Understanding the Internet of money — Bitcoin

BY: Kwami Ahiabenu
Understanding the Internet of money
Understanding the Internet of money

Money rules the world. It can be defined as the official-issued legal tender made up of notes and coins, which is sanctioned by a country’s government as its primary medium of exchange. Each country across the world has its own money that is circulated to facilitate the exchange of goods and services.

In general, economists classify money into three types namely commodity money ( a form of a commodity such as gold which intrinsic value is considered money with value outside of its use as money), representative money (something that represents money but it is not money itself (  such as the historic  use of tobacco or salt) and  fiat money (absolutely no intrinsic value but used as money backed by authority of a government). The rapid growth of  information society where new digital technologies are fuelling innovation in all aspects of human endeavour has, given birth to new types of money collectively known as virtual or internet money.
What is a virtual currency?

According to the European Central Bank, virtual currency is "a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community." In comparison to ordinary money, virtual currency relies more on a system of trust than on a central bank or other financial regulators. Therefore, virtual money is generally unregulated, uncontrolled digital crypto-currency with key characteristics of portability, durability and uniqueness.

It is important to note that there is a distinction between virtual money and digital money. Digital money refers to physical notes and coins in circulation which are converted into digital forms but still linked to our financial system whereas virtual money started as currency which are exchanged online. In recent times, however, virtual money is also being utilised in the physical world to make payments in stores thereby making the true line between virtual and digital money very blurred.

Virtual currency does have some unique characteristics such crypto currencies (based encryption techniques), they have founders, heavy reliance on algorithms and high level of anonymity. Generally they are a recent phenomenon and overall its transaction costs is relatively lower.
What is bitcoin?

One of the most famous and popular types of  virtual currency is Bitcoin. It  was established in 2009  as a decentralised virtual currency. Without a central authority or banks, the issuance of bitcoins and management of its transactions are collectively carried by the network.  A peer-to-peer (P2P) model connotes a decentralised communication model with equal parties who have the same level of capacity to initiate a communication session as opposed to client/server model, in which only one party (client) initiates a service request and the server then fulfills this request. Therefore in P2P network model, each node is able to function as both a client and a server.  The official bitcoin website:  https://bitcoin.org/en/   describes it as “bitcoin is an open-source; its design is public, nobody owns or controls bitcoin and everyone can take part. Through many of its unique properties, bitcoin allows exciting uses that could not be covered by any previous payment system.”

According to www.coinmarketcap.com, bitcoin holds about 90 per cent  (approximately $4.8bn out of $5.3bn), of the total Market  Coin Capitalisation which consists of more than 650 virtual currencies. Other names in the market includes but not limited to mastercoin, digitalcoin, novacoin, zetacoin, feathercoin and zetacoin, etc etc . It is important to note that the cryptocurrency space is in constant fluxid with some currencies folding up and new ones being established each day.
How does it work ?

Bitcoin runs on a peer-to-peer network making it a true decentralised currency system where currency is not issued per se; instead its value is mined(extracted) by use of advanced computers solving extremely difficult math-based equations.The central technology at the heart of Bitcoin and other virtual currencies is “Blockchain” and “Mining.” Every payment made first gets encrypted via a unique secret key which is thereafter transmitted from one address to the other over bitcoin’s core protocol usually referred to as a (blockchain) which serves as a decentralised financial public register that monitors every bitcoin’s transaction. To finalise this transaction, miners verify the true identity  of the persons initiating the transaction to establish that they are the true owners of the money. By this mechanism, it is possible to transfer money around the world without the need for our traditional banking system. Also a Blockchain technology has provisions to support the adherence of a number of regulations including AML (Anti-Money Laundering) and T+2 Settlements.  As of  the time of writing this article GH¢100,000  equals 18.37155 bitcoins and for the first time this year (2017), bitcoin value tops gold this year as demand for digital cryptocurrency is now increasing.

Advantages and risks

Bitcoins and other virtual monies provide any user with an online presence, access to the world financial system to any user with online access. Also, a Blockchain technology does have provisions to support the adherence to a number of regulations such as AML (Anti-Money Laundering) and T+2 Settlement.  

Virtual money can become a very important catalyst for e-commerce, where electronic forms are not readily available by providing a payments system for online retail.,  for example, Bidorbuy, a growing online marketplace in Africa , now accepts payments in bitcoin. One unique advantage of virtual currency is that, it allows money transfers with little or no commission while offering same value globally and, therefore, being touted as a panacea for the reduction of billions of dollars spent by Africans abroad on remittance charges back to the continent.  

Any user on the Internet can make use of virtual currency without  any approval from government payment processing services. It holds universal value and does not require any intermediary and further, no one country can manipulate it to the disadvantage of another country such as happens in the financial markets.

However, Bitcoins are not without risks and challenges such as numerous scams, privacy, scalability, fluctuations in value, reported losses of wallets, security issues, hacks/thefts as well as, it being susceptible and a vehicle for crime and tax evasion. As a volunteer-based infrastructure, people questioned how it could be sustained over time.


Though at its infant stages in Africa, Bitcoin’s popularity is increasing, for example https://www.bitpesa.co based in Kenya is making payments to any bank in China from Nigeria, Tanzania, and Uganda using the blockchain technology. In our subregion, Nigeria appears to be a leader in the use of Bitcoin with growing interest of virtual currency in Ghana as well, with http://www.pmcedi.com serving as authorised agents for such payment systems as PerfectMoney,Bitcoin,LiteCoin and WebMoney.

Virtual currencies outperformed central bank-issued counterparts in 2016 by 125 per cent; they are here to stay, with China being the country where most Bitcoin trading is done globally. Although Bitcoin and other virtual currency users are increasing by the day at over six billion, its market capitalization share is still insignificant in comparison to the trillions of dollars in the global financial market.

Virtual currency is going to be the money of the future. It provides a solid proposition of moving the power of banking regulation into the hands of the consumers with the potential of disrupting the banking system in the near future.