You see this word everywhere everyday. Bitcoin.
Every explanation uses the words like blockchain, cryptography, digital signatures,…
Not mine. This article is different. Just read.
Updated the chapter about Bitcoins as a commodity.
This article was formerly just comment to one article of Ramit Sethi - We messed up. An apology from Ramit.
Finishing the comment I have realized it has close to two thousands of words! What? No my blog post is so long.
This should be my new blogpost!
At the beginning, I have to admit that I’m a computer geek and I don’t own any Bitcoin (BTC) yet.
1. Is BTC currency or commodity?
You can look to BTC from 2 different perspectives:
A) Electronic money (cash)
Today, all money is just non-existing numbers on some computers.
(The physical cash is in minority and - in some countries - will be even prohibited by law.)
Since the national currencies are not covered by gold or any other valuable commodity, all money is just imaginary numbers.
The value of any currency is given by trust of the people. Mostly.
You can use seashells as money. If you find somebody who will exchange milk for 2 seashells.
You can use small pieces of clear carbon crystals. If you find somebody who will exchange this small carbon crystal for 5 horses.
To collect some amount of seashells you have to be good in diving and spend a lot of hours underwater.
Or to grow some fruit and exchange it for some seashells.
To collect some amount of small clear carbon crystals you have to dig a deep ground hole and spend hundreds and even thousands of hours of hard work to find one.
Or you can make thousands of shoe pairs to exchange it for one crystal.
That’s the reason the people consider a small clear piece of carbon more valuable than seashell.
But if you will try to pay for a cup of coffee by seashell in London nowadays, you will look pretty weird.
Seashells are not considered valuable today.
If the trend of diamond wedding ring will not be cool anymore, maybe also these pieces of carbons will lose them value as well. (There are rumors that most of the mined diamonds are secretly stored just to keep the value high.) Do you know the book “The Space Merchants”? The oak ring was considered as really expensive jewelry.
What else can we use as a currency?
What about leaves? Everybody can just take them from the nearest tree. Easy. Thousands of leaves.
What will be the value of single leaf? Almost zero. (And the forests disappear even faster.)
O.K. Let’s try something different.
Not common numbers (I want numbers 1,2,3,4,11,254 and 10000) but e.g. prime numbers. It’s not easy to find a high prime number. To find new and new prime numbers you need a lot of effort. Like for seashell or diamonds or gold.
You can physically hold shells, diamonds, gold. You can write down the prime number on a piece of paper but it will not work. Millions of people will create paper with prime number 11.
(O.K. Bitcoin is not the prime number. It would be too easy. Take it as an example.)
O.K., let’s base a bank for prime numbers and they will be assigned to people instead of salary. They can be exchanged for goods and services and this bank will change ownership of numbers accordingly by simply moving some records in some database on some computers. Simple.
Coffee will cost one prime number, lunch 10 numbers and for the new car, you will need 10 thousand of prime numbers.
But the government will hate such bank. It uses non-official currency! And even worse.
Trading with numbers is going under the radar of Ministry of Finance! How to collect taxes in the system not fully under control?
Disable it? Not enough? Put the owner in the jail. Read article about Liberty Reserve .
There has to be something better. Not possible to shut down it. Not possible to put the owner in the jail. It can be possible just without central database.
What’s the opposite of central database?
Database spread over the Internet. The database, where everybody can hold own copy. All transactions will be public. There is no way to cheat or steal such money. Or - at least - it will be horribly difficult.
The concept of the public ledger is great but not the only one. (The concept of public ledger works also in other situations than digital currency - read the article about trading with "virtual" Mackrel tins in the jail .
What if the searching the new numbers is extremely difficult (just for comparison, to seek for high prime numbers is easy-peasy) - like mining real gold or diamonds.
And what if you hardcode anti-inflation to the currency? Paradise!
At the beginning, it looked just like an experiment of few nerds. To pay by numbers? Are you crazy? Who even will sell you something for numbers?
The first trade was 2 pizzas for 10.000 BTCs - probably considered as the fair price for a good joke.
How much is it today? Ehm, 82 million USD (2017-11-23)
As the more and more people started to use it, the value grew. Remember, currency is about trust. And people - even it’s very weird - started to trust numbers. The people started being willing to exchange goods and services for numbers.
Most of the people don’t use Bitcoin as currency but as the investment commodity.
But why the people are using BTC as the commodity and not USD or GBP?
Ehm, they do!
Even USD and GBP can be used as the commodity. ( Forex )
You can buy (e.g.) GBP, JPY for USD, wait until exchange rate will be better for you and sell it.
Because these currencies are mostly (due to interventions of central banks) without big changes, the business plan is based on speculation on short-term small fluctuations.
Why is the Bitcoin such popular as investment commodity?
- You can buy it easier than gold. You need just PC and Internet.
- You can handle it easier than gold. To create BTC wallet is easier than to carry and store in a secure way the physical gold. (Yes, in both cases you can buy just “ownership” and gold or Bitcoins are kept by some 3rd party but it requires a high level of trust.)
- Bitcoin has currently high ratio between demand and supply. Maybe even higher than for gold (not sure about it). That’s the cause of price skyrocketing.
Bitcoin looks like ideal investment commodity.
Gold will keep his value next decades, even centuries. The value can grow or drop but will probably never be zero.
Nevertheless, people want to own gold jewelry some millennia already. And the gold is an important metal for technology too. The current technology life cannot exist without gold.
Bitcoin is different. Its value is given only and only by the willingness of other people to exchange Bitcoin for something else.
If the trust in Bitcoin will drop, nobody will be willing to accept your ones. Nobody will exchange your Bitcoins for some stuff. Neither USD, neither web hosting, neither Steam account. Oh, you are not able to pay for Steam account by BTCs already ( Steam ends Bitcoin payment option ).
Maybe, somebody will sell you 2 pizzas for 10.000 Bitcoins.
Nobody knows what will happen.
Use your brain as for every investment. Diversification…
2. Why is the value of BTC growing?
The basic principle of BTC tells that the price should rise due the hardcoded limited amount of BTCs. The “mining” will stop when there will be about 21 millions of BTCs around the year 2110.
Call it the anti-inflation feature. If you have limited resources with increased demand, the price increases as well. (Check the price of orange juice after poor crop.)
And not only there is the final limited amount of BTCs but also the speed of mining is limited. The complexity of mathematical operations for seeking (=mining) new bitcoins vary to not be faster than about 1 TBC per 10 minutes.
The demand is growing much faster than the amount of available BTCs. What’s the result? Skyrocketing the price.
And more the price is going up the more people demand it. And the price is growing even faster…
3. Will it grow forever?
Who knows? Nobody is able to guarantee permanent value growth. What? Didn’t I said that the value growth is “hardcoded”?
Why would the value go down if the anti-inflation is assured by design?
Easy. People will not trust it anymore or just stop to use it.
Or the government will criminalize the usage.
Then all your savings are useless as nobody will want to exchange your numbers for some stuff.
People who bought a gold at the beginning of the 20th century would be very rich today. (Ups, not if the government steals all your gold.)
People who bought a bitcoins 5 years ago, would be very rich as well. And the government is not able to steal your money.
But government can criminalize the usage of bitcoin.
Or the people will decide to use some other digital currency.
Why? BTC is the best. Or not?
4. Is it currency for terrorist and drug dealers?
As I have mentioned above there is a high risk of Bitcoin prohibition.
The government will explain it by a war against terrorists and drug dealers.
BTC is untrackable and there is no way to track financial transactions of criminals.
It’s a BS. Do you remember? The ledger (database of all transactions) is public. Anybody can have a copy. All transactions are recorded forever.
Of course, there are no real names in ledger but some IDs in form 3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy (https://en.bitcoin.it/wiki/Address).
It looks like a real anonymous address. It is. Until you will sell some your BTCs for dollars. Or you will order pizza with delivery to your flat. There are services that will take your transaction, split it into thousands of other transactions, shuffle them with other users, re-send them to different accounts, merge back to the previous value of transactions.
It makes the tracking more difficult but not impossible. Believe me, NSA has computers for it.
Terrorists and drug dealers would be crazy to use Bitcoins. They still use good old dollars. And not only cash but bank transfers as well ( How a big US bank laundered billions from Mexico's murderous drug gangs , Banks Launder Billions of Illegal Cartel Money While Snubbing Legal Marijuana Businesses ).
Will the government criminalize the dollar ownership? No.
The reason is completely different. The government wants a control. BTC is not possible to control. Yes, you can track the payments but you cannot stop the system. The only possible way is to make the BTC usage prohibited. It will decrease the usage but will not stop it.
And this decreased usage will lower the price/value of the BTC. To use BTC as commodity, you have to watch the situation and sell when anything suspicious the government will plan.
But not only prohibition can decrease the usage and value of BTCs.
People will just to start demand real anonymity. Not because they are terrorists or drug dealers. But just because they can feel uncomfortable if anybody in the World is able to see - among a lot of innocent shopping - one order from (e.g.) a sex shop.
If there will be (and they are already) the currencies with the same features as BTC plus some level of privacy, they will switch.
5. What about other currencies?
According Cryptocurrency@Wikipedia there were about 1100 digital currencies in September 2017.
And to be honest, except few really used currencies, you can divide the rest of them into two different groups:
- playground - somebody just wants to try to code own cryptocurrency or start it as a small community project with “own gold”
Yes, most of the currencies are the scam. The scenario is very similar. “Hey, we have new cryptocurrency! Buy it now for 1USD and we guarantee you the value will be 1000USD in 1 year. Look for BTC. It’s a proof!”
Or even “New have brand new currency we are mining already. Buy shares of this mining pool and when we will start to sell our currency, you will get a percentage of our profit. Of course, people will buy our currency, look BTCs!”
You will buy a bunch of useless numbers and after some while, you will not find anybody willing to exchange them for anything valuable. Not even small coffee.
6. Use it or not?
Why not? Just try it.
The initial effort is bigger than to put some cash to your valet.
You have to create digital valet (software or - if you are paranoid enough - hardware). You have to learn how to use it.
You have to buy some Bitcoins. Ehm. Or millibitcoins.
(Don’t try to “mine” it. You have no chance.)
You have to accept a limited list of places to spend it.
You have to accept that validation of your transaction will not be faster than 10 minutes. Even more.
You have to accept that to be more attractive for “miners” to validate your transaction, you will have to offer some transaction fee. Bigger fee, your transaction will be more “attractive” for validation.
Or you can decide to invest in Bitcoin. You don’t care whether your transaction takes 10 minutes or half day. Wou will buy BTCs and check exchange rate every morning. When you will get retired you can buy a yacht.
The same as you bought a Nokia stock years ago.
Hey, Nokia stock? Oh, shit…
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