Bitcoin: At $20 000, is it a bubble?

If you have not bought any Bitcoin, please read this post carefully.

If you have bought any Bitcoin, please read this post carefully.

To understand whether or not Bitcoin is a bubble, we first need to understand Bitcoin.

Unique unto itself, the first cryptocurrency combines three things into one thing:

  1. It is a social network platform.
  2. And it is a currency.
  3. And it is a store of wealth.

Nothing ever invented does all these things at once:

  1. LinkedIn is a popular social network platform, but that is all it is.
  2. Government-issued (fiat) currency works as money, but is a poor store of wealth due to inflation and other risks, such as sovereign incompetence.
  3. Gold is a popular store of wealth but can’t be used for transacting.

In more detail:

  1. The value of any network is determined by how many people subscribe to it. Bitcoin, being neither a spoken nor written language, but rather a mathematical protocol, transcends culture, nation, border, morality, regulation, and space. Being decentralized, it has no central server. It has tens of millions of users worldwide, which number is increasing exponentially as it gains mainstream adoption. Among the thousands of cryptocurrencies, Bitcoin is the original, the simplest, and is worth more than all other cryptocurrencies combined. It has the brand name. It is the brand itself, and constitutes the very reason that the (potentially world-changing) blockchain protocol was even invented. Other digital coins are called either altcoins or bitcoin. Bitcoin is elemental; well described as digital gold. One could call an altcoin “a Bitcoin with an app”. As its network size increases, so does Bitcoin become more valuable and more powerful.
  2. Bitcoin is de facto currency. Money is money because people think it is money. Bitcoin is used the world over to purchase most anything. It is legal tender in Japan. Its (current) high transaction cost makes it unsuitable for small transactions, but its impenetrable security makes it perfect and popular for large ones.
  3. Although Bitcoin was originally intended to be a “peer to peer electronic cash system” (as per its white paper written by its cryptic inventor, Satoshi Nakamoto) it has now become so valuable that people tend not to want to spend it. Instead, they “hodl”. This development has made Bitcoin’s ‘scalability problem’ (for fast, cheap, transacting) somewhat irrelevant, at least for now.  Its attraction, then, as a store of wealth has a lot to do with its combination of unique properties: It is indestructible, immutable, unseizable, infinitely portable, at once visible and invisible, divisible, impenetrable and anonymous. Added to this is its provable scarcity.

We can see why Bitcoin appeals. But is its price justified?

Three famous examples of bubbles are the so-called Tulip bubble of 1637; the dotcom bubble of 2001 and the housing bubble of 2008. Let’s compare each one to Bitcoin.

We can immediately see that to compare Tulips to Bitcoin is ridiculous. I won’t waste time with this other than to say that tulips are perishables that can be produced ad infinitum.

The dotcom bubble is more interesting. But again, you are comparing the frenzy for shares in companies in a new industry (Information Technology) to that of a single entity (Bitcoin) which, as we have seen, is neither a company, nor a product, but a mathematical protocol. More useful would be to try to compare the ‘internet’ to Bitcoin. But the internet is not quantifiable, whereas Bitcoin very much is.

The housing bubble was one giant systemic fraud perpetrated by banks, with government collusion. So, again, to try to compare it to Bitcoin makes no sense because you are comparing something vague and obtuse with something specific.

But I can see where people using these analogies are coming from: They are pointing to the frenzy; the mass hysteria; the FOMO (fear of missing out).

Yet history has examples of things whose prices started off low, and have continued to rise, and whose prices have never ‘burst’. Although there are lots of examples, including some companies’ shares and certain real estate, let’s choose three: Gold (but a shiny element dug out of the ground); fabled works of art; and just for fun, Superman Comic #1 (1938).

These things all have something in common:

  1. Unique utility
  2. Desirablity
  3. Scarcity

To pay $1000 for an ounce of gold (there is only so much of the stuff available) is objectively no more unusual than to pay $1.5 billion for a Da Vinci painting (the only one on the market), or $1m for a Superman comic (only ten known examples of #1 survive).

Which brings us to Bitcoin’s attributes:

  1. Unique utility: Bitcoin has attributes possessed by no other entity, which create its utility.
  2. Desirability: Unlike art, comics, and even gold, it is Bitcoin’s combination of qualities that have created its international demand.
  3. Scarcity: The last of 21 million Bitcoins will (theoretically) be mined in the year 2140. Today there are an effective approximately eight million Bitcoin in circulation, which number will not materially change in our lifetimes: The protocol ensures that 12.5 new Bitcoin are mined every ten minutes. So even if you had a computer the size of the Empire State Building, your mining reward would remain a static 12.5 Bitcoin every ten minutes (the protocol cranks up the ‘difficulty’ accordingly).

In other words, we have seven thousand million people chasing eight million coins. Hence a price today of some twenty thousand times more than a single US dollar.

Because Bitcoin is almost infinitely divisible, and because users can have more than one wallet, it is impossible to know how many people worldwide own this crypto coin.  But, be it five million or fifty million in number, it is still a tiny fraction of the world’s population. With a market cap of say $300 billion, it constitutes a minute fraction of the world money supply.  Institutional investment (pension funds, hedge funds, endowments, and so on) into Bitcoin is right now approximately zero – for the simple reason that Bitcoin is not as yet not ‘approved’ for these highly regulated vintage environments (apart from a couple of ‘futures’ exchanges… but of course a futures contract is no more than a side bet on where Bitcoin’s price is going, and is settled in fiat). But it will be. The consumer will so demand.

For me then, it makes no more sense to say that Bitcoin was, or is, a bubble, be it at one dollar, at $10, at $10 000, at $100 000, or even at a million dollars. The relationship between its utility and its scarcity makes the price what it is. It is an idea whose time has come. At $20 000, Bitcoin is not a bubble, but a bargain. The herd is coming. It may become the most valuable thing in the world.

Sound financial decision-making happens when we first listen to others, then do our homework and think for ourselves. May this blogpost please constitute part of your own homework, so that you can formulate your own opinion, and become your own expert? Then at least you can live or die on your own best work. Remember that as far as the markets go, there are no experts. Not one. And not me.

This post has been written for entertainment purposes and does not constitute financial advice.

Postscript:

The flipside of FOMO: One evening in 2010 a youngster in London was hungry, and broke. But, in his computer, he had some ‘digital tokens’. So he used 10 000 “Bitcoin” to buy two pizzas. Today he can reflect with pride on having consumed the most expensive meal in the history of mankind. Two hundred million dollars’ worth of crust and toppings. Why didn’t he just buy one?

 

 

 

 

 

 

 

 

 

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Bitcoin: The Revenge of the Herds

“There is nothing as powerful as an idea whose time has come.”

                                                                                               – Victor Hugo

Today is a watershed moment in the financial history of the world.

One “Bitcoin” has certifiably become worth ten thousand times more than a single US dollar.

For me, the reason for the explosion in value of Bitcoin over the last nine years is easier to understand not so much for what Bitcoin is, but for what fiat (government-issued) currencies and other stores of wealth are not.

Let me explain.

Right now, the US dollar is still the benchmark ‘valuator’ of all things in the world – from gold to oil to all fiat currencies (from the Latin word fiat – “let it be done”), to collectibles, to Bitcoin.

However, nobody – and by that I mean the man in the street – understands what a US dollar is, what it represents, and how many there are, or what its future holds. The fractional reserve system means that banks can create money out of thin air, to the tune of many multiples of the cash that they have on hand. Apparently there is nothing wrong with that.

We are led to believe that the US dollar is ‘backed’ by the US economy, or something to that effect. Never mind the (ever-growing) $20 trillion national debt, which nobody ever seems to want to talk about. The whole bang shoot is propelled by the tax dollar. The folk that demand tax dollars are the same folk that print the stuff, and this arrangement seems to have worked very well and is fine-tuned by that champion of the economy, the Chairman of the Fed. All that we can do is ‘trust’ that ‘they’ know what they are doing and that ‘they’ are acting in our best interests. Which they are, right?

For example, in March 2016, the US government took a plane load of hard cash (well, actually it was a few jumbo jets’ worth) – $1.7 billion to be exact – literally tons of money – and delivered it to the Shah of Iran, who must have been very grateful for this magnanimous gift. This actually happened. Who knows what deal was done behind the scenes. And who knows what that money was and is being used for. Is Iran famous for its philanthropism? No. For all we know this gift is being used to build atom bombs to drop on your and my heads, or to sponsor dusty folk to proselytize their unique culture in whichever way they deem. This was a deal done by the US government…  the same one that issues US treasuries… the most secure financial instruments on earth (well… until now, that is).

The ‘Iran deal’ (excoriated by outsider President Trump) is a perfect example of the opaque behavior of big government at the highest level. The Fed must have been involved in the deal, because to arrange the assembly of $1.7 billion worth of non-US denominated banknotes must have required the pulling of some heavy strings. One thousand seven hundred million US dollars.

Does this kind of behavior inspire confidence in the US dollar, and the people behind the US dollar’s creation and management? Umm… no.

What about the so-called “financial crisis” of 2008, when a whole bunch of regular folk lost their entire net worth? Weren’t the big banks that created this “crisis” (a euphemism for “government-condoned fraud”) supposed to go bankrupt? Yes they were. But they were bailed out by the same people that gave all that ammo (excuse the pun) to Iran. Remember of course that this ammo is forcibly extracted from that obedient drone… the taxpayer. And which bailout money the evil geniuses that created the problem in the first place used to reward themselves with bonuses greater than all the pay you and I will ever see.

That’s the USA. What about all the other countries of the world? Venezuela? Greece? Zimbabwe? South Africa? And that political and cultural quagmire, known as the EU?  All of whose governments are purveyors of opaque, odd, behavior, and who create and control the currencies that their people are forced to use.

What then, about gold? We all know that gold is an age-old store of wealth. But… how much gold is there? Who controls the price? How much gold is there in Fort Knox? I have no idea, and if the US government told me how much gold there was in Fort Knox, would I believe them? How much gold do the Russians have stockpiled?  Ummm… also no idea.

Anyway, to buy physical gold bullion, you need to authenticate that the stuff is pure, and that you actually receive what you’ve paid for. This requires that you ‘trust’ the seller. And once you have that 24 carat ingot in your hands, who do you trust to keep it, and to not ‘modify’ it? Who would you trust, not to tell that you had it? How would you use it to buy stuff, like computers, cars, or companies? And how do you divide it amongst your kids? Take it with you overseas? On the other hand, you can simply buy gold as a financial instrument that is somehow and apparently attached to real gold, from an institution that you ‘trust’. Mmmm. Never mind that its pricing is a mystery, and doesn’t seem to be going anywhere any time soon.

Finally, a quick word about shares: If you own a share in a company, you effectively own a portion of an actual enterprise that provides goods or services. Great. But what if you own shares in a photographic film company (Kodak), then some smart-aleck comes along with a digital camera? Or you own shares in the Whatever Car Company, and Henry Ford arrives with his production line? If you are not personally involved in the operation of the company, you are at the mercy of its owners’ ingenuity and integrity: What happens inside a company is outside your control. Apart from that, the market ‘morphs’ all the time. Shares are great, but you do need an element of luck to go with them. And, of course, trust.

I won’t even talk about leaving your money in the bank.

Then along comes Bitcoin.

First, a short refresher of what Bitcoin is, and how it works:

Like trying to comprehend the ‘internet’ in the early 1990s, Bitcoin as a concept does require a paradigm shift in ones thinking, because even though it uses physical hardware and software to make it work, it remains an abstract concept (rather like the fiat money that banks create out of thin air via the ‘fractional reserve’…).

‘Bitcoin’, then, uses a mathematical protocol called the ‘blockchain’, which is a ledger of records arranged in sets of data, called ‘blocks’.  Each new block is linked with its predecessor via a cryptographic function called a ‘hash’, which is a whopping 256-digit byte of bits. Each hash is created by a partial, known, input from the previous hash, to form the new hash in this unbroken chain. Hence the name blockchain. (Your reward for being the first person to solve a new hash is that you are presented with some shiny brand new Bitcoin. You will appreciate that the computing power required to do this “mining” is vast and very expensive, because it is now extremely competitive. By the way, to stop clever, rich, geeks from solving hashes faster than every ten minutes, the “difficulty” is cranked up via a cryptographic dial built into the protocol.)

To change any data in the chain will require that all the data in the chain, right from the genesis block, be changed.  This is mathematically improbable, to put it mildly.

However, apart from its immutability, the other big deal about the blockchain is that it is public. I prefer to use the term “distributed ledger”, which tells there is no central server; no special entity that is in charge.

The consequence of a distributed ledger is threefold:

Firstly, everyone can see every transaction, past and present, any time, and forever (well, for as long as the internet persists).

Secondly, being open source, it effectively uses the computing power of all the users on the system, combined. It is easy then to see why it is computertorially invincible.

And thirdly… there is by definition, no intermediary. Does not exist.

So, from where does Bitcoin derive its so-called ‘value’? In his white paper, its anonymous originator, “Satoshi Nakamoto” describes Bitcoin as “a peer-to-peer electronic cash system which would allow online payments to be sent from one party to another without going through a financial institution.”  There is no mention of ‘linking’ its ‘value’ to anything. The expression “electronic cash system” for me says that it is a digital token. No more, no less. On the first day, its value was zero. Only a few Bitcoin existed. The ‘early adopter’ geeks used them to buy pizzas from each other.

The essence of Bitcoin is that it is not a form of ‘money’ that represents something else (a country’s economy, or gold, or even other money) but rather, that it is a ‘digital value system’ that lives in the ether. But because you can now use fiat currency to buy Bitcoin (via the various exchanges that have popped up, including in South Africa), it has become called a currency because you know exactly how much fiat you need to use to buy some. And you can dispense with it like you can a regular currency.

Remember, all Bitcoin are created by solving a cryptographic riddle. So, to obtain Bitcoin, you can either solve a riddle, or you can get existing Bitcoin from someone else. But it is easy to see that because their Bitcoin came at a price, their owners are not exactly going to give them away. Especially when everybody wants one.

Which brings us to the subject of its finiteness. As we have seen, every ten minutes, when a new block is generated, the creator of the block is rewarded with some Bitcoin. Fifty, to be precise. Every four years, the reward halves. (This is called “halvening”.) For the first four years, until 2014, the reward was a hundred. Now, and until 2018, it is fifty. You can log on to www.coinmarkecap.com and under “Circulating Supply” you can watch the number refreshing in front of your eyes. (Right now it’s around 16 706 000). Next year it will be 25 per every ten minutes. Doing the math, you will arrive in the year 2140 with the last of 22 million Bitcoin ever created. A provably finite number.

This numerical certainty is apposite to the ad hoc way in which the fiat currencies of the world are organized, which is literally by crisis management. Versus Bitcoin, being backed by mathematics inside an open source cryptographic protocol that can only be changed by consensus among 95% of its users. Close to perfect. Each Bitcoin is precisely divisible to one hundred millionth of its size.

Transacting with Bitcoin does not require you to ‘trust’ the intermediary. There is no intermediary to trust. This is the best way of solving a problem: By starving it of an environment in which to exist in the first place.

Furthermore, all transactions are recorded and visible. To the end of time.

They are immutable and irreversible. No exceptions. Ever. There is no “manager” to email, no hotline. No CEO at whom the buck stops. You are the CEO to start and stop your own buck.

Transactions are at once both visible, and invisible: Anyone can see all the cryptographic identities but nobody knows, or can know, to whom they belong… unless the owners choose to disclose them. One day, when the government legislates for you to disclose your Bitcoin balance, you can nod and give them your public key so that they can go and have a nice skwizz, and tax you accordingly.

Provided that a person can connect to the internet, the socio-economic implications of Bitcoin are astonishing. Let’s see. Your ability to transact financially transcends the language that you speak. Your level of literacy. Your economic status. Your geographical location. Your net worth. Your creditworthiness. Your nationality. The national currency to which your country is tethered. Your tax status. Your age. Your gender. Your health. Your attitude towards the free market and whether or not you think things are “manipulated”. Your opinion of your country’s government’s ability to manage its money.

None of these things is relevant to Bitcoin. For the first time, ever, it gives you the chance to obtain and spend and save something that is invisible, indestructible and inalienable. Three very useful attributes that no other asset or currency on earth possesses. Not even US treasuries.

Bitcoin is the man in the street’s revenge on the system. It provides a sense of financial freedom and security for which he is prepared to pay dearly. To the tune of ten thousand dollars, for a single coin.

As I write this, the market capital of Bitcoin is approaching a fifth of a trillion dollars. The herd is coming.

Don’t say I didn’t warn you.

Chris Van

28 November 2018

Caveat:  This blog is written for entertainment purposes and does not constitute financial advice. At one stage, Bitcoin fell from $1200 to $200 and took three years to recover. Cryptocurrencies are volatile. Enter at your own risk. And then, above all, hodl!

Occam’s Razor and the Moon

What do a 14th Century Franciscan monk and the Apollo 11 space program have in common?

Many years ago I was a court orderly in the South African Supreme Court.  One case I remember well:

Accused of first degree murder was a sincere, well-spoken gentleman. He presented his defence with patient intensity, explaining to the court in minute detail how it was impossible that he could have committed the crime. His story was convincing, his logic impeccable. It became clear to me that the wrong person had been arrested. Amazed as I was by the expressionless investigating officer, was I grateful too for a court of law whereby the accused could prove his innocence of a vicious and senseless crime.

With relish I waited for the state prosecutor’s challenge. She would need to keep her wits about her.

But she stood up and said to the court, “My lord, I only have one question for the accused.”

The man in the dock looked at her, and waited.

“Can you please tell the court what your fingerprints were doing on the murder weapon, and on the deceased’s refrigerator?”

After a second, he said softly, “I don’t know.”

“No further questions. The accused may stand down.”

I didn’t realize it at the time, but this was a perfect example of “Occam’s razor” at work: Once you have determined something as being the truth, there is no point in exhausting other options.  This cognitive tool was mooted by William of Occam (1285 – 1347), a logician and Franciscan friar, from the village of Occam in the English county of Surrey in which he resided. Even Stephen Hawking acknowledges its power: As he writes in A Brief History of Time (in another context): “It seems better to employ the principle known as Occam’s razor and cut out all the features of the theory that cannot be observed.”

In life we cannot be absolutely 100% sure about anything. An honest criminal justice system acknowledges this, requiring a standard of proof beyond all ‘reasonable’ doubt versus beyond ‘all’ doubt, which we know is unachievable. Even if a man’s life depends on it. On which a man’s life did, and which he lost, by being duly hanged.

Occam’s razor applies what is called a “heuristic technique”: An approach to problem-solving that looks at the practical realities, which although not guaranteed to be perfect, are sufficient for the immediate goal. Heuristics are mental shortcuts that ease the cognitive load of making a decision.

William of Occam’s razor is not emphatic: It just says that once an observable set of facts has been accepted as the truth, we hold onto it until we are presented with a superior set of facts.  Criminal law, again, offers excellent examples of this: When DNA evidence supersedes earlier evidence, often with heart-breaking results.

In our example above, it remains possible that the accused was indeed innocent, and that one of an almost infinite set of circumstances had played out on that fateful day when a lady lost her life while she was baking a cake. But we can’t live our lives staring into space, pondering the infinite.

Which brings us to NASA and Apollo 11.

I was seven years old and can remember listening to the 1969 radio broadcast; Neil Armstrong’s crackly voice proclaiming one small step for [a] man, one giant leap for mankind. An understatement if ever there was one. A human being from planet Earth, setting foot on another celestial body. An achievement of unmatched magnitude and magnificence.

Every astonishing event elicits its disbelievers; either as to the happening itself, or as to its engineers. Apollo 11 a prime target; events do not get much more amazing than walking on the moon.

Some months ago, to mollify a friend who persisted in calling the moon landing a “hoax”, I visited the internet, only to discover an online bun-fight between believers and disbelievers, each side convinced that the other was a bunch of gullible fools.

The believers have the establishment on their side; NASA’s version has the credibility of being the word of the United States government. Deniers – conspiratorialists – the “lunatic fringe” have a burden of proof that requires more than a balance of probabilities: Demolition the minimum standard to dislodge the incumbent. Society cannot function without taking certain information for granted, especially when it is encyclopaedically entrenched.

I confess to being somewhat irritated that even after watching extensive footage and argument, I was unable to find anything that would put the matter to bed, one way or the other. No Occam razor moment.

Then I found it.

The fingerprints on the murder weapon. Evidence so pure that everything else became redundant. Unlike the Supreme Court judge mentioned above, I was not required to make a judgment, either for or against the question at hand, on which somebody’s life would depend. All it had to be, was good enough for me. To put the matter to bed for myself, and to be able to move on.

For my part, I now do not believe, for one second, that man ever set foot on the moon, or even went anywhere near the place.

And here is why. Let me share my personal Occam’s razor moment with you.

Imagine that you have just spent four days, first in a space rocket, then in a special “lunar module” first to orbit and then to land upon the moon. (Not an astronaut. You.) Then you opened the hatch and got out and climbed down the ladder. Then you set foot on the actual moon dust, and took your first steps, as the first human being to ever actually walk on the moon. With one sixth of the earth’s gravity, you’d now weigh about 15kg, yet your legs would have the same power as they did on earth. Even with your space suit on, how would that feel? I don’t need to help you answer. Now imagine that you walked around (well, you would be hard pressed not to be leaping around like Superman) for a few hours. Then you hop back in the capsule, press the buttons, and then take off again and hook up with the waiting rocket. Then you fly back down to Earth, and finally parachute into the ocean, where you are picked up James-Bond –like by a waiting boat. Then you arrive back on terra firma. You are put in quarantine for a few days, then you go to a hotel and freshen up. Then you and your two buddy astronauts appear before the TV cameras for your first interview. Imagine your disposition as you walk in from the wings, to appear, for the first time, to a delirious audience, as the first person to have walked on the moon, to the waiting world. How would you appear? How would you feel? What would you want to say to your fellow humans, as the one person privileged beyond belief to have been singled out to have that moment?

If you were a Hollywood screenwriter, and were asked to write a movie script called “The Man Who Went to the Moon”, how you would describe that scene, as the climax to your movie? That unique astronaut – with his two co-astronauts flanking him?

If you were to describe that scene from the footage you are now going to see on YouTube, the producer reading your screenplay would laugh at you. He would think you had no passion for the subject, no grasp of human nature.  That you were a screenwriting moron. Because you would be describing three shifty-eyed, nervous, men that looked like schoolboy pranksters that had colluded to get their story straight for the headmaster. With Teleprompters. Yes, that’s right, so that they could remember what to say.

You would describe three men, fiddling with their pens and briefcases (in case they needed to remember what they saw, and how they felt on the moon) continually glancing at each other, and talking in stock phrases and being unable to remember if they saw stars or not. And with no emotion. Zero. Your character has just come back from the moon and has no emotion about the experience at all, and can’t decide if the Earth was big or small from his lunar vantage point.

Here is the footage. Remember, this cannot have been edited nor photo shopped. It is 100% original and authentic. Which is what sets it apart from any other photographic and other evidence that you may come across regarding Apollo 11.

I find the interview cringeworthy.  Almost unwatchable.

Never mind the footage of Neil Armstrong in 1994 on the 25th anniversary of Apollo 11, when he told a group of college graduates, “There are breakthroughs undiscovered… to those who can remove one of truth’s protective layers.”

Why on Earth would he say a thing like that?

I rest my case.

 

1969 Post landing press conference (raw footage): https://www.youtube.com/watch?v=gKl_oXxsQiA

1994 “Truth’s protective layers”: https://www.youtube.com/watch?v=gCsYwgxZVHo

Bitcoin – Opinion piece

It is thrilling and frightening to see how the so-called crypto currencies – never invented as an investment – are now the hottest thing in town. More than in town. On the whole planet. From rice paddy sifter in Yuanyang to hedge fund guru in Wall Street, people are taking hard-earned cash to buy something online… that does not exist.

With hindsight, everything will have been so obvious. Every week that goes by gives tantalizing new clues as to how this dramatic cyber-chicanery will pan out… if we only knew how to interpret them.

In 2008, an anonymous persona under the pseudonym “Satoshi Nakamoto” invented an open-source (i.e. there is no central server) digital ledger – that records ‘blocks’ of transactions. Each block is then ‘chained’ to the next block, using a cryptographic signature.  In 2016 the word “blockchain” entered the lexicon. Its power as a tool that provides decentralized transactional certainty cannot be overstated. It is one of the great inventions of all time.

The following year (2009), Satoshi Nakamoto used this protocol to start an online user-to-user payment system with tokens that he called “bitcoins”. For a single dollar you could buy yourself a bitcoin and have fun using your online “wallet” to pay a merchant or whoever, without having to bother about things like banks and borders, or supplying your name and address. All you needed was internet access, and voila, you were your own bank. No middleman. No borders. No forms. No credit check. Provided you didn’t lose your password “keys”, your bitcoins were 100% secure. To steal your bitcoins, the thief would have to rewrite every single transaction from day one. Not possible.

This “bitcoin” fad caught on. There was even a “rewards” program in place, so that if you could find a faster way to validate a pending transaction between two other people, you could earn yourself some bitcoin for your trouble. People with time on their hands even built special little programs to “mine” bitcoin on their home PCs and have huge fun earning a couple of ‘em and using their reward to buy a pizza to celebrate. Today, Bitcoin mining is a multi-million dollar industry.

Imitation being the sincerest form of flattery, Bitcoin spawned copy-cats. There are now some 900 other “bitcoins”, and counting, all of them using Satoshi’s famous not-so-secret blockchain recipe, available at a website near you. Some even dangle special things in front of you called ICOs (initial coin offerings) to get you hooked.

With the Bitcoin price now some four times the price of an ounce of gold, and some four thousand times the price of a dollar, what next do we do? Talk about FOMO! (Fear of missing out.)

The adoption of Bitcoin as actual money had two consequences:

The first was that the price started to climb.  In its quest to replicate a precious metal, Bitcoin had needed two qualities: Scarcity, and progressive difficulty of ‘mining’. Bitcoin’s genius protocol enabled both to be achieved at once:

As we saw earlier, new Bitcoins are created as the reward for ‘miners’ who win the contest with other miners to validate a pending transaction.  Just like the mining of real gold, which becomes more and more difficult as the underground element becomes scarcer, the Bitcoin mining reward decreases by 50% every four years. This is called ‘halvening’. The last halvening event will take place in the year 2140, after the definite total of twenty one million Bitcoins have been created.

The market’s friend is certainty, and while the market seems to be wearing this ‘cap’ with pride; the price of Bitcoin seems to know no limit.

The legal expression sui generis describes a situation “of its own kind”. For me, that is what Bitcoin is and is how we ought to manage our thinking. I am not saying that Bitcoin won’t crash. It will. It keeps on crashing.  And then it recovers. Every time. At first, the price-volatility may look extreme, but is the wild fluctuation not commensurate with the vast price increase in the eight year time period?  Some have called Bitcoin a bubble. But there are lots of examples of things that have become valuable from almost nothing and stayed valuable.  Bitcoin’s sustained value over nearly nine years must exempt it from the bubble epithet.

The second consequence for Bitcoin was that, once trading volumes increased, so did transaction time and cost. This has been dubbed Bitcoin’s “scalability problem”. If you wanted your transaction validated faster, you could do so by bribing the miner to hurry up. But merchants struggled with the long validation time. Seven transactions per second does not compare well with Visa’s two thousand.

Yet the world did not lose interest in buying Bitcoin, even if they could not use it in the way for which it was originally intended – as money.

Why?

Unlike real gold, the ultimate supply of Bitcoin is provably finite. Gold may be an established store of wealth, but it makes for a poor currency, because it can be corrupted by being alloyed with other metals and is a magnet for robbers. Nor is it easily divisible or measurable. By contrast, Bitcoin is divisible to eight decimal places. It is infinitely portable, unlike its weighty mineral counterpart. Nor does it require physical safekeeping, other than to secure a password (easier said than done, as we all well know). Bitcoin too has ease of access and a ubiquitous market: Most anyone can purchase Bitcoin for even a few dollars, or make a purchase of any size, locally or internationally with equal ease. And above these things, its owner knows that the safety of his coins is in his own hands. The protocol is unhackable. There is some $70 billion dollars’ worth of Bitcoin up for grabs – a handsome payday for devious digits.

Some say that Bitcoin’s price has increased because speculators have jumped on the bandwagon. But what of the sheer size of its market?  Any entity with internet access, from teenagers, to syndicates, to corporations, to fund managers, to entire countries, who deem that owning Bitcoin is desirable, can do so. Anonymously. The current $140 billion crypto currency market capitalization is a drop in the ocean of the world money supply and I don’t need to give examples of countries whose populations don’t trust their governments or their national currency.  It is impossible to know how much of Bitcoin’s price is driven by gamblers. Perhaps we are seeing a once-in-a-generation online gold rush for “the internet of money”.

The question is whether Bitcoin is doomed to be the ‘carrier wave’ for another crypto phenomenon that supersedes it, either as a currency, or as a store of wealth, or both. That is a possibility. The ‘Bitcoin bears’ may yet have their day.

What is the likelihood of that happening?

Bitcoin possesses what I would like to call the ‘accolade of origin’. It was, and will always be the ‘first’. It is the byword and benchmark for blockchain currencies. Perhaps the existence of the word “altcoin” – to describe any crypto currency that is not a Bitcoin, tells us everything we need to know. With hundreds of altcoins competing with it, this clunky, pioneer blockchain currency still owns some 50% of the market. Bitcoin is legal tender in Japan. The giant accounting firm Ernst and Young accepts Bitcoin as payment in their Swiss office.

There is something called the ‘network effect’, which is very powerful: Once people are used to something, even if something demonstrably better comes along, they yet may not go with it. Another altcoin may achieve mainstream appeal as a trading currency, but Bitcoin may remain the safe haven as the ‘gold’ of online currencies. Remember, it is provably unhackable. That is one hell of an attribute. And it is finite. Never mind that it is slow and clunky. People like to know that their money is safe, and that the government can’t just print more of the stuff when they feel like it.

If Bitcoin’s scalability problems can be solved (apparently the “Lightning Network” may do the trick) then Bitcoin could become mainstream money, and a store of value. The best of both worlds. Its price could go crazy high, as some have predicted it will.

Every day that Bitcoin survives decreases its chances of being usurped.

The next international eruption will tell us a lot. To where will the “flight to quality” be? To US treasuries? To the British Pound? To gold? Or to a new, world reserve currency that exists in an online public ledger?

We shall find out.

Happy crypto-coining. Good luck.

Kindly note that this is not financial advice, even though it is.

Chris Van

22 August 2017