Bitcoin and cryptocurrencies: what you need to know

By Mark T. Amoguis, Researcher

So far, 2017 was Bitcoin’s best year. From around $450 per unit in May 2016, it shot up to almost $20,000 in December – a record-high on account of investors’ increased risk-on sentiments. This quick climb led some economists to tag Bitcoin as a bubble waiting to burst similar to tulipmania in the 1630s and the dot-com bubble almost 20 years ago.

Since then, Bitcoin has fallen about 70% from last year’s peak and below the $10,000 mark amid concerns of increased regulation in developed economies such as South Korea and China. Since then, its price hovered around the $10,000 per unit mark.

This degree of volatility, however, was not the first time Bitcoin’s stability was put to the test. Like any tech-based platform, Bitcoin exchanges were prone to security breaches with the most prominent being that of Tokyo-based Mt. Gox in 2011. In 2014, Mt. Gox, which at the time held 70% of all bitcoin transactions worldwide, filed for bankruptcy.

In the Philippines, meanwhile, the Bangko Sentral ng Pilipinas (BSP) – the country’s monetary authority – is in the process of approving entities seeking to operate as a Bitcoin exchange after authorizing two – Betur, Inc. (also known as Coins.ph) and Rebittance, Inc. – last year, which are considered as remittance companies and thus required to comply with regulations such as rules on anti-money laundering.

Transactions of so-called virtual currencies in the country reached a monthly average of over $8.8 million per month in the first half of 2017 from $2 million and $6 million in the entire 2015 and 2016, respectively, according to Reuters, citing BSP data.

What is Bitcoin?

Born from the wreckage of the 2007-2008 Global Financial Crisis, a hacker (or a group of them — nobody really knows) created the trustless financial medium — the bitcoin.

Bitcoin’s origins can be traced to 2008 when Satoshi Nakamoto, a pseudonym of an anonymous programmer wrote a whitepaper that year outlining the mathematical theory of a peer-to-peer currency. This materialized a year later into what we know now as the Bitcoin software.

In its early days, it was used only by cryptography geeks with its price next to $0 in 2009. In 2010, the trading of Bitcoin started according to BuyBitcoinWorldwide.com.

There are also other cryptocurrencies as well with those like Ethereum, Litecoin, and Ripple gaining popularity.

They are also open-source, meaning that nobody owns or controls these cryptocurrencies, not even monetary authorities.

While different in value and appeal, they all hinge on one technology – the blockchain.

The Blockchain

Blockchain is a distributed public ledger where all confirmed transactions (in chronological order) can be verified and being maintained by numerous computers all around the world. It is enforced with cryptography to keep it secure.

“That’s really the most important breakthrough to me, when bitcoin arrived,” John Bailon, co-founder and chief executive officer of SCI Ventures, Inc., said in an interview, referring to the blockchain technology. “It’s not so much the currency behind it.”

“Blockchain is the best way to record digital transactions of anything not just money, it can be information, it can be land titles, any sort of assets, anything that you need to track in a secure manner, blockchain is the best technology for these,” he added.

SCI is the local company behind bitcoin-related products such as Rebit (remittance service using bitcoins), Bitbit (bitcoin wallet), and Buybitcoin (bitcoin exchange).

Creation

The computers that maintain the blockchain can’t create one all at the same time. These computers must compete in solving a mathematical problem that takes around 10 minutes to process a block – a process called “mining.”

By design, only 21 million bitcoins will be “mined” at some point, making the cryptocurrency deflationary in nature.

SCI’s Mr. Bailon said that transacting via bitcoin is quick, but it also depends on the volume of transactions that are happening in the network.

“For example, if you send bitcoin to me right now, it would hit the network within seconds. But the best practice there, if I don’t know you, not that distrust you but I just don’t know you, I need one confirmation. A confirmation takes about 10 minutes. Sometimes it can go an hour depending on the volume of the traffic. Sometimes it happens within seconds,” Mr. Bailon explained.

“The nature of bitcoin is that there’s always a fee market. Meaning the higher the fee you pay, the quicker your transaction to be confirmed…,” he added.