Bitcoin, the $60,000 cryptocurrency, is featured in financial news on a consistent basis these days.

The event of cryptocurrency exchange Coinbase Global Inc, (trading symbol COIN: Nasdaq) listing its shares publicly last week to record purchases and valuations, only heightened interest (and investment considerations) in regular trading markets.

COIN ended the first public trading day at a $86 billion dollar valuation, higher than numerous traditional financial companies, another sign that crypto-related investments are headed to mainstream acceptability.

According to Bloomberg, bitcoin (and ethereum – the second largest cryptocurrency by market capitalisation behind popular bitcoin) represented 56 per cent of Coinbase’s 2020 trading revenue. Started in 2012, a little more than three years after bitcoin was incepted, Coinbase’s website www.coinbase.com currently lists 56 million verified users, 7,000 institutions, and 115,000 ecosystem partners in over 100 countries utilising their trading, learning, and support platforms.

When was bitcoin created?

In August 2008, the domain name bitcoin.org and its website was quietly registered. Three months later, an anonymous individual (or individuals – no one knows the identity for sure), Satoshi Nakamoto published a treatise paper on digital cryptocurrency called Bitcoin: A Peer-to-Peer Electronic Cash System.

Moving surely ahead, early in the new year January 2009, Nakamoto released version 0.1 of the bitcoin software on SourceForge (open source and business software platform for development resources and collaboration), launching the network by mining the genesis block of bitcoin (block number 0), which had a reward of 50 bitcoins.

Reportedly, according to his now legendary status it appears that Nakamoto started writing the code for bitcoin in 2007, in order to start the implementation of this sceptically viewed mysterious new way to effect mediums of exchange in tandem with devising the first blockchain database.

Keep that concept of a blockchain in mind as that development is the true beginning of a disruption to the then conventional methodology of processing commerce (and other) transactions. One might say that both cash and transaction processes were revolutionised by bitcoin and blockchain.

If these descriptions sound hazy, they are.

Why was bitcoin created?

Various personal and finance community reasons have filtered out over the years:

• Created a peer-to-peer version of electronic cash

• Bitcoin independent of and an alternative to reliance upon financial institutions

• Online payments sent directly from one party to another without going through an intermediary, eliminating the middleman

• Privacy can be maintained by keeping public keys anonymous – this concept discussed in further weeks

• Mobile, accessible and stored on your computer, smartphone or cloud – as long as the internet grids are functional (always my worry)

• Both buyer and seller in a transaction are anonymous (discretion)

• More resemblance to wire transactions, rather than the credit card process; however, credit card charges are reversible, bitcoin transactions are not.

• Lower transaction fees

• Transactions are not reversible, as compared to traditional financial institutions

• Cryptographic proof of transactions rather than based on trust

• Third party intermediary fees are eliminated

• Deposits used in the lending process does not exist

• Cryptocurrency generally would not be utilised for monetary supply control as bitcoin is not (currently) issued by governments

• Bitcoin can be thought of as an asset class

Gradually, investment/banking firms have embraced this newest of investment derivative – on demand from clients and one assumes to keep their clients happy, as well as to invest for their own Treasury accounts. And, probably even more importantly, for the blockchain ledger applications underlying transactions.

Some financial institutions have been slower to embrace this new, new thing. It isn’t just about the cryptocurrency itself, it is the regulation, risk insurance, capital funding and compliance costs that every financial institution must maintain to meet central banking requirements.

We all know that such compliance regulations are: KYC, AML, FATCA, CRS, and more that are rigorously required for every financial institution account holder. How to handle that anonymity? What controls should be in place? How, what and who has responsibility for protocol and execution of these new transaction procedures?

According to Reuters last week, one global firm has banned customers from buying or exchange of products (stock) related to or referencing the performance of virtual currencies.

While the acceptance of the cryptocurrency trend is still mixed, bitcoin and its competitors are probably here to stay. After all, one can now purchase a Tesla with bitcoin, and hundreds of other items, including pizza and some unmentionables, according to the New York Times.

So, if the whole idea of an intangible coin that is traded between anonymous participants is almost beyond comprehension to you, here are some even more interesting concepts.

Losing (or forgetting) your password to your anonymous bitcoin transactions and your purse that stores your bitcoin assets, means possible devastation. No way to go back, recreate, or trace such a transaction – not like calling your local banker and asking for duplicate proof of a trade.

But what happens when you can’t tap that wealth because you forgot the password to your digital wallet?

Stefan Thomas, a German-born programmer living in San Francisco, has two guesses left to figure out a password that is worth, as of this week, about $220 million.

Buying or selling in a transaction, means that the recipient of the bitcoin should (or must) cash in the bitcoin as soon as possible to preserve the value agreed upon in the outside transaction.

Oh, well, one can only feel bad for this person. While, most of us won’t or don’t have to worry about such a desperate situation, the lesson is another truly stark reminder to keep your passwords listed and available – to find!

Echoing another comment of last week.

Is it money madness or the wave of the future? Stay tuned for more crypto next month.

References

“Bitcoin and blockchain explained,” https://medium.com/bitcoin-blockchain-explained

“Coinbase’s Whipsaw Debut Takes It Past $100 Billion, Then Back”, Crystal Tse, Katie Roof, and Olga Kharif, https://tinyurl.com/ak43je7x

“Bitcoin ATMs are coming to a gas station near you,“ Imani Moise, Anna Irrera, Reuters, https://tinyurl.com/4k4f37jb

“What Can You Actually Buy With Bitcoin?” Jacob Bernstein, New York Times, February 3, 2021

“Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes,” Nathaniel Popper, New York Times, January 12, 2021.

• Martha Harris Myron, CPA JSM, a native Bermudian, is the author of The Bermuda Islander Financial Planning Primers https://www.royalgazette.com/bermuda-islander/, international financial consultant to the Olderhood Group Bermuda, and financial columnist to The Royal Gazette, Bermuda. All Proceeds from these articles are donated to the Salvation Army, Bermuda. Contact: martha@pondstraddler.com