Monthly archives of “April 2014

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WTF is a bitcoin?

WTF is BitCoin

WTF is a bitcoin? There’s much ado over the digital currency and many people struggle to understand what it is. In fact, even I haven’t fully grasped the fundamental nature of how it works–but then again I don’t know how the banking and fiat currency system work, yet I still use it.

In essence, there’s been a huge amount of really technical literature written about bitcoin, but most of it is long–really long, and unless you’re prepared to spend a few hours and some mind-numbing amount of effort to digest it, I took it upon myself to distil my knowledge of bitcoin so that you have at least a working knowledge of it.

So here’s bitcoin explained.

Don’t think of it as a currency

The first mistake people make is thinking of bitcoin as a currency, the analogy works but not so well. A piece of paper currency has a valued ascribed to it by a central bank. In Malaysia, Bank Negara controls and regulates the Ringgit–and it can restrict foreign outflow (just like we did in 1997) and we can print more ringgit to pay of debt (just like what the British did with the Pound). In essence the value of the ringgit isn’t ‘regulated’ by Bank Negara, it is controlled by Bank Negara, and they have a whole bunch of levers that they can push and pull to raise or lower the price of the Ringgit.

On the other hand we have precious commodities like Gold. Gold isn’t regulated by any one central government or bank. The value of Gold is purely a result of the supply and demand in the marketplace, and just like any other precious commodity, part of that value lies it is rarity. It’s rare, and mining it is complex business, so the supply of Gold into the market is controlled by natural consequences.

Gold is valueable because it has value–a currency is valuable because a government says so.

So the best way to think of bitcoin is to treat it as digital gold rather than digital currency.