I hesitated for a long time before writing this column because of the negative perception of a certain part of the investors towards cryptomoney, especially Bitcoin. For many who are less familiar with this asset class, Bitcoin is an object of speculation with no real intrinsic value that is destined to return to zero in the more or less near future. For others, especially the younger ones, it is a revolutionary technology as important as the Internet. But what is it really about?
With the dizzying rise in the price of bitcoin over the last few months, and indeed over the last 10 years, it is difficult to dismiss out of hand the extraordinary value creation enjoyed by holders of virtual currencies during this period. A historically highly volatile asset class, a significant portion of the cash of large public companies now consists of Bitcoin. Are we really witnessing a revolution?
To answer this question, let’s go back more than a decade, when an individual hiding under the pseudonym Satochi Nakamoto solved the two major problems that had been delaying the creation of a purely electronic currency until then. How can one unit be prevented from being spent twice and how can one avoid having to rely on a third party (such as a central bank) to supervise transactions? The key to this was the chain of blocks.
Beware, the rest is a bit technical. The chain of blocks is a public and digital ledger containing all the transactions in its history. It is based on cryptographic technology that allows transactions to be authenticated using a personal signature that is impossible to guess or duplicate. All the transactions carried out are electronically announced on the network. They are integrated into blocks of transactions that are then validated by computers that perform complex calculations to do so. When a block is validated, it is added after all the preceding blocks. The set of these blocks constitutes the chain of blocks. The latter is completely immutable, preventing any possible fraud.
But you don’t need to be a mathematician to understand some of the advantages of Bitcoin compared to more traditional currency:
– it is completely decentralized and it is not issued by a central authority;
– transfers are virtually instantaneous and the costs are minimal;
– all transactions are entirely public and easily traceable;
– transactions are partially anonymous through the use of a cryptographic address rather than a unique identity.
In recent years, the usefulness of Bitcoin has evolved. While many initially thought they would one day use it for routine transactions, it turns out that it is potentially much more useful as a guardian of value, much like gold. In fact, with the exception of its thousand-year history, Bitcoin has all the advantages of the mythical metal, without its major flaws, which are its difficulty of transportation and division into smaller parts.
With central banks printing new banknotes, many are rightly wondering if there is an interesting alternative to them. Bitcoin is certainly one of the potential solutions.
Our columnist Martin Lalonde is president of Les investissements Rivemont, a financial institution specializing in portfolio management based in Gatineau.