I don’t know what a blockchain is and I certainly do not know how they work. I know that they are the technology behind Bitcoin, that they are very clever and that they will have uses beyond digital currency.
Somehow these blockchains are the ledger for all Bitcoin transactions and are the arbiter of who owns Bitcoins. And that pretty much exhausts my knowledge of blockchain.
Probably because I do not understand the technology, I have not yet purchased Bitcoin. There is always a suspicion and wariness of something you do not understand: can I trust this “money”?
After all, isn’t money supposed to issued and controlled by governments rather than shadowy computer nerds who are possibly serving black market adventurers?
Bitcoin and the other digital currencies sit outside and government command and regulation.
In fact, there are plenty of instances throughout history of currencies that are not issued or controlled by a government. A small, personal example of this is when I was on an expedition to climb Mt Everest 20 years ago: Base camp was fairly isolated with little opportunity to bring in fresh supplies.
One item, always scarce but critically important, were AA batteries. It got to the point that you could trade just about anything for AA batteries (four AA batteries for a bottle of Scotch). A currency does not have to be issued or regulated by a government.
A currency can be whatever a group of people agrees – and a lot of people have put their trust in Bitcoin.
To own some Bitcoin is to give currency diversification. If there is political or economic Armageddon, it just might be good to own some Bitcoin (a bit like gold).
Like gold, Bitcoin has scarcity value, pays no interest and, also like gold, has its fervent believers. Gold bugs (and some who believe in cryptocurrencies) have an enthusiasm for their products that rivals religious rapture.
Usually the purpose of Bitcoin purchase is to speculate or to diversify. The currency has made a few people rich: Someone who bought Bitcoin in 2010 for US$100 would now, according to CNBC, be sitting on more than US$50m.
Bitcoin has been extremely volatile. There has been rabid speculation that has seen the currency take wild swings up and down. That volatility may be no bad thing for speculators who are encouraged to ride those swings to profit or to loss.
As diversification Bitcoin probably also works. It is possible to imagine an economic crisis that hits some currencies hard but where cryptocurrencies maintain their value.
I will never understand block chain technology but, then again, I do not fully understand how computers on jet aircraft work either and yet most weeks I quite happily get on a plane. So, I will buy some Bitcoin for some diversification and to learn more. I do think cryptocurrencies are here to stay and buying in will help keep me in touch with what they are all about.
Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com.