Sunday, January 7, 2018

Bitcoin and other cryptocurrencies

Well we’re in the middle of a blockchain technology boom. Blockchain technology is the software and databases that underlie cryptocurrencies such as Bitcoin and Ethereum. Basically, the blockchain technology creates databases or ledgers that are maintained/updated on a decentralized network of computers.
A Bitcoin is one of up to twenty-one million units tracked in the bitcoin ledger. The ledger is maintained/administered by a network of computers equipped with the appropriate hard and software. The owners of these computers are miners (even my son started recently his own mining operation). Miners are compensated in bitcoin. They charge a bitcoin fee for each transaction in an auction type system. Of course, the highest fee payers get the fastest service.  Currently, miners also receive newly created bit coin for every block of transactions they have verified collectively. The amount of newly created bitcoin paid to the miners will decrease over time to zero when the maximum of 21 million bitcoins have been created.
Currently there are 16 million ‘active’ bitcoins, 1 million owned by the designer or a group of designers, who operate under the name ‘Satoshi Nakamoto’. There were glitches such as the unintended creation of 184 billion bitcoins in August 2010, but the glitch was quickly remedied, and an updated bitcoin version was created restoring the ledger. This update was the first ‘forked’ bitcoin protocol.
Another ‘hard fork’ created Bitcoin Cash which started out with the same ledger as Bitcoin up to the release of this new blockchain protocol on August 1, 2017. A synopsis of the bitcoin history can be found on Wikipedia.
Each bitcoin has a public key in the ledger and a private key known only by the current owner. The keys are generated using public key cryptography. If the current owner loses his key the bitcoin and its transaction history become defunct. It is like losing a dollar bill or coin only there is no finder. In 2013, an owner of 7,500 bitcoin accidentally discarded a hard drive containing his private key – that was expensive, especially in today’s valuation which is close to $17,000 per bitcoin.
A transaction is basically an exchange of private keys and a collective update of the ledger database executed by the miners. Bitcoin are held at a bitcoin exchange in an account on the owner’s name or on the owner’s computer or phone (software wallets) or off-line on a memory stick or similar device called a hardware wallet. You can start your research on wallets and other aspects of Bitcoin at its website: which is not the most exciting experience, but it is functional.
There are about 13 million bitcoin owners, who buy and sell their bitcoin via a bitcoin exchange. That may sound like many, but it is equaling the size of accountholders at the Charles Schwab brokerage in the U.S.  The total system value of bitcoin is currently estimated to be around U.S. $250 billion.
The value of bitcoin is set in an auction system at the bitcoin exchanges and its price is highly volatile. Graphing the Bitcoin pricing looks like a bubble and there is no real underlying value.You may argue that the costs of ‘mining’ bitcoin in terms of computing power and energy required is its underlying value just like the all-in mining costs of gold underpins that precious metal’s value but that is debatable. To speak with Don McLean’s song: “The more you pay, the more it’s worth”.

It is somewhat like fiat money that way. Fiat money value is an expression of the public’s confidence in a state-owed IOU. Bitcoin value seems to be rooted in the confidence its owners have in the personal IOU value of the collective ownership. Bitcoin is attractive in that it cannot be manipulated by any country and that there is, contrary to fiat money, a limited amount of money. Bitcoins are divisible into tiny fractions, the smallest, sometimes called ‘satoshi’ is one-hundred-millionth of a bitcoin.
Most financial experts claim bitcoin and related cryptos are in a bubble. But they are part of the financial establishment which is benefitting from the existing fiat money systems. They represent the current middlemen that are threatened by the cryptocurrency system. Most cryptocurrency owners are retail investors while the professionals of the finance system are generally skeptics. Yet, cryptocurrencies have gained a lot of acceptance, especially in 2017. Lately, you can buy options on Bitcoin in the U.S. futures market; most financial institutions bet on the downside while retail investors bet typically on the upside.
 Is it in a bubble, will it crash?  Very likely but just like after the ‘.com’ bubble the survivors may be the stars of a new financial system and a new blockchain technology that may underpin our society in the future as the main or an alternative system of exchange for goods, products or services.

With transaction costs averaging $28 (mining fees) buying a $2 cup of coffee may not seem practical. But this system is still in experimental stage and there will be many improvements or forks coming down the line. It is a bit like we experimented at home with Atari and Commodore64  and other 8 to 64K RAM desktop computers to learn about desktop computing. These early desktop computers later morphed into laptops, smartphones and tablets and into whatever-more.

Today’s bitcoin and fellow cryptos and other types of blockchain systems (protocols) may be the initial baby-steps of a new financial system and numerous other blockchain applications 10, 20 maybe even a 100-years from now. Also, it is a statement of lack-of-confidence in the current fiat monetary system that is so shamelessly manipulated by our financial and political elites, who’s only purpose seems to be to control our lives in minute detail.

This is an opportunity to get familiar with the future. Sign up to a bitcoin-exchange such as ‘coinbase’; buy a wallet and invest a small, tiny amount in a cryptocurrency. Do this, just so you don’t stand besides the tracks 5 or 10 years from now when this may become a daily-aspect of your life.  
Buy not everything at once.  A hardware wallet, which you can buy on Amazon, is around $250.  Buy $750 or $1500 worth of bitcoin (or whatever currency you prefer) in three or four transactions – approximately $500 per transaction. If you lose it all, then it was the price of education not much more than attending a seminar. If you double your money, sell half to get your original investment back and then with the rest you play for free. 

What is there to lose? By taking part in it, not only may you protect yourself against the demise of a fiat money system (just like when owning gold).  You actually may be contributing to its demise and the demise of today’s financial and political elites (yes keep on dreaming).


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