Understanding Cryptocurrencies and Block Chain technology.

Jamie Diamond caused a stir in September when he claimed bitcoin as a fraud although he did commend the block chain technology which facilitates not only the use of Cryptocurrencies such as Bitcoin, but has many other applications. 

Block chain is regarded by many as a brilliant technology which will revolutionise the way business is conducted.

Someone asked me yesterday at a luncheon celebrated with former workmates how to explain it and although I am no expert here is how I would attempt a simple explanation.
Maybe the first thing you need to understand is how the age old universally accepted Double Entry Accounting concepts work. In a nutshell the principle of double entry recognises the reality there is always two sides to every transaction, so there is always a seller and a buyer, a receipt to add to one account and a corresponding reduction in another’s indebtedness and so on. 

Now replace that double entry principle with double entry block chain accounting.  That’s because block chain accounting at the outset facilitates transactions between two pairs, a buyer and a seller or a receipt and payment or one virtual wallet increasing whilst another deceases. It happens virtually instantaneously because those in the encrypted chain using cryptocurrencies to record the transactional effects at the same time. Think of it as giant ledger in cyber space where all the debits equal to the credits of the linked parties from the aggregate of parties’ transactions at any given time in the block chain.
The final seal of approval has led some to try and distinguish the process from double entry accounting by call this the third entry. 
  
Parties hold the Cryptocurrencies in so called wallets and the largest of these is Bitcoin.
Hence, there is no need for 3^rd party clearing houses or back office staff to facilitate large numbers of bundled same type transactions for subsequent settlements which mostly occurs to day.  


What is mining Bitcoin ? Mining can be carried out by anyone who has invested in a very powerful fast computer, has the capacity to pay for the large energy bills and has a penchant or talent to solve puzzles. The system was predicated on the basis of each batch of transactional  data is encrypted by a formula that can only be unlocked after a  massive scale of trial and error guesses. As the first miners solve the puzzle, the answer is verified by others, so that the data is added to an existing linked chain of blocks of data. The miner in return  receives newly issued Bitcoin. One of the criticisms of the system is it uses up a lot of electricity.    

I think financial institutions will eventually begin to use more of the Block chain technology which will mean the adoption of either a digital cryptocurrency or a similar substituted means to do that. After all cryptocurrencies are no more than bits of code. But eventually such facilities will have to have some form of regulation for what it is as an alternative more efficient system of settling business transactions. But even given eventual regulation not everyone is going to be happy trusting in the integrity of a new technology and we all will have to have a new breed of technologically savvy auditors to check the integrity of the Block chain providers. 

In relation to Bitcoin there are currently several Hedge Funds which have bought large holdings which of course have gone up exponentially due to the rapid rise in this Cryptocurrency. Such rises are underpinned by pure speculation as no one can put a value on this Cryptocurrency which is responding to a rapid demand when there is currently only a limited supply.

But Cryptocurrencies are no different to traditional currencies which appreciate or depreciate according to supply and demand.   But the important distinction of course is currently they are unregulated by any central banks and have attracted criminal activity as it is much harder to ascertain transactional records.

The question of trading in Bit Coin is facilitated by on line platforms such as Coinbase which provides a market. The facility allows for buying, selling or transfer of digital currency between online wallets involving merchants or individuals. Currently the facility is free of charges and such facilitators claim they provide both security and backups.

Nevertheless there has already been some bogus websites where the holdings of digital currencies have vaporised without trace.  Since the arrival of Cryptocurrencies more than one billion has been stolen from wallets. 

On the question of Bitcoin being a bubble set to burst that in turn depends more on whether or not merchants will continue to accept them. Microsoft and Pay Pal already accept Bitcoin under their platforms.

The total size of the traditional market dwarfs that of the Cryptocurrencies suggesting it may well have further to run. But when it finally crashes don’t rule out another version rising from the ashes.