Research

All Things Bitcoin; Under The Hood

August 10, 2021
Steven McCormack
1 min

So we've started with a suggested name change. Now let's take a closer look. As a wholly digital creation, it can be hard to get your head around Bitcoin's perceived value. Especially as we have been so reliant on banks to store our precious savings. For all their (many) faults, the likes of HSBC and Bank of Scotland can still feel comparably safer. A little education goes a long way however. Once I grasped the various moving parts that make up this asset, I became much more comfortable, even excited, about holding it. I realised that this was not magical funny money after all. Instead it was the culmination of over forty years of computing innovation.

The Machine in Action

With the internet now firmly established, Bitcoin is simply an idea whose time had come. I suggest you watch the video below, which builds up the asset from scratch. I particularly like this one for avoiding hardcore maths and PHD level terminology. As someone who is more letters than numbers oriented, it is very easy to get lost in equations. Instead we are presented with the logos of Bitcoin; how it all comes together. Think of it like driving a car; you don't need to know the intricacies of the internal combustion engine to fill the tank and get from A to B. Likewise, it is not completely necessary to be a computing genius to become familiar with digital assets.

In essence, Bitcoin is the perfect marriage between long established record-keeping systems (ledger), cryptographic genius (signatures, keys, hashing) and networked computing (internet). Add a sprinkling of economic incentive (scarcity, mining, fees), and we have something rather tangible. But it can still take a leap of faith to imagine a bunch of ones and zeros as the basis for our financial future. For me it clicked when I (rightly or wrongly) visualised Bitcoin as a far more sophisticated version of Kazaa or LimeWire; a peer-to-peer network for payments rather than music. Perhaps not the best examples of trust and reliability - but it still radically changed how we consumed media. And most importantly, it was a ground up revolution. We were drawn to music file sharing as a response to the inefficiencies of the old world (CDs, record labels etc). And now we have the very same dynamic playing out with Bitcoin and legacy banking.

A Natural Evolution

Bitcoin also permits us to look under the hood of money itself. It is after all a tool for accruing and transferring value. An important conduit for information between communities, like language and music. And as society evolves with technological innovation, so too does money. It feels only natural then that the maturation of the internet age brings with it a fundamental upgrade to the communication of value. With this version of money (expressed as digital data, rather than physical coinage or notes) we are no longer bound by permission, exploited by third parties or limited by geography. Bitcoin Magazine touches on this with their summary of the technology that underpins Bitcoin;

'Bitcoin depends on a distributed ledger system known as the blockchain. The blockchain is possibly the most powerful innovation associated with Bitcoin, as countless industries from financial services to healthcare have begun contemplating how to leverage the technology for their own uses. So it’s worth asking: What is a blockchain?

The essential power of blockchain technology is its ability to distribute information. Because it is distributed across all of the nodes, or individual computers, that make up the system, the term “blockchain technology” is often swapped with “distributed ledger technology.” A blockchain’s database isn’t held in a single location, which could be infiltrated or controlled by a single party, but rather it is hosted by numerous (in the case of Bitcoin, tens of thousands of) computers all at once.

The blockchain network automatically verifies itself at certain intervals, creating a self-auditing system that guarantees the accuracy of the data it holds. Groups of this data are known as “blocks,” and as these blocks are cryptographically chained together, the pieces of data get buried and harder to manipulate. Altering any piece of data on the blockchain would require a huge amount of computing power.'

The illustration below (hat tip G2A Pay) adds a little more colour to value communication in the 21st century. Note how John and Linda are now free to interact with each other, regardless of which jurisdiction they may be in. It's powerful stuff, folks.

https://pay.g2a.com/blog/how-a-bitcoin-transaction-works/

So that will do for today. My brain can only take so much exposure to mathematics. But hopefully this opens your eyes to the innovation that sits behind the hype and memes. Next up we'll consider the incentive structure that keeps the show on the road, and further explore Bitcoin's allure as a store of value.

Signing out, Steven.

Photo by Sitraka Rakotoarivelo on Unsplash.

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the views and opinions expressed in this posts are those of the post’s author and do not necessarily reflect the views of McCormack & Partners, or its affiliates. This post has been provided solely for informational purposes and do not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The author makes no representations as to the accuracy or completeness of any information in our posts or found by following any link in this post.