In 2007, the financial meltdown had many scrambling to protect their assets and cash. Billions of dollars were lost, and many fortunes went under. Even banks in the US — thought of as ‘unbreakable’ — filed for bankruptcy. Assets had ballooned, especially property, and it was your typical boom to bust cycle.
While the fall wasn’t the hardest, it was harder and quicker than most. However, as quickly as it came, things seemed to recover even quicker. Some believe we are still living in the aftermath of the credit crunch that happened in 2007–09.
But there was one man in Japan determined to get transparency and control back into the market, taking the payment system out of the banks hands. No longer would they toy with our global currency, asset and derivative markets.
Satoshi Nakamoto came up with the idea of ‘Bitcoin’ in November 2008. His idea has stood the test of time in making its way into the hearts and minds of investors.
While it might be unlikely that you personally own bitcoins, many investors and businesses around the world do. In 2008 Nakamoto posted a paper on the internet titled, ‘bitcoin: A Peer-to-Peer Electronic Cash System.’
The paper detailed methods of using his peer-to-peer network. And by doing so, people would generate what was described as ‘a system for electronic transactions without relying on trust.’
What Nakamoto is actually referring to is the trust we put in our governments and central banks. We trust that our paper/plastic money is worth something. Why? Because the government has personally insured us that they will redeem our fiat money whenever we wish.
We trust that inflation is under control, and that the economy is prosperous. Why? Because central bankers have been appointed to do so.
However, this trust has been broken on more than one occasion. With multiple decisions being made on behalf of society, which actually lead us further into debt, making the next crash that much larger.
In January 2009, the bitcoin network came into existence. The first open source release of the bitcoin client, and the issuance of the first bitcoins. Satoshi mined the first ever block of bitcoins, which are now referred to as the ‘genesis block’.
However, maybe we have gone too deep, too quickly. First of all, how does one come by bitcoins? And what’s all this mining business?
Think of the blockchain as a public, digital ledger. It records all transactions ever made, and that ever will be made, via bitcoins. Just like the name suggests, there are blocks that make up the chain. These blocks can consist of one or more transactions. Once a block is finished, it is publicly shared throughout the blockchain.
But who’s making these blocks?
This is where we get out the pick axe and shovel. Miners, not physical but digital, are responsible for making individual blocks. And these miners utilise specialised software and equipment designed specifically to create blocks.
By being a blockchain miner, you are entitled for two types of rewards. One is a per-block commission and another is a fee for maintaining, or verifying, the blockchain.
Let’s use an example to make this a little clearer.
Say that I have some oranges for sales and you love orange juice for breakfast in the morning. OK, so we have a seller and a buyer. I am willing to sell you my oranges so that you can make your own fresh orange juice in the morning.
But instead of Australian dollars or USD, I only accept payment in bitcoins. As luck would have it, this is the only currency you have. Therefore, you send bitcoins from your electric wallet into mine. And bam, we have a transaction.
You receive your oranges on the spot, and I receive my payment in bitcoins.
While our transaction is more or less over, miners scramble to write our transaction into a block. There are thousands of miners who are tabulating how many bitcoins were transacted, where they were sent, and at what time.
The first miner to successfully write this information into a block will receive a reward. The reward is a pre-determined fee. This fee is usually already priced into the transaction. Therefore, if we go back to our orange analogy, you might pay $5.10 for my oranges, for which I only charge you $5.
Thus the remaining 10 cents is a fee for miners to put your transaction into a block. You could of course not even choose to pay a fee. This might discourage miners from putting your transaction into a block.
This could become a problem later on. If you failed to receive your oranges, you could easily pull up the details of our transaction from the blockchain. So you could use this information as evidence that a payment had been received, and that you are entitled to your oranges.
So just like fiat money is given to the public by governments, bitcoins can be bought, sold and mined from the market place.
But what happens if the blockchain becomes tampered with or hacked?
While it’s never happened before, it’s typically thought of as ‘impossible’ to break or hack the blockchain. When a new block is created in the chain, the miner sends it out to every other miner. Therefore, once a block has been created, every miner knows about it. It becomes public information for everyone to see.
But the beauty of the blockchain is that every miner is continuously verifying every block in the blockchain. So if a block is verified by one miner but not by others, it is not considered a part of the blockchain.
This prevents hackers from creating fake transaction histories in order to redeem bitcoins. And this process of constantly verifying each transaction is another way miners can earn a fee. But more importantly, this constant verification allows the blockchain to be what it is — a public ledger free from control or errors.
Furthermore, it is the blockchain, and not the bitcoin, that is seen as revolutionary and innovative. That’s because the blockchain has so many applications other than acting as a payment system.
More than just a Payment System
The Economist described one implementation of the blockchain as coming with ‘A programming language that allows users to write more sophisticated smart contracts, thus creating invoices that pay themselves when a shipment arrives or share certificates which automatically send their owners dividends if profits reach a certain level.’
Deloitte, in their 2016 report, Blockchain: Enigma Paradox Opportunity, stated:
‘The blockchain is also about the ecosystem of advance but fledging technologies , including artificial intelligence, robotics and crowdsourcing, that look set to play a fundamental role in the future of commerce and society. Blockchain will affect the way that individuals and organisations interact, the way that businesses collaborate with one another, the transparency of processes and data, and ultimately, the productivity and sustainability of our economy.’
Blockchain technology is even making its way into the electricity market. Perth power company, Power Ledger, has teamed up with Leger Assets to devise a business model for peer-to-peer energy trading.
Effectively, both companies are trying to cut out the middle man — the energy retailer. With roof top solar panels and storage batteries, Australians could be highly rewarded for the excess energy they produce.
And the blockchain could do exactly the same for so many other industries. The possibilities just need to be thought of, and the blockchain could create a whole new marketplace.
So if this blockchain thing is so big, how do I invest?
Slim Pickings on the Blockchain Market
Obviously, if you think gold will increase in value, you might invest your money in gold. Not the physical asset, but listed gold mining companies. Why? Because trading the idea could yield you far more in returns than trading the physical commodity.
The same is true for iron ore or copper. Rather than investing in the actually asset, you’d invest in companies profiting off these assets.
So if you wanted to invest in bitcoins and the blockchain, you wouldn’t go out and buy bitcoins. Instead it would be preferable to invest in companies on the forefront of blockchain technology.
However, when it comes to listed blockchain stocks, there aren’t that many to choose from. I mentioned before Australia’s largest blockchain company, Ledger Assets. But unfortunately they are a private company.
Instead you’ll have to go hunting, trying to find penny stocks that are involved in the blockchain. There are a few out there, and you can bet they’ll be more in the future.
Junior Analyst, Money Morning
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