a price on goods in Bitcoin if the value of Bitcoin moves so much.
In recent years newer cryptocurrencies, like Etherium, have surpassed Bitcoin in their speed and cost of transfer. An Etherium transfer takes a matter of seconds.
In the past, governments created paper and coin money that was valued by the amount of gold they kept in reserve. This system was referred to as the Gold Standard . By 1971 the world governments had all moved away from the gold standard and basically printed as money as they wanted (called FIAT, or “perceived value” currency). Each currency therefore had a perceived value, based on supply and demand both locally and internationally.
Scarcity plays a large role , in that printing too much money fuels inflation as each unit of currency drops in value. As time progresses, more of it is required to purchase an item today than last year. (I haven’t heard of any government printing too little cash 😊 )
At the time of writing this article approximately 16.7 million Bitcoin exist. Mining operations will create more Bitcoin until the maximum of 21 million Bitcoin are created. The algorithm creating the bitcoin will effectively self destruct at this point and no more bitcoin will be produced.
The scarcity and usefulness of Bitcoin together establish the value of Bitcoin.
HODL: HODL is an acronym for Hold On for Dear Life. Buy Bitcoin, ride the wild swings in price and watch your wealth in Bitcoin grow.
Since its inception, the value of Bitcoin has fluctuated wildly, but has climbed inexorably skywards.
Many expert investors recommend hoddling as the best Bitcoin investment strategy:-So far they have been proved right as the worldwide demand has steadily pushed the Bitcoin price upwards.
TRADE: Bitcoin can be traded on open exchanges similar to existing currency exchanges. Cryptocurrency traders buy and sell the various currencies and make money by trading the volatile swings in their prices.
This practice is not for the feint-hearted. I have tried my hand at this and lost one third of my holdings in an afternoon. My skills have been honed since that fateful day, but like conventional currency trading, there remains a significant gambling element to trading!
MINE: Bitcoin is mined (earned) by contributing your computer power to verify and add transactions to the public ledger, called the block chain.
For the less technical amongst us, you can invest in mining operations rather than mining yourself. Mining companies will take your cash investment to fund their mining equipment and offer you a return on your investment.
In Summary, Bitcoin South Africa – as an asset class, business is risky but booming, and as usual there will be the early adopters, the sceptics and in a few years the “I wish somebody had told me” people.
There are many different ways to buy Bitcoin.
In South Africa the simplest method would be to register with an exchange like CEX-IO and pay by credit card. There are South African exchanges which will allow you to purchase by bank eft, and we’ll cover those in detail in another article.
My advice is to educate yourself now rather than be sorry later.