Blockchain evolved out of Bitcoin

Bitcoin was a Crypto currency developed by Satoshi Nakamoto (a non-de-plume) in 2008. It allowed this “virtual currency” to be transferred between third parties without the knowledge of third parties and government agencies. It was also used by “spammers” who hacked the dating site for married people called “Ashley Maddison”. They demanded a payment in untraceable bitcoins in order for them not to tell your spouse.

The chart below shows the changing value of bitcoin in USD between July 2010 and March 2013. 

This chart immediately set of the alarm bells:

• Why has its value varied so much?
• What is the demand for bitcoin?
• How do you purchase bitcoin?
• Who gets the money when you buy bitcoins?
• Is there liquidity when you want to sell your bitcoins?
• How do you receive “real money” when you sell bitcoins?
• Is it a scam? Bit coin are the software based online payment system; it is one type of digital currency an alternative form of money. This Bit coin represents two things i.e. “B” refers to the payment network and “bit coin” refers to currency itself. These bit coin are neither created nor controlled, or regulated by a central body. Rather like a currency issued by the government in “Alice in Wonderland” or even Zimbabwe.

HOW DO YOU BUY BITCOIN?

The practical steps for doing this are as follows:

• Create a free account at a trustworthy exchange like BitStamp.net
• Put money in the exchange, typically by linking your bank account or sending a wire.
• Once your funds are at the exchange, you can buy Bitcoin at the current market price. The coin then stay at the exchange in your account until you send them somewhere else (to your personal wallet or someone you’d like to pay, etc). If you want to sell Bitcoin for dollars, you simply do the process in reverse – send the Bitcoin to an exchange, sell them at market price, and transfer the USD to your bank.

IS BITCOIN SAFE?

Bitcoin mining becomes more difficult over time, in order to facilitate limitation on the supply. It is referred to as a “high performance computing problem” and thus is best solved with hardware that is specifically built for that purpose. In order to mine Bitcoin, you have to “solve a block,” and that gets harder as the network of miners grows. Proof of work must be shown for anything to be valid. It is a very competitive endeavor. To help improve the odds for success, miners often form pools, where resources are combined and any yield from the effort is divided.

The answer is: “Bitcoin is probably safe, but we have no ideas as to what affects its value. Predicting regular currency movements is difficult enough. Predicting the future value of bitcoin seems impossible to us.

BLOCKCHAIN EXPLAINED

Blockchain started as a methodology for the transfer of Bitcoins.

Central banks, including the RBA (Reserve Bank of Australia) are looking very closely at Blockchain.

Blockchains enable us to send money directly and safely from me to you, without going through a bank, a credit card company, or PayPal.

Rather than the Internet of Information, it’s the Internet of Value or of Money. It’s also a platform for everyone to know what is true—at least with regard to structured recorded information. At its most basic, it is an open source code: anyone can download it for free, run it, and use it to develop new tools for managing transactions online.

As such, it holds the potential for unleashing countless new applications and as yet unrealized capabilities that have the potential to transform many things. Big banks and some governments are implementing blockchains as distributed ledgers to revolutionize the way information is stored and transactions occur.

Their goals are laudable—speed, lower cost, security, fewer errors, and the elimination of central points of attack and failure. These models don’t necessarily involve a cryptocurrency for payments.

However, the most important and far-reaching blockchains are based on the bitcoin model. Here’s how they work. Bitcoin or other digital currency isn’t saved in a file somewhere; it’s represented by transactions recorded in a blockchain—kind of like a global spreadsheet or ledger, which leverages the resources of a large peer-to-peer bitcoin network to verify and approve each Bitcoin transaction.

Each blockchain, like the one that uses Bitcoin, is distributed: it runs on computers by volunteers around the world; there is no central database to hack. The blockchain is public: anyone can view it at any time because it resides on the network, not within a single institution charged with auditing transactions and keeping records.

And the blockchain is encrypted: it uses heavy-duty encryption involving public and private keys–like the two-key system to access a safety deposit box–to maintain virtual security. You needn’t worry about the weak firewalls of Target or Home Depot, or a thieving staffer of Morgan Stanley or the U.S. federal government.

Every 10 minutes, all the transactions conducted are verified, cleared, and stored in a block that is linked to the preceding block, creating a chain. Each block must refer to the preceding block to be valid. This structure permanently time-stamps and stores exchanges of value, preventing anyone from altering the ledger.

If you wanted to steal a Bitcoin, you’d have to rewrite the coin’s entire history on the blockchain in broad daylight. That’s practically impossible. So the blockchain is a distributed ledger representing a network consensus of every transaction that has ever occurred. Like the World Wide Web of information, it’s the World Wide Ledger of value—a distributed ledger that everyone can download and run on their personal computer.

Some scholars have argued that the invention of double-entry bookkeeping enabled the rise of capitalism and the nation-state. This new digital ledger of economic transactions can be programmed to record virtually everything of value and importance to humankind: birth and death certificates, deeds and titles of ownership, financial accounts, votes, provenance of food, and anything else that can be expressed in code.

The new platform enables a reconciliation of digital records regarding just about everything in real time. In fact, soon billions of smart things in the physical world will be sensing, responding, communicating, sharing important data, doing everything from protecting our environment to managing our health. This Internet of Everything needs a Ledger of Everything. Business, commerce, and the economy need a Digital Reckoning.

We have formed a (preliminary) view that Blockchain has the potential to (positively) disrupt the entire financial services value chain. WORLDWIDE.  

The end of Master Trusts, Wrap Accounts, Complicated ASX Settlement Systems. All that needs to be done is to build a proper “front end” and a proper “back end” for the financial services industry, and its game over for existing players if they are too slow.

Paul Resnik and Peter Worcester

25 August 2016

Paul Resnik is a co-founder of FinaMetrica, provider of psychometric risk tolerance testing tools and investment suitability methodologies to financial advisers in 23 countries. Paul has 40 years of experience in financial services. Peter Worcester is an actuary who also has 40 years of experience in financial services, and he was a key witness for the Joint Parliamentary Committee investigation into Storm Financial.