Bitcoin – show me the money!

Continuing the series looking at cryptocurrencies, blockchains, tangles, bubbles and other interesting concepts like mining, forks and paper wallets.

Enough with the background stuff already!  Show me the money!

Obviously the top-of-the-mind recall name in this space is Bitcoin (BTC). Bitcoin is a currency, just like the tenner in your pocket.  The $10 note is a thin piece of plastic that two parties in a transaction agree is worth that amount and we trust that the bank will honour it when we go to deposit it.  So just like the $10 note, Bitcoin has no intrinsic worth but it can be used to buy and sell or store value.

me.me

And a Bitcoin does NOT look like this:

thesun.co.uk

(It doesn’t look like anything at all, it is digital.)

Disclaimers:

  1. Neither the author nor WhaleOil are Registered or Authorised Financial Advisors and nothing written here should be construed as advice to buy or sell anything.  
  2.  The author owns a few cryptocurrencies, so is likely to be biased.

Bitcoin is different from the tenner in that it cannot be forged or falsified.  You cannot cheat the system. It has no geographical boundaries, so no forex fees buying from another country. There is no central bank or Federal Reserve behind it to inflate or deflate its value and it is pseudonymous, a bit like the tenner in a cash transaction, it is very hard to be traced back to you.  No personal details need to be exchanged in a Bitcoin transaction.  Hence its early adoption by the bad-boys on the dark web who thought that Bitcoin transactions were fully anonymous.  See here for an article on this.

So, what’s not to like?

You are completely on your own.  If someone socially engineers your credit card details off you and steals from your account, there is often assistance to be had from your bank.  An unusually large bank transaction may well be queried by your bank.  Not so with Bitcoin.  If someone gets access to the password securing your Bitcoin stash and cleans you out then it is ‘all over rover’. No call centre to cry to, Fair Go can’t help, it is gone for good. Like the chap who destroyed a hard drive before removing the password key to 7500 Bitcoin. Ouch!

Also, as a currency, Bitcoin has a major disadvantage in that transactions are slow. Visa can handle over 20000 transactions/second, a Bitcoin transaction is closer to 250/minute.  This is because of all the computational maths involved in securing each transaction.  See last article.

Bitcoin eats power! The power consumption of all the computers doing all this maths has been calculated as being greater than the entire power consumption of Ireland or Wyoming.

So why are they going up in value if computers “just make them”?  There is a physical limit built into the Bitcoin system of 21 million coins and about 17 million have been mined to date. As the number grows the rate of production of new coins decreases. So there is a scarcity built into the system.

“Ordinary” money (or fiat currencies) can, and are, simply created at will by central banks and so the value drops over time.  A national currency is only as good as the trust people have in the Government.  See Venezuela or Zimbabwe for examples of currencies worth zip.

So is it a Ponzi scheme?

No, a Ponzi scheme is where early investors are paid out from the deposits of late-comers. This is not the case for Bitcoin as the supply is restricted so late-comers have to convince an early adopter to part with their coins. The laws of supply and demand apply so the price increases.  

OK, then, so Bitcoin must be a bubble, just like Tulip mania, the South Seas bubble, the Dot-Com bubble?  

We will pick up that thought another day.

 


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