The Origin of Bitcoin

By Sheri Kaiserman, Head of Advanced Securities at Wedbush Securities

In October 2008, a white paper was published by Satoshi Nakamoto: “Bitcoin: A Peer-to-Peer Electronic Cash System”.  To this day, the identity of Satoshi Nakamoto is unknown, making the phenomena of Bitcoin even tougher for people to fully grasp.

The fact that Satoshi’s identity remains unknown is not surprising.  This whitepaper was released in the midst of the financial crisis when trust in large institutions was at an all-time low.  The essence of the whitepaper is to eliminate the need to trust centralized authorities.   Whether Satoshi had the grander vision for blockchain, the technology behind Bitcoin, is not clear; but the opportunities for blockchain technology extend far beyond financial transactions.

The paper discusses how e-commerce has come to rely almost exclusively on financial institutions to act as trusted third parties for processing payments made electronically over the Internet.  While the current system serves our needs well enough, it is encumbered by friction, intermediaries, and payment uncertainties that have resulted in higher transactions costs, the need for credit card transactions to be a minimum size in order to be cost effective, and the fact that there is a certain amount of fraud which merchants and consumers have just come to accept.

Satoshi articulated a vision of having an electronic payment system based on cryptographic proof provided by computers instead of needing to rely on a trusted third party to operate in between two transacting parties. The system would time stamp transactions which would be irreversible, transparent and have an embedded escrow mechanism to ensure assets don’t change hands until the appropriate time.  All of this would be managed by hundreds or thousands of computers (nodes), located all over the world, each maintaining their own copy of the chronological chain of events.  While this was the beginning of the description for Bitcoin, an electronic payment system which would operate without a central authority acting as the trusted middleman, it actually became the advent of something much more transformative – a new decentralized world.

Bitcoin is both a crypotocurrency used as a medium of exchange and as a coin reward for nodes which maintain the network.  Bitcoin is also the name for this peer-to-peer electronic payment network.  The technology behind the network, which dictates how the nodes function, is known as blockchain technology.  The name stems from the fact that groups of time stamped transactions are formed together into a block and, once approved, get added to the permanent chronological chain of blocks, thereby forming a blockchain.

Offering a cryptocurrency reward as an incentive to help maintain a decentralized network is part of the true brilliance of the Bitcoin network and blockchain technology. Bitcoin is the blueprint for a model whereby compensation can now be provided to anyone contributing to open source systems.  For example, in the first Internet era, there was no way to compensate contributors to sites such as Wikipedia other than making charitable donations.  In a blockchain world, contributors of any value have the means to be directly compensated.  Opportunities for people to earn money in any part of the world will grow exponentially as new blockchain enabled business models are created.

The most exciting thing about Bitcoin is the blockchain technology that powers it.  It eliminates the model of one centralized authority controlling everything within a business and replaces it with an incentivized community of distributed computers providing the backbone for a permanent digital record (or ledger), which is time-stamped, unalterable, transparent, allows for direct peer-to-peer transactions, and can be used for anything, not just financial transactions.  This revolutionary concept was immediately recognized and became an inspiration to many developers.

Bitcoin is simply the first application of blockchain technology and has been around for nine years. It is viewed as a much better store of value in countries like Venezuela, where there is hyperinflation and political turmoil.  Bitcoin can also be used to expedite the remittance of the $600 billion a year sent by international migrants to their families in other countries. According to the World Bank, 73% of these recipients are in developing countries and have no access to bank accounts.  Instead of using a Western Union, which charges 8-15% of the total being sent, bitcoin is now being used, allowing roughly 99% of the money to reach the recipient.   When paying international workers or foreign businesses within their supply chain, multinational companies like Microsoft are starting to use Bitcoin to process payments instead of international wire transfers.  With Bitcoin, payments are more efficient and have increased speed and transparency.

Bitcoin has been the inspiration for over a thousand other cryptocurrencies, each touting their own use cases or unique features as a better alternative to current payment systems.  Much like oil is the lubricant for an engine, cryptocurrencies are like the lubricant that enables a blockchain to operate.

Blockchain technology will also be helpful in any situation where multiple parties benefit from accessing one shared ledger rather than having to independently keep track, reconcile and process their own part of the data.  Imagine the redundancies, inefficiencies and costs that would be eliminated in sectors such as healthcare or Wall Street settlement and clearing, if all parties operated from one shared, trusted, unalterable and transparent ledger.   The use of blockchain technology is being explored and adopted by almost every industry and government.  Many use cases of blockchain technology are currently up and running and the possibilities for its use are unlimited.

Using a cryptocurrency, like Bitcoin, eliminates the need for a middleman, making peer-to-peer transfers of anything of value possible between two parties quicker, cheaper, transparent and more secure.  Blockchain technology allows anyone, or anything, to enter into a peer-to-peer transaction where the system itself validates, processes and permanently records the transaction.   Decentralized applications utilizing blockchain are quickly emerging in every industry from finance to healthcare, energy, food supply, real estate, etc.  Google any industry, government or company, along with the word blockchain, and enjoy learning about the vast amount of blockchain enabled projects already underway. What Satashi Nakamoto’s white paper introduced in 2008 is quickly becoming the next revolutionary technological advance that will transform the world beyond our current imagination.

About the Author, Sheri Kaiserman

 

Futures trading involves the substantial risk of loss and is not suitable for all investors. Each investor must consider whether this is a suitable investment since you may lose all of or more than your initial investment.  Bitcoin futures require much higher margins than other futures contracts, and Wedbush may require higher minimum account balances for those clients who trade these contracts.