Decrypting cryptocurrencies

By Rosie Duff

Money's a funny thing. A paradox in itself; it can serve as a source of immense pain and of intense pleasure. Sometimes simultaneously.

Indeed, historians generally agree that money — in some form or another — has played an instrumental role in society for at least, the last 5000 years. Today, the primary medium of exchange is in the form of traditional fiat, (governmentbacked) currencies. Largely dependent on the strength of any given country’s economy, a fiat currency holds little intrinsic value. For this very reason, it can quickly become worthless if too much is printed. Such issues deeply frustrated one pseudonymous individual by the name of Satoshi Nakamoto. So much so, he hatched a plan to invent a form of exchange that was immune to such unpredictability. One evening on January 3rd 2009, just that he did. But, upon the advent of Nakamoto’s currency, there were no paper stacks, nor nickel, aluminium or copper coins in sight. Merely, 31,000 lines of code and an announcement posted via the world wide web. Whilst he wasn’t to know it then, his cryptocurrency – ‘Bitcoin’, as it came to be recognised – has since become one of the most controversial commodities in circulation. Said to be gold’s digital equivalent, it’s certainly not something to be missed.

Breaking it down

after feeling ‘disgruntled’ with the global financial system. After investing in Bitcoin himself, he established BitPrime – a full-service cryptocurrency retailer – in early 2017, to help facilitate such investments within the New Zealand community. Ross explains that to properly understand the application of cryptocurrency, one must first hold a basic understanding of ‘blockchain’ – the technology that most cryptocurrencies operate on. Put simply, a blockchain is a system of recording and distributing information. Whereas a traditional database – like a spreadsheet – usually structures its data into tables, a blockchain structures its data into blocks that are strung together. Hence the funny name. Most importantly, the key property of this technology is that once information (such as transactions of a cryptocurrency) is added to the blockchain and encrypted with a hash, it’s permanent and immutable. In other words, it can’t be tampered with. Now, the kicker, Ross says, is that by operating on the blockchain network, cryptocurrency – like Bitcoin – sidesteps the need for a central authority, such as the bank, to regulate it. “It’s ultimately controlled by the users rather than a political body,” he explains. This enables cheaper and speedier processing of transactions and protects users from issues beyond their control – such as political uncertainty and unstable monetary policies. However, much like with anything, the system has its’ tradeoffs. Like perhaps, if you lose your account and password, you can’t rely on the bank to reset it. “Also, when things are decentralized, it’s hard to make decisions since there’s not one person calling the shots,” adds Ross. This is overcome through using what he calls a ‘consensus algorithm’. Essentially, this refers to a procedure in which all of the users of the blockchain network reach a common agreement to verify the present state of the data spread. “So, for example if you added some zeroes to your balance, that transaction would get rejected because it wasn’t consistent with the majority of the other copies of the blockchain. “Does that make things clear, or more confusing?” laughs Ross.

Is it worth the hype?

Here in New Zealand, the main use for cryptocurrency currently tends to be speculative investment, says Ross. “We’re seeing a lot of individuals in the business community adding cryptocurrencies to their portfolio – it’s becoming much more common,” he explains. However, being that it’s a newer asset class, cryptocurrency is largely subject to significant upward and downward movements. As to be expected, this often attracts a lot of media coverage. Ross contends that despite the negative press, many investors have enjoyed great returns by employing a buy-and-hold investment strategy. “In this sense, it’s a much easier investment to manage if you have a long-investment timeframe, because you’re not so worried about the volatility on a day-to-day basis,” explains Ross. Christopher Walsh, the founder and chief executive at MoneyHub New Zealand, says it’s anyone’s guess how cryptocurrency will perform as an investment. Though he warns individuals to proceed with caution. “The reality is it’s very easy to buy, but the wider use of crypto is still in its infancy,” he says. As enthralling as it can be to think you’ve cracked onto the next big thing, Walsh points out that it’s worth remembering, like most things, “It’s buyer beware – no one should expect to get rich, and they should also be prepared to lose all of the money they put in.”

Bitcoin and beyond

Not to be left in the dust, many central banks are increasingly recognising the efficiency of blockchain technology, and are accordingly looking at ways to leverage it. As to the success of these endeavours – “It really comes down to how each country implements it,” explains Ross. “We’ve seen the likes of the Reserve Bank of New Zealand actively looking to float what’s known as a central bank digital currency (CBDC). “But a central bank could design a CBDC that uses a blockchain, yet it could all be managed from centralised data centres, which makes a single point of failure,” he says. So far as the future of the crypto sector oes – “I’ve lived and breathed this for many years, and I still can’t keep up with every single development. “[The space] is moving so quickly that no one person, or no one company can actually keep up with all the individual advances of technology,” Ross admits. All in all, one certainty remains; from bartering to banknotes right through to Bitcoin, society’s obsession with money shows no sure signs of ceasing. But as to whether the ‘cult’ of crypto will prevail? Your prediction is as good as mine. So far as Satoshi Nakamoto is concerned, “If you don’t believe me, or don’t get it, I don’t have time to try to convince you, sorry.” CT