Unveiling the Mystery of Bitcoin
BY: BENJAMIN "BENJI" KARMIS
Bitcoin’s value has skyrocketed since its debut. Today, the value of just one bitcoin has reached over $5000. But despite how often people toss it around in the news, most still struggle understanding how Bitcoin works. So, we sat down with the Senior Vice President at one of Chicago’s biggest financial companies to crack the Bitcoin enigma.
“Bitcoin is unique,” marveled Lawrence, who has worked at his century-old firm for decades. “But investing in it is risky. There’s no association responsible for being an umpire in cases against fraud.” Lawrence is familiar with Bitcoin because he depends on constantly updating a lifetime’s worth of industry knowledge to predict where will be best to invest his clients’ money, opposed to using the newer, automated algorithms like newer hires.
Bitcoin is a cryptocurrency, which is a digital currency that relies on computers to solve advanced mathematical equations for security and anonymity. Bitcoin uses a “peer-to-peer” system, which resembles torrenting. Essentially, Bitcoin’s data is spread across everybody who owns any Bitcoin to keep it running, opposed to governments that use stockpiles of gold to back up their paper currencies. This system makes it “decentralized” from other markets, allowing it to remain unaffected when entire markets dependent on government currencies crash.
Regardless, Lawrence’s concern is warranted because Bitcoin has been hacked in the past. “It’s also difficult to trade,” he added. “The transactional process is complicated, and requires a lot of know-how.”
How does trading Bitcoin work? Let’s try to make it simple. If you have one Bitcoin, you are given an “account number” that everybody can view alongside your balance as part of the peer-to-peer system, though it’s just a random bunch of numbers and letters that hide your actual identity. Your Bitcoin has a “private key” that nobody else knows, which is further concealed in your “Bitcoin wallet” used for trading. If you want to transfer me your Bitcoin, your private key would be manipulated through your Bitcoin wallet with a special “transaction key” that is only used once for our specific trade before it expires. Math happens, and you get a unique “signature.” On my end, I would pair your publicly-viewable account number with our shared transaction key in a “signature checker” to confirm your legitimacy. Once we’re NSYNC, if you will, we could then commence the trading process, which is even more confusing. It’s an incredibly calculated and complicated system to comprehend.
Still, Lawrence acknowledges Bitcoin’s value. “Since it’s decentralized, you can use it anywhere that accepts it without any hidden fees,” he addressed. “I was appalled when I found out how much the bank had taxed me for using my card during my recent trip to Mexico. Bitcoin would have avoided that entirely.”
That’s another advantage of the peer-to-peer system – because of the mutual confirmation required to trade Bitcoin, you are systematically prevented from being charged any hidden or extra fees without your consent. This could solve the classic “I thought my account had more money” problem we’ve all experienced when late fees, bills, and restaurant tips charged us by surprise, though it probably won’t change any urges to impulse buy that bagpipe don’t know how to play.
But there’s another major reason to brave the risk – the immense reward. If you spent $100 in the underdog $0.06-a-share Bitcoin back around this time in 2010, you’d have about $7.8 million dollars today. We could have been making millions back then instead of averaging 200 million minutes a day on Angry Birds. So should you stop, drop, and invest?
Lawrence doesn’t think so. “It’s not with my clients’ money,” he chuckled. “But I’m curious where Bitcoin will be in five years. It could get tied to an association to make it more stable, or it could completely crash. We have no idea. But Bitcoin will continue to challenge the business models of banks and companies like PayPal since it can avoid extra fees and has its own safeguards for trading with strangers on the internet.”
He’s right, and beyond that, such a bamboozling system like Bitcoin creates the necessity for us to learn about how currency and investing works. So let’s start watching videos on how any of this works now, and maybe we will finally figure out how to do our taxes on our own by next year.