Saturday, 21 October 2017

An Overview of Bitcoin, Blockchains & Cryptocurrencies In The UAE By A Rookie

Please find below an objective compilation of my perusals through several laborious articles and books - the idea is to promote discussion on technology that has the potential be the 'dot-com boom' (and bubble) of our era. If you find any glaring mistakes in the text below, do drop me a message and I shall happily rectify it. I am a very nascent pupil of this field, with limited academic qualifications and through this blog post wish to encourage more people to get into the discussion of (and not necessarily investment in) blockchains and cryptocurrencies.

If I can understand bits of it, you definitely can get way, way more.

What this is:

- Your one-stop reference pool for diving into the basics, and not the technical details of cryptocurrencies. A lot of technical information has been omitted and ignored for the readability of this nerd-fest, so treat this as the Harry Potter movies in comparison to the novels.

What this not:

- A guide to cryptocurrency investment, because if you really sit and think about it why on earth would you take investment advice from a blatant rookie? (actually if you think even further, you'll find that you should definitely not be taking advice from purported industry experts as well, so I guess that makes my opinion just as valuable as a notorious economist's)

(not that valuable)


What is Blockchain?

A blockchain is a 'chain of blocks' - a series of digital blocks linked to each other to serve as a digital ledger of data. Each block contains within it data relevant to its application - in the case of Bitcoin each block contains transaction history. Additionally, each block contains data linking it to the previous block - consequently creating a chain. It is possible to trace the entire history of one element through its blockchain.

Blockchains are hosted and replicated across millions of systems, thereby decentralising the model and eliminating the possibility of any one person altering the records by hacking into one system.


Blockchain Working Introduction Diagram
Source: 'Blockchain Introduction', JWorks Tech Blog (accessible here)

In a future largely controlled by data (with Mukesh Ambani postulating that it is the new oil) the possibilities of blockchains are endless - decentralised network of data that can be applied to medical history, stock management or event history to name a few apart from digital transactions.



Further Reading

'What is Blockchain technology?', Blockgeeks

'What is Blockchain technology?', CoinDesk

Bitcoin, Ethereum & Cryptocurrencies

Bitcoin is a digital currency. Created by the anonymous Satoshi Nakamoto, bitcoin was created in the wake of the 2008 financial crisis which saw many people lose millions of dollars and served as a modern testament to the fallibilities of banks. Apart from Ripple and Stellar Lumens, most cryptocurrencies were created to combat the vices of banks - which means that if Jamie Dimon of JP Morgan is threatening to fire employees for investing in bitcoin, it is more out of fear of competition than fear of stupidity.

Bitcoins are stored in digital wallets which can be used for transactions. Currently, bitcoins can be obtained by:
  • purchasing them on trade exchanges
  • as a payment 
  • as a reward for mining blocks in the blockchain.
Bitcoin is based on a public blockchain network. Think of blockchain as the operating system or the underlying technology and bitcoin as one possible application (in this case, a decentralized digital currency).



Ethereum is an open-source blockchain network that allows developers to create any application of their choice using blockchain technology. While 'smart contracts' is the most popular feature yet, the possibilities of expanding this platform are endless.

Ethereum Smart Contracts
Smart Contracts
Source: 'What Is Ethereum?', Blockgeeks

Other notable cryptocurrencies: Ripple, Dash, Zcash, Monero, Bitcoin Cash, Litecoin

Further Reading

2008 financial crisis: The Big Short by Michael Lewis (or you can watch the movie, which might be a slightly more enticing option since it stars Ryan Gosling and Margot Robbie, inevitably endearing to your tastes no matter which way you flow)

Ethereum: 'What Is Ethereum?', Blockgeeks

Mining

If you care about how exactly bitcoins come into existence, how the number of coins is regulated, the processes ensuring a bitcoin network is secure and what is required to keep the network stable, safe and fast, this video might serve as a good introductory tool. 

The algorithms and hash code encryption techniques that form the core of the mining process might take this compilation of data beyond the realm of comprehensibility. Additionally, I have admittedly come up short in my technical knowledge and interest in the core algorithms defining each and every cryptocurrency, and I shall leave the onus of further research to the reader.


Advantages of Cryptocurrencies

(Bitcoin has been used in several examples but it should be noted that most advantages are not just linked to bitcoin alone - in fact, cryptocurrencies like Ethereum and Ripple have several additional advantages, and consequently, limitations)

Convenience: Imagine being able to instantly transfer money to relatives in a different country, without having to pay Western Union a fee for the service and a higher fee in currency conversion. Imagine not having to deal with change, withered notes and high credit card transaction charges. Imagine not having to wait on a public holiday for a bank to transfer cash the next day. Think about the convenience online banking and payments added to your life, and now expand that to daily transactions.

Counterfeits: With digital currency you combat the possibility of counterfeits as each bitcoin is in essence, an abstraction of digital addresses. Each address is unique and every bitcoin is linked to the blockchain - which means, there is no way to create a counterfeit of a bitcoin.

Identity Theft: The current model of credit card transfers works on a 'pull' mechanism. When you enter your pin at a card machine, you give access to your entire savings to this particular merchant to 'pull' a specific amount. This is analogous to offering your wallet to the merchant and asking them to take exactly the amount you owe them.

This linear bond of trust is susceptible to calamity if your card details fall in the hands of a crook - a crook with access to your entire earnings and the ability pull any amount he or she wishes to. The linearity of this bond of trust is further complicated if you consider that your card details are not just shared with the merchant, as in this process they are also shared with their IT network supplier, the acquiring bank, the issuing bank, any third-party processor, the card network and each employee who works for these entities and handles these transactions.

Suddenly, the argument that cryptocurrencies aren't as safe as current options starts to look ugly, does it not?

Credit Card Pull Mechanism
Source: 'Are 'Pull' Credit Card Transactions Making You Truly Vulnerable?', CryptoCoin News (accessible here

Bitcoin on the other hand uses a 'push' mechanism - it pushes an amount of your choosing to the merchant. In comparison to the prevalent pull mechanisms, the potential risks are significantly lowered, though not completely eliminated.

Decentralization & Inflation:
"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman." - Ronald Reagan
"Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair." - Sam Ewing 
Say, for example, USA owes China a sum of $1 million dollars (all hypothetical, of course). The logistics of current fiat currency transactions ignore the significance of inflation - on paper USA owes China a million dollars regardless of the current value of the dollar.

Since the government controls the currency, they decide that in order to clear this debt they will print more dollar notes than necessary. While the government has literally conjured a million dollars out of thin air and paid off their debt, they have significantly altered the existent supply-demand value. The current value of the dollar is affected by the influx in supply - tipping the scales towards more supply and less demand. As a result, the value of the dollar starts to drop. Your $10 bill now gets you one burger instead of two - for the same bill.

We often underestimate the dangers of inflation - in this exact same scenario there is your average worker who had just accumulated a lifetime of savings worth $200,000. In a month, he watches his savings get diminished by half - as it now costs double to buy the exact same things he could have bought with the original value. Would you want to give an external authority that much power over your hard-earned money?

Bitcoin takes power away from a single, central authority and splits it over a million users that create, sustain and expand the network - which means that no one person can decide the value of your money overnight. The performance of currencies backed by governments is often parallel with the performance of the government itself. Are you willing to bet your money on your government, especially if you did not vote for the ruling party and have explicitly expressed zero faith in their ideologies?

An even more chilling question might be: do you have any other choice?

Inflation Cartoon
Source: 'Inflation The Evillest Theft', The Final Wake Up Call (accessible here)

Further Reading

Identity Theft: Are 'Pull' Credit Card Transactions Making You Truly Vulnerable?', CryptoCoin News

Inflation: Naked Economics by Charles Wheelan

Disadvantages

Double-spend: Initially, due to the small size of the growing network it was possible for a user to gain control of the majority of the hash power - which in turn would allow him to spend the same bitcoin for two transactions. This kind of a scam is known as a double-spend, which gets more and more unlikely as the size of the bitcoin network grows.

Acceptance: We are still months, rather years, away from the day when cryptocurrencies would start getting accepted at your local grocery store. (never forget that one of the first bitcoin transactions was a pizza for 10,000 BTC ~ which would equal $43,000,000 today) The high volatility aspect further results in lack of trust in the currency, but this is expected to stabilise with time.

For a list of top companies that accept bitcoin as payment, click here. Currently, there are over 500 retailers in the UK itself that accept bitcoin as payment, which can be found here.

Deflation & Volatility: Since we will only have a fixed number of coins (21 million for bitcoin), it is possible and already the case that a bunch of investors might hoard up all the coins in hopes of selling when the time is right. The shortage of bitcoin would drive up the price, which would in turn align with the speculative investors' ambitions. This is a serious disadvantage of not having a regulatory body in charge.

The consequences can even be felt in the short term, where the small size of the market comes into play as well. Any multi-millionaire or investment fund can decide to drive the price of a coin up or down by indulging in mass selling or buying of coins. The 'pump and dump' scheme ensures that as an individual investor your coins are in the hands of manipulative traders (and ignorant speculators who simply follow the market blindly, thereby accentuating each swing)

Hacking, Scams & Lost Wallets: If you lose access to your digital wallet you lose your bitcoins. This has been rectified lately with wallets with multiple keys. Since bitcoins are digital, if your network crashes you lose access to your money.

There have been very popular cases of hackers changing the address of the wallet on popular crowdfunding websites - consequently directing all the donations into their personal digital wallets rather than the person or organisation raising the money.

Fuelled by the meteoric rise of bitcoin, there are thousands of cryptocurrencies out there in the market. Amongst them you will also find Dogecoin, which was created as a joke based on the famous dog meme. Despite the blatant mockery, Dogecoin saw bullish trends of around 1500% this year.

Most coins however, are scams, relying on speculators to purchase the sham coin in hopes of it rising 1000% and higher like other popular digital coins. China is the most recent example of governments getting aware of fraudulent ICOs and trying to clean up the mess that follows any promising venture.

Further reading

Pump And Dump: Wikipedia or The Wolf Of Wall Street (also starring Margot Robbie, so I would definitely recommend)

Cryptocurrencies In The UAE & Investment

Currently, one of the safest ways to obtain bitcoins in the UAE would be through BitOasis, a Middle-East centric trading exchange. With a beta trading exchange that allows you to trade bitcoins and ether, along with a digital wallet for storage of currency it can serve as a good starting point for anyone in UAE looking to join the fun. 

Additionally, you could also explore trading the bitcoins from your local wallet into a US-based trading exchange if you wish to deal with even more cryptocurrencies like Ripple. 

Recently, a local coin called OneGram was announced, back by a physical asset - gold. Being touted as the only Sharia-compliant cryptocurrency in a region where this market is still bubbling, it may seem as an easy entry into the world of crypto investment. 

Having read a bit about it and attended a seminar hosted by the founder and CEO, my personal take is that it is definitely not a currency I would be investing in ever, for multiple reasons. However, as with all investment advice, your best bet is form your own understanding based on your own research. Don't let my biased, ill-informed opinion influence your choices!

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