My grandmother overheard a talk in a church group where bitcoin was mentioned. She came to me and asked me to explain to her. She knows money (a given?), she has a phone and she knows how to recognize and read Mpesa messages only.
It got me thinking and I have been looking for the best way to describe this massively talked about creature to her. What is it really and how can you explain it to a grandmother. Is it money, is it mobile money, is it a commodity, what is it really?
Let me start by explaining money. Money is something (a medium of exchange) created by a government and universally accepted by the citizenry, to be used to facilitate exchange of goods and services between them. In itself, money is not something that can be consumed or used for personal purposes. For example, you cannot eat money when you are hungry, but you can use money to buy bread and eat that bread when you are hungry.
That means money in itself is not useful, its usefulness is derived on transfer to another person in exchange for a good or service. This is what has come to be known as fiat money. Fiat money can be defined as currency without intrinsic value that has been established as money, often by government regulation. This government regulation is the circuitry that preserves the value of the currency and makes the money work in the economy.
Next let us explain mobile money like Mpesa. In reality, Mpesa is a digital form of the Kenya shilling or any other currency for that matter. The shilling by design and form is in paper or coin format and to transfer it you must give it to the next person physically. Where the recipient is physically located at a distance, money has to be moved around. That is why we have armed security companies moving money from companies or individuals to banks and vice versa.
I remember them days when sending money to grandma required that I tightly wrap it in an envelope with polythene to protect it from accidental water, go to Akamba bus service and declare it as a letter or parcel. The terms and condition read that Akamba did not permit the transfer of money and will not be responsible for any loss. I ignored those warnings and kept calling upcountry to ask if she has received the money. Many of us did, it was the cheapest way to transfer cash.
This is where mobile money comes in. You give your shillings in notes and coins to Safaricom, in exchange for digital tokens called Mpesa which are stored on your phone. That means, you have translated the shilling from paper form into a digital form. In this digital form, you can transfer it to other people via a mobile phone network.
We can therefore loosely say mobile money is equivalent to fiat money. One being a digital translation of the other.
Now we know two things. That money is created by a government and is not backed by gold or any other thing, just regulation and citizenry acceptance. At the inception of money, it was called commodity money because it was directly backed by gold or silver. Nowadays governments have monopoly over it and can print more or withdraw some in an effort to maintain its value against other currencies.
Now to Bitcoin.
Bitcoin is produced from the blockchain through a process called mining. The blockchain is a network of computers which simultaneously maintain identical copies of the activity happening on the blockchain. This activity includes transferring bitcoin from one person to the other and keeping the record. The blockchain is maintained by a community of technology volunteers.
Mining is the process of utilizing computer software and hardware to solve algorithmic problems that keep the blockchain synchronized.
Mining utilizes several inputs to produce a bitcoin. These inputs are labor, computer software, computer hardware and electricity.
Labor is in the form of persons creating the mining software, configuring the hardware and managing the processes on the blockchain to ensure integrity leading to eventual production of bitcoin.
Electricity is the most critical component which is consumed in the whole production process. To produce a bitcoin, at the current electricity rates, the global average cost is over $5000.
Bitcoin is therefore an irreversible or unrecallable reward for solving the mathematical problems necessary to keep the blockchain working. Once it has been mined, the miner keeps it for good and can only exchange it for goods or services from other people.
The miners cannot consume the bitcoin by themselves, hence a circuitry needs to be created to ensure its value is maintained. With a working circuitry which supports buyers and sellers of the economy, the value of bitcoin is maintained and hence early adopters get rewarded when they transfer this value to other people inform of transferring the currency.
In itself, bitcoin is a non-consumable software product which can only be used as a medium of exchange. That means, the person holding it can’t consume it, just like money.
So, what’s bitcoin? Is it a commodity, money or a digital form of money like Mpesa?
Commodity can be consumed, e.g. gold can be used to produce a necklace that can be worn by the holder.
It is my conviction that bitcoin is digital money. This digital object, recorded into existence can be equated to a blank bank note that can be passed around and reassigned. It is produced irreversibly and stored in digital wallets on digital devises and transmitted from one person to another without the intervention of central authority like governments.
Therefore, as money, it is subjected to the vulgarities of supply and demand. Supply side is fixed at 21 million bitcoins, therefore demand side is what must swing in accordance to sentiment.
The fact that most people still don’t understand it, even people in government, conflicting information, regulations and news are springing from everywhere which is affecting its demand and creating see-saw like swings in the prices. In the fullness of time, with the right regulations, bitcoin will be a universally accepted currency that will bring down the cost and speed of dealing with fiat currency and lead to greater economic inclusivity of the masses.