Some of the financial advisors reading this post have probably received a question from curious clients asking about Bitcoin and the blockchain. This article aims to explain it. We’ll keep the explanation as brief as possible.
Bitcoin is a decentralized blockchain currency. Decentralization means that no central body controls its value. In this way, it is like gold, as gold has value but no central authority exists to assign its value. A typical blockchain system has three parts. This can be explained using the analogy of Sudoku.
The blockchain is a massive game of Sudoku, which users play, and collect currency.
1) The blockchain is a game of Sudoku. The more complete the Sudoku game, the more secure the network. Securing the network helps guard against events such as fraud and double purchases.
2) Users play Sudoku. The more they play, the larger the game becomes. The larger the game, the more difficult it becomes.
3) Playing Sudoku earns currency in blockchain currency, such as Bitcoin. The pay for a user’s efforts depends on the amount of the game they complete, as well as the currency they are playing for. If users are in a Sudoku group with lots of others, they will receive less than others if they have done less work on the game than others have.
Many a user has embarked on the quest to run a blockchain computer but realized too late that their computer was draining more value out of the power grid than they were adding with their puzzle-solving capability. The immense power consumption of blockchain computers is the reason that the Bitcoin network has grown to consume a full hundredth of the world’s electricity (1).
Blockchain is spreading as a phenomenon among consumers as well as commercial applications. The Dallas Mavericks now accept payment in Bitcoin, as well as Microsoft, and Expedia (2). With major merchants now accepting payments in Bitcoin, the acceptance of blockchain currencies as tender has the initiative to spread. As the blockchain network grows, the more security it will have to host major transactions, and the more potential it will have for massive transfers of value between institutions such as banks. As soon as we enter that era, the financial world has the direction by which to change seismically.
The blockchain is a new phenomenon but it is not an unimportant one. Financial advisors should be informed on trends like this to inform their customers of it, and remain knowledgeable on trends in the financial industry.