Last October, UAE Central Bank governor Mubarak Al Mansouri warned against bitcoin, terming it as unofficial and lacking sufficient supervision, according to a WAM report. He said bitcoin “can be easily used in money laundering and in funding terror activities.”
Earlier this year, a new set of regulations from the UAE’s Central Bank said “all virtual currencies [and transactions thereof] are prohibited.” However, it seems these regulations do not cover virtual currencies such as bitcoin. So there is a confusion. But that is not stopping some companies in the UAE to start accepting bitcoins. In September this year, Dubai-based Fam Properties said it will start accepting bitcoin payments for residential property rental within a new development.
Confusion & skepticism aside, bitcoin has seen a dramatic surge. The initial price of bitcoin, set in 2010, was less than one cent. On Nov. 29, it crossed $11,000. Once thought to be the domain of IT geeks and later the territory of drug dealers & money laundering, today it is as mainstream as trading Apple stocks.
It’s high time we nail down what exactly this bitcoin is all about, so here goes!
So, what exactly is a bitcoin?
Well, bitcoin is a form of money that is actually nothing like money! You cannot hold it in your hand or place it in your wallet. It is not accepted by many businesses and it is not issued by your government. Bitcoin is a software protocol that generates digital tokens and backs with a tracking program that makes it impossible to counterfeit.
Who’s the guy who started it all?
Hmm, would you believe that in today’s modern age of technology, we actually don’t know the identity of the person. On 18 August 2008, the domain name bitcoin.org was registered. In November that year, a link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list. Nakamoto implemented the bitcoin software as open source code and released it in January 2009. The identity of Nakamoto remains unknown.
And how does this thing work?
The key idea behind bitcoin was the blockchain — a publicly visible, largely anonymous online ledger that records bitcoin transactions. Let’s start with understanding what happens in a online fund transfer transaction. The bank verifies that the funds are available, it subtracts the funds from your account and credits it into the receiver’s account. Your and the sender’s banks are electronically connected. You are trusting the bank to deduct the exact amount and the bank also makes sure you cannot use that amount again. Well, the blockchain is a database that performs those functions but without the bank or any other central authority.
Who is exactly performing the bank function, in case of bitcoin?
It’s done by consensus on a decentralized network. Bitcoin transactions can be made through sites offering electronic “wallets” that upload the data to the network. New transactions are bundled together into a batch and broadcast to the network for verification by so-called bitcoin miners.
Who gets to be a miner?
Anybody, so long as you have really fast computers, a lot of electricity and a desire to solve puzzles. The transaction data in each batch is encrypted by a formula that can be unlocked only through trial-and-error guessing on a massive scale. The miners put large-scale computing power to work as they compete to be the first to solve it. If a miner’s answer is verified by others, the data is added to a linked chain of blocks of data and the miner is rewarded with newly issued bitcoin.
Why is the system fraud proof?
Because every block contains data linking to earlier blocks, an attempt to spend the same bitcoin twice would mean revising many links in the chain. Plus, as miners compete, they verify each other’s work each step of the way.
I will fire any employee caught trading the bitcoin. Jamie Dimon, CEO of America’s biggest bank JPMorgan Chase
Didn’t JP Morgan CEO say that bitcoin is for drug dealers?
Yes, in fact Jamie Dimon, the billionaire CEO of America’s biggest bank JPMorgan Chase, said he’d fire any employee he caught trading the cryptocurrency. He said in September that bitcoin is a scam and it’s only useful for drug dealers, murderers, and North Korea.
Then, why is it still going strong?
Personal opinions apart, Bitcoin’s reputation has improved, partly because there are fewer large-scale thefts like the one in 2014 in which bitcoins were stolen from a bitcoin exchange called Mt. Gox. (Security has improved, but it’s still an issue.) And many technology and financial firms grew interested in blockchain as an idea separate from bitcoin.
What is so appealing about blockchains?
Enthusiasts see it as a new way of doing all sorts of business. Costs could be lower without a central middleman doing the work of keeping track of transactions, and charging for it. Banks and stock exchanges have invested heavily in developing blockchain technology, while retailers like Wal-Mart Stores Inc. are experimenting with using blockchain for ensuring food safety. Central banks are even speculating about issuing blockchain-based official currencies. And other forms of blockchain emerged, often using their own cryptocurrencies to facilitate transactions. The most prominent is the etherium blockchain, sometimes described as a platform for so-called smart contracts.
Why is bitcoin still the best known cryptocurrency?
Simple. Do you remember the second man on the moon? Many competing cryptocurrencies have emerged, but bitcoin remains the first and most time tested. It is also an indicator of the success of all cryptocurrencies.
In spite of all the negatives, why is this surge in the price of bitcoin?
New investors, and expectations of many more to follow, has increased the price of a bitcoin about 11-fold so far this year. CME Group and other exchanges plan to offer bitcoin futures contracts, potentially expanding bitcoin’s appeal. The fact that bitcoin’s software guarantees that there will be a finite supply has added to the fear of missing out for some investors. New crypto-focused hedge funds are opening up weekly, and already surpass 100. Most of them invest at least part of their funds in bitcoin.