The Bitcoin Legacy

Published: 25 May 2015 09:30

Nathan Jessop tells us what bitcoins are and why they are now worth thousands

VERY simply, bitcoin is the worlds first decentralised digital currency created by a pseudonymous character known as ‘Satoshi Nakamoto’ in 2008.

Nathan Jessop, Elliptic

Unlike traditional fiat currency, bitcoin is decentralised and is not controlled by one central authority such as the Bank of England, instead people, groups and businesses all over the world make up a network that work together to processes bitcoin transactions using computers to solve complex mathematical problems in exchange for a reward (bitcoin). This reward is limited as there will only ever be a finite number of bitcoins in the world because the bitcoin code was written to only allow 21 million bitcoins to ever be mined.

Now while it is true bitcoin was worth thousands ($1,242 at it’s highest price) the question of why they have any value at all is a tricky one to answer. Establishing ‘intrinsic value’ for bitcoin is not easy. We say gold has real value because it can be used for jewelry and circuitry and we say the pound has intrinsic value because you can pay taxes with it and the government accepts no other currency, so if you want to engage in commerce within the Uk you need to use pounds, thus creating an underlying value for pounds. However, for bitcoin the answer is not so simple.

You could say that bitcoins value derived from its beneficial technological aspects like we mentioned earlier. However, I believe that bitcoins value comes from its behaviour as a currency. You can exchange bitcoins for items on overstock or even for beers in east London, much like we do with traditional currency, and you can even watch your bitcoin rise (or fall) in price as the bitcoin ecosystem grows, similar to an equity.

What you should do if you bought some years ago and forgot about them

For those that got involved with bitcoin early and have since forgotten about them, you should probably find where they are located and ensure that they are safe. As someone that knew about bitcoin storage this was not a problem for me, however, I would consider this the first thing to do before you consider doing anything else. The bitcoin.org site provides ample information on what to lookout for when securing your bitcoin and there are great consumer wallets available to help you manage your bitcoins more easily such as Coinbase or Blockchain.info . Alternatively, if you prefer managing your own funds there are hardware manufacturers such as Trezor or Ledger that create hardware that allow you to keep your funds safe without relying on anyone else.

For enterprises or businesses that have bitcoin, storage becomes a more difficult issue, they should should seek an insured custodian to help store their funds in full reserve storage. Read our guide to the three things worth knowing if you're a business looking to store bitcoin.

Why they are big news

Bitcoin is big news because there are some features of this digital currency and appl that make it quite revolutionary.

1. As I mentioned previously, bitcoin is decentralised and is not controlled by one centralised authority. This means that no single entity or authority can manipulate the network to cause it to break or worse, take or lose your bitcoins.

2. There is currently 2 billion adults in the world without access to a bank account. Setting up a bitcoin wallet is free, takes seconds and can even be done on a mobile phone. Such wallets give anyone the ability to set up a bitcoin address, which allows anyone the ability to send funds to your wallet.

3. Bitcoin’s underlying technology, the blockchain, is transparent and allows everyone to see how many bitcoins are in one address, but personal information remains hidden. This is great for organisations that are required to produce accounting documents about their activity, or for nonprofits that want the public to see how much they receive in donations.

4. Due to bitcoin’s miniscule transaction fees and speed, international transactions are practically free and immediate. With current remittance providers, transferring money can sometimes cost a 10% fee to send $100.

What they are worth

Bitcoin’s price has gone from $0 in 2009 to $1,242 in 2013 is now currently fluctuating around $220-30. Such price fluctuations in bitcoin price are driven by its extreme volatility (Latest estimate 3.19%) which is caused by factors such as:

- Varying perceptions of the intrinsic value of bitcoin

- Limited options to large holders of bitcoin ($10M plus) For investors with large amounts of bitcoin, there is no clear way for them to liquidate a position into a fiat position without them severely moving the market. Bitcoin does not have the amount of users required that would provide the bitcoin network with more option value and stability.

- Negative news. When the bitcoin holders hear of a security breach they often sell their holdings due to them questioning the integrity of the bitcoin protocol. For example, a bitcoin exchange known as Mt Gox that was handling over 70% of all bitcoin transactions lost over $450M in customer funds, which lead to them reducing the float of bitcoin by 5%.

Who wants them

In November 2014 the University of Kentucky published a paper examining the who Bitcoin users where. They concluded that the main people that want and use bitcoin are:

- Programming enthusiasts

- Speculative Investors (Hedge funds and individuals)

- Libertarians

However, since then it’s become apparent that these are not the only people that want to have and use Bitcoin. An increasing number of major retailers are realising the potentials of accepting and holding bitcoin such as Overstock and Rakuten. This combined with the fact that more and more people are creating and using wallets such as those provided by blockchain.info have reached almost 3.4M, which would suggest that there is no limit to who wants bitcoins.

Options for buying, selling, trading

You can currently buy, sell and trade bitcoin on a multitude of exchanges and trading platforms, here are a few:

- Kraken

- Bitstamp

- Bitfinex

- Coinbase

- BTCChina

- Coin.mx

- BTC.sx

How to avoid being scammed or ripped off

When looking to store your bitcoin there are a few things you should look for to avoid getting scammed or ripped off.

Insurance

- There is no way to reverse a bitcoin transaction or recover lost or stolen bitcoins, so it’s crucial to pay attention to the financial strength of the insurance company that covers the bitcoin company you’re interacting with as it will impact if you get your bitcoins back or not if they’re lost.

- The issue of insurance is even more important when you’re storing bitcoin with a third party. You need to make sure that your storage provider’s insurance policy includes professional indemnity and covers 100% of client deposits, much like the Elliptic Vault. Currently, Elliptic is the only bitcoin custodian globally to offer this level of protection from a Fortune 100 insurer.

Accreditation

- Does the bitcoin company you are using have international accreditation by a respected third party? The lack of accreditation is not the end of the world, however, those with it are less likely to try to scam you.

- Elliptic the only bitcoin and blockchain asset custodian to obtain the international accreditation ISAE 3402 from KPMG, which means that our “deep cold storage” procedures meet the same standards as a traditional custodian bank.

- Despite other bitcoin storage solutions launching after Elliptic, our custodian solution remains the only one to receive ISAE 3402 accreditation from a “Big-4” audit firm. This has led us becoming the trusted custodian for publicly listed trading houses and institutional funds representing more than $3BN in market cap.

Storage type

- How does the bitcoin company you’re approaching store your bitcoin?

- If they do any of the following you stand a higher possibility of scammed or ripped off:

- ‘Pool’ your bitcoin together with the other users bitcoin - Hold all of your funds in ‘hot wallets’ which are always online and connected to the internet. This is a poor security practice as most of the bitcoin hacks in the past can be attributed to ‘hot wallets’.

- To avoid this you want to look for a bitcoin storage provider that keeps your bitcoin in ‘cold storage’ (storage that is never connected to the internet) and in full reserve (funds are just stored, not reinvested or moved).

How to retrieve them from old hard drives, or if you have forgotten your password

Providing your old hard drive is working, you will simply be able to retrieve your public and private keys from your hard drive and gain access to your stored bitcoin. However, the issue of a broken or malfunctioning hard drive is a different matter. You would need to find a forensic data recovery specialist to help you retrieve your old bitcoin. However, some issues with this include:

- Expense. Sometimes the cost of the recovery could be more expensive than the bitcoins on your hard drive.

- Partial recovery. It could be that the data recovery specialists are able to perform a partial recovery of the data on your hard drive. Which could have mixed outcomes:

- A partial recovery of a plaintext copy of your private key is possible to recover with a little help from your friendly neighbourhood developer.

- A partial recovery of an encrypted file (especially a wallet file) is useless as with encryption you need all of the file to access the data.

- More information can be found here

About Elliptic

The block chain, Bitcoin’s underlying technology, will be used to represent a range of financial assets and revolutionise the way we store and manage them. We created Elliptic in order to provide a custodian banking service for these assets.

Elliptic is a highly secure, insured digital asset custodian service that safeguards bitcoin or other block chain assets using proven deep cold storage techniques. It combines best-in-class security with insurance, and controls certified by KPMG.

Nathan Jessop is chief operating officer and co-founder of Elliptic.

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