Bitcoin has been the hottest topic over the past year. In fact, it was last year’s second most searched word on google, following ‘hurricane Irma’! But despite such large scale awareness of the technology, it’s saddening to see just how many people can’t give a proper explanation of what bitcoin is, and/or how it works. What’s worse is that Kenyans, whose country is virtually driven by digital commerce, don’t seem to get it either. Hopefully this article can help to solve the bitcoin mystery for Kenyans in both a simplified and informative way.

“There is no darkness but ignorance” — William Shakespeare
Before we begin, if you know you won’t last to the end of this article, then at the very least take this paragraph with you. Bitcoin is simply digital money, just like that 50 bob in your MPesa account. Just as any other currency, it was created to be used as a global means of exchange and store of wealth. The fundamental difference between Bitcoin and the digitalized Kenyan shillings in your MPesa account is that Bitcoin is not controlled or secured by anyone, no person, no company, and no government. This gives it unique advantages and disadvantages which will be addressed further in this article.

To understand Bitcoin well, you need to understand the technology that makes Bitcoin possible. This technology is called the Blockchain. A simple way to think of the Blockchain is as a massive file on the internet that keeps a live public record of all the valid bitcoin being sent and received by everybody. Alternatively, you can picture it as a publicly available spreadsheet or a ledger that has within it a massive list of all the valid transactions made using bitcoin.

As mentioned earlier, this “spreadsheet” of transactions is freely and publicly available to everybody who has access to the internet, and nobody runs, or controls this spreadsheet, as it was designed to automatically update itself in a secure and incorruptible manner. The Blockchain therefore eliminates the need for a third party. No one needs to act as mediator, intercessor, or middleman in any transaction. If we trust the technology, we don’t need to trust those who us it. The way in which this security/trust is achieved is what makes the Blockchain so magical.

People who send and receive Bitcoins using the Blockchain do not have to worry about anyone else stealing their money, falsely impersonating them, or using counterfeit currency to make transactions, this is because of a bunch of special functions embedded in the “spreadsheet” (called cryptographic functions). How cryptographic functions work is a highly technical subject, therefore, in the same way that many people use the internet but do not understand how it works under the hood, most people will not have to know the cryptographic mechanics that power the Blockchain in order to us it. That being said, there is a separate article on www.gainingalpha.net covering all the technicalities behind the Blockchain in detail.

Okay, so we get it, Bitcoin is running on some pretty exciting technology, but does this mean it should be worth over USD 10,000! Unlike other currencies the value of bitcoin is not derived from any “government guarantee”, but instead, it derives its value entirely from the fact that people believe that it has value. I know, that might sound absolutely ridiculous, but bear with me.

Most Java’s accepts a 200 bob note in exchange for their coffee because they also expect to be able to use the note to benefit them in the future. They could use that same 200 bob, along with rest of the money they collect, to pay off expenses, make purchases for the shop, or pay off Kevin Ashley’s (CEO of Java) 4 day vacation trip at the Maasai Mara.

But let’s imagine that all the employees at Java suddenly refused to be paid in shillings, as well as the farmers who supply milk for Java’s famous milkshakes, and even all the lodges at Maasai Mara. This would obviously render the shilling much less valuable, at least to Java. The point being made here is that the ability to use a currency or asset in exchange for other preferred assets is a major determinant of its value. In economic terms this is called acceptability. A decision made 50 years ago by the USA to unpeg the dollar from gold, making it no longer convertible to the precious metal, has also rendered the dollar valuable largely due to its maintained acceptability. The price of Bitcoin is so high because many people believe it will be a very useful currency, acceptable by many for purchase of goods and services over the internet over the next few years.

In summary, Bitcoin is much like the MPesa version 2.0, that allows money to be sent anywhere in the world with an internet connection, without KES 140k limits on your daily transactions, capable of holding wealth of more than KES 100,000, and you can don’t have to rely on a middle man like Safaricom to safeguard and administer your funds for you. People believe that these advantages make Bitcoin worth over USD 10k, and therefore it is.

Bitcoin is far from perfect though, the downside of not having any company or government controlling a currency is that you’ve got nobody to run to when someone steals your money, or when you forget your passwords and cannot access your funds. The risks inherent in having no recourse are undeniably the bitcoins greatest drawbacks, and are worthy of special consideration for anyone planning to convert their Kenyan shillings into Bitcoin or any other cryptocurrency. However, though many cryptocurrency exchanges have been hacked, Bitcoin itself, has never been hacked, the technology has for the most part been resilient to all threats.

It appears today that stigmatization and name calling have become popular Kenyan defense mechanisms used to camouflage what is, in most cases, just a genuine lack of understanding. Hopefully this article has shed some light on what Bitcoin is, and more importantly, the technology that powers it called the Blockchain.