Let me preface this article with a few things.
- I’m not, nor do I claim to be a financial professional / bitcoin expert.
- Bitcoin is a highly volatile and you should invest in it at your own risk.
- I own a few bitcoins and hope they win, so my opinions are biased.
Bitcoin is an experimental de-centralized digital currency.
There is no central monetary authority with Bitcoin. Unlike the US Dollar or any other fiat currency, Bitcoins (BTC) are not linked to any government, economy or financial institution. Bitcoins are a highly volatile experimental virtual currency with zero intrinsic value.
Why would anyone use a digital currency?
- Protection from traditional fiat currency.
- Anonymity for legal and illegal transactions.
- Low fee + fast trading anywhere in the world.
- Protection governments, banks and laws.
- Instantly transfer wealth to anyone in the world.
- Cannot be counterfeited and transactions irreversible.
There are is a finite supply of Bitcoins. Currently an average of 300 coins are mined every hour, yet this becomes more difficult each month and the release rate is cut in half each year. The total supply of Bitcoins will plateau at 21m around 2030. That’s 27 years from now…
Evilnight on Reddit describes Bitcoin elegantly,
To use a gross analogy, it is like bittorrent for money. It’s peer to peer and decentralized, and like all other such systems, utterly beyond the control of any one individual, government, or group of people. If you want to shut it down, you must turn the entire internet off and walk away.
In order to make changes to bitcoin itself, the majority of the people using it must upgrade their software to something that supports the upgraded features. Now that so many use it, the idea of any one entity gaining a controlling (51%+) share of the network is simply impractical.
The value of all money is based on one thing and one thing only: confidence. The US Dollar has value because people have confidence in it, because it is backed by the US Government and has a long history of performance. Before that, they had confidence in it because it was backed by gold. They had confidence in gold because it was portable, finite, useful, pretty, hard to tarnish or destroy, and also had a long history of use as a currency.
The confidence in bitcoin comes from its immunity to outside interference. It is governed by well understood and totally transparent mathematics. It has many of the same properties of gold, though it gets them in a different way. It also has utility beyond that, being the only means to privately conduct financial transactions with anyone, anywhere there is an internet connection, with no chance of outside interference.
Like any technology, there will be growing pains. Just as flaws in the computerized stock market can lead to crashes from time to time, flaws in the services built up around bitcoin (not to be confused with bitcoin itself) can and do have flaws. Yesterday’s crash was due to the current sad state of bitcoin exchanges, where one can exchange other currencies for bitcoins. People who were buying and selling and doing business in bitcoins directly had no problems. Only those attempting to profit on converting bitcoins to other currencies were affected.
It is an experiment. It is, without exaggeration, a staggering, brilliant work of cryptographic ingenuity. The skills that are required to dream up something like this are the kind of skills that get one a lifelong career at the NSA, on Wall Street working for the likes of Goldman Sachs, or a top engineering job at companies like Google or Microsoft. That is part of the reason people think Satoshi was more than one person. It’s like when people say that Shakespeare was too good to have been written by one man – that kind of cleverness and ingenuity is one of a kind.
Of course, now that the idea has been had, one can create other networks. Bitcoin, being open source, can be cloned, changed in any way, and started from scratch. That is where Litecoin and Namecoin come from, and there will be more. Bitcoin has the first mover advantage and is the only currency of its kind that is currently beyond being taken control of by an outside entity due to its current high level of adoption and participation.
So Bitcoins have a limited supply and zero intrinsic value. If the US economy goes up, the USD goes up with it. Bitcoin is tied to nothing.
A limited supply of bitcoins is attractive because it prevents hyperinflation and but don’t automatically assume that because they’re limited that inherently makes them valuable.
Example: If you own an original painting by Pablo Picasso, it’s worth a lot of money because of the limited supply and the value attached to the Picasso name. If you own a painting by Ben Hebert, it’s not worth crap.
So if we wake up tomorrow and no one is using Bitcoin and merchants aren’t accepting it, then the trust dies. No one believes in Bitcoin and there’s no value there. People sell all of their coins for more secure currency and those of us invested bash our heads against the wall.
I don’t think this will happen as more and more people and businesses open up to it. For Bitcoin’s price to ever stabilize it will have to be used more in transactions and less for investment. Widespread usage is coming… Knife Party just announced that you can buy their new album in Bitcoins.
Why I believe in Bitcoin.
I think we should all be concerned with the future. Whether it’s crazy dictators threatening nuclear holocaust, computer viruses that can shut down entire industrial systems, or the drones flying overtop the US. There’s probably going to be another recession in our lifetime, China’s economy is going to eclipse ours and the jobs… well they aren’t coming back.
A currency that is devoid of government interference or manipulation (they can’t just create more) can withstand world crises, financial meltdowns or hyperinflation. In fact, when Cypress annuounced that they were seizing 6% of deposits the Bitcoin price boosted. Bitcoin removes the barriers for securing, transferring or spending currency between borders. It’s going to have the same impact on the financial system that the internet had on media.
There are two major factors that have me excited about Bitcoin. These are my gut feelings.
- Destabilization and weakness in existing currencies
- Bitcoins ability to create a true frictionless global market
Warren Buffett in a 2012 letter to shareholders -
“Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control. Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time.”
When the government of Cyprus proposed that they would be taking at least 6.75% from all bank accounts (even insured), the global interest in Bitcoins grew exponentially. The original deal fell through, though now those with uninsured accounts stand to lose all of their deposits. It has served a reminder that there are dangers associated with depositing money into a bank account.
Banks are notoriously the most evil organizations in the world. Those involved in the scams, insider trading, money laundering and other egregious crimes almost never have to face real punishment. If there’s a good reason to trust the bank you’re with, let me know.
From The New Yorker -
“The weakness in existing currencies stems from lack of faith in institutions—particularly central banks, which are often in league with commercial and investment banks. When a government bails out a failed bank or insurance company—in essence, by printing money—the net effect is that the currency as a whole is debased, in favor of a few and at the literal expense of everyone else, which amounts to a fair description of today’s global financial system.”
Bitcoins are free from any government regulation or oversight. They provide an option for users to store their finances in a place that the government cannot touch and they can take anywhere in the world with them. Jump on a plane, access the internet and then open up your Bitcoin wallet. Your life savings is right there with you. You can’t do this with any other form of currency or commodity.
This sounds great, but you’d be crazy to put your life savings into Bitcoin at this stage. That said a lot of people have made decisions others thought were crazy and were handsomely rewarded.
A Frictionless Global Market -
The internet has opened the global economy to buying and selling and Bitcoin will facilitate the transactions. It’s already powering an underground black market for drug dealing and other illegal items, but the potential is so much greater than that.
The desktop era is dead. No one is going out and buying desktop computers anymore and other countries, especially those in the third world will skip the pc generation entirely and go straight to mobile. This is already happening.
But now if I’m in South Africa and want to purchase something in the United States, there are so many regulations and barriers that come up. The transaction from one currency and financial institution to the other takes time and can often get rejected or cancelled without notice. Taking too many orders from outside of the United States or have too many incoming transactions? Paypal will freeze your account without a word.
With Bitcoin these barriers don’t exist. The buyer can directly pay the seller with almost no fees. There are no failsafe methods like what scammers do when they issue a chargeback to the merchant or use a stolen credit card. The risk for sellers is minimal. Once the Bitcoins are in your account and validated by the system, that’s it. Now Tthere are no methods for repercussions (although for widespread adaption these or some sort of liability will have to be developed).
Bitcoin allows transactions to occur anywhere in the world at any time without the fees or laws.
But no one accepts Bitcoin?
This is one of the most exciting things… how will entrepreneurs embrace this new currency and create products that use it? There are companies like Bitspend, Bitcoinstore, Reddit and Mega that accept Bitcoin now. Others will offer to exchange BTC to USD or other currencies for a .5% fee. This will only grow exponentially over the next few months / years.
New markets are new opportunities and the big money venture capital funds smell blood.
Jeremy Liew recently wrote why VCs Love The Bitcoin Market on TC,
As a VC, my interest in the Bitcoin ecosystem is not ideological but mercenary. I see the opportunity for Bitcoin to disrupt multi-billion-dollar markets, but in doing so also create new big markets. There are three key markets in Bitcoin:
Wallet. Holding your Bitcoins for you, serving some of the checking account functions of a bank.
Exchange. Converting from USD to Bitcoins and back.
Payments. Helping merchants accept Bitcoins for their transactions.
Bitcoin is at the center of the perfect storm. Venture capitalists, hedge funds and the rest of the 1% that run the world are going to take huge positions in Bitcoin and pump it up with new companies and media coverage.
Expect a constant stream of articles and media coverage on new uses for Bitcoin, scams and people talking about how it’s a complete waste of time that will never catch on.
A lot of smart people are going to tell you that this is the dumbest f*cking idead they’ve ever heard of. They don’t understand the world. How much things are changing and how further we’re going to go within our lifetimes.
Do I believe Bitcoin will be the catalyst that changes how we exchange currency on the web? Not yet. But there’s a need and something will fill its place.
If you look at illegal file sharing online, people want to be able to watch their favorite shows wherever they are from whatever device they own. If the content creator doesn’t provide a solution, the market does. It’s why Game of Thrones is the #1 most pirated show in the world.
It’s hard to conceptualize all of the uses for Bitcoin, because they don’t yet exist.
When the internet was invented, the “experts” laughed at the proposed uses and scoffed that their industries could ever be displaced. Even when you look at Twitter which was founded in 2006, originally no one had any use for it. Now it’s the second most popular social network in the world. Pinterest… same. Instagram same… and none of these have the potential impact that Bitcoin does.
Paul Krugman, economist and winner of the Nobel Prize (PKarchive) -
The growth of the Internet will slow drastically, as the flaw in “Metcalfe’s law”–which states that the number of potential connections in a network is proportional to the square of the number of participants–becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.
Paul isn’t alone here. A lot of people failed to adapt to new technologies. See – Borders Books and Blockbuster.
We cannot predict all of the uses that people will have for Bitcoin, but it’s impossible at this point to brush off. Could it be worth the same as a share of Netscape Stock? Sure, but we’re not in a bubble yet and a ton of people made a ton of money off of Netscape before it collapsed.
I’ll be the first to admit when the Bubble comes and exit on the way up with the intention to re-enter at a later date. The bubble will be here when there’s advertisements on TV about “bitcoin investment opportunities”, a segments on your nightly news and discussion at the watercooler at work. If you ask 10 people maybe 2-3 of them know about it. Your parents… forget about it.
So should YOU take a position in Bitcoin?
Yes, but only if you are willing and able to take a complete loss on your investment.
Don’t bet the farm or do.
One of my friends invested around $10,000 USD in Bitcoin in January when the exchange rate was roughly 10 USD = 1 BTC. The price peaked at $250 on April 10, 2013, he got out making a handsome $250,000 and re-entered a few days later when the price returned to $75. I’m still sick to my stomach for missing out on that kind of action.
To conclude I’ll steal this paragraph from Trace Mayer at Bitcoin Magazine (read the hell out of this)…
You know what’s cool? A $150 per bitcoin? No, a $1m per bitcoin. It may take a decade to get there but the fiat currency market coupled with fractional reserve banking is the largest bubble in the world and since the Great Credit Contraction has started along with Bitcoin being a censorship-resistant honey badger of a currency it just may eat these bankster cobras.
If you want to know how to get started with Bitcoin, you can shoot me a message on Facebook or wait until the next post.
More intelligent reading:
- A Guide to Mining Bitcoin (VICE)
- The Bitcoin Bubble and the Future of Currency
- The Bitcoin Boom (The New Yorker)
- Bitcoin May Be the Global Economy’s Last Safe Haven (Bloomberg)
- Yes, people are hoarding bitcions (Quartz)
- Bitcoin Investors Hang On for the Ride (WSJ)