tech

Why China and Russia have had no real effect on Bitcoin and other cryptocurrencies

Whether you follow Bitcoin and cryptocurrencies or not, you’ve likely seen the headlines report on China’s recent crack down on Initial Coin Offerings (ICOs) and public cryptocurrencies markets.[1] Russia recently held a high profile conference with Ethereum creator Vitalik Bucherin, which was thought to be a huge boon.[2] But then Russia began to disavow cryptos, in  favor of their own national cryoto.[3] Many people reduced their holdings after this news broke and shouted dooms day epithets to anyone who will listen. This was followed by a handful of influential financial magnets (e.g. CEO Jamie Dimon, and others) publically denouncing bitcoin. The markets crashed by over 25% in a matter of days.

Now with the summary of recent events out of the way, I want to address at least part of the story: the part where China and Russia’s actions don’t really matter for Bitcoin and other cryptocurrencies.

Distributed means there is no central source of control

It is virtually impossible for any single authority (e.g. China or Russia) to exert full control over Bitcoin. Ignoring some theoretical problems which are technical in nature, as long as the Bitcoin network is secured by miner nodes all around the world, it remains distributed and highly resistant to singular attempts to control it. Even using access control techniques to restrict access to the Internet can be easily circumvented using VPNs, cellular networks, and internet protocols like Tor.

Ultimately, the real question in my mind is whether or not cryptocurrencies have become popular enough that people will continue to want them despite what their government does. If the demand remains strong, then cryptocurrencies will survive in these countries. And so far, it seems like that is the case. One key aspect of cryptos is that you can do peer-2-peer transactions, without any banks or central institutions involved. This is very similar to dealing in cash! Imagine if the government attempted to block you from trading $10 in cash with someone else? Basically impossible!

Loss of mineing farms is another’s gain

China made a big impact in the past several years by steadily increasing their mining share of the Bitcoin network, ranging from having 30% to as much as 70%[4] of the Bitcoin network hashing power. China has not cracked down on mining yet, but if they did, it would only open the doors for others to jump in. Russia, for example, has already begun courting miners who are seeking asylum from hostile governments.[5]

Mining would perhaps be less of a vacuum phenominon if Bitcoin was still a completely nascent technology. But now that the cryptocurrency is making headlines in newspapers and news shows around the world, people are paying attention. Stories of how lucrative mining can be are everywhere. The problem for individuals and small time mining operators is competition. But if that competition drops, say by 50% or more, it would most certainly create a vacuum effect, being filled quickly by opportunists.

Several countries have very favorable outlooks on cryptos

We see several examples of countries, with a money system in shambles, increasing Bitcoin and other cryptos at exponential rates. Venezula is a prime example. Basically, because their national currency has lost their people’s trust, people are turning to alternative means of value transfer. In these countries, a single Bitcoin can trade for 20-40% or more versus the more open global market. Before you get excited and think you see an arbitrage opportunity, just know that I’ve looked into it a couple of times, and unfortunately there are almost always barriers to entering these nascent markets.

Other countries like Japan, South Korea, and the United States appear to be open to having cryptos around, but they want to regulate it a bit more. Whether it’s for tax purposes, or money laundry prevention, the point is that several big player countries see a future with Bitcoin and other cryptos in it.

ICOs do need to be regulated

Initial Coin Offerings (ICOs) have emerged as a new and novel way for startups to “crowdsource” their funding. In essence, they work by creating “smart contracts” along with “tokens” on cryptocurrency networks that support these features, such as Ethereum. A smart contract is basically just a small software application that runs in a secure and reliable manner on a blockchain. These “tokens” are simply arbitrary units of value. Tokens are typically sold by ICOs in exchange for a promise of service (e.g. the token can be used to pay for the new service once it launches) or for speculation that the startup will succeed, and others will want the token in the future, thus increasing the price.

The problem is that without any regulation, these startups can basically form at the drop of a hat, and ICOs can be about as valuable as dirt. Of course, this is true if you invest in any startup, be it on a publically traded exchange, Kickstarter, or another way. You run a very high risk of losing your investment. But in most of these cases, you have someone you can rely on (like the Securities and Exchange Commission) to weed out the frauds and scammers. ICOs often do not have this.

Summary

This post focused on the (lack of) effect countries have on the future of bitcoin and other cryptocurrencies. While the markets might react sharply to negative news, these swings are emotional and temporary. If nothing else, I look at these dips as opportunities to buy into cryptos while they are lower. Year-over-year, month-over-month, cryptocurrencies have gained in value. This makes the long term prospects too good to pass up!

Want to enter the Bitcoin market?

Unless you’ve been on vacation for the last month or two (which if so, good for you!), you’ve likely heard about a rapidly growing technology called Bitcoin. Bitcoin has experienced dramatic growth over the past couple of months, thought largely to be fueled by global economic instability. This theory works because if you, as someone who holds a certain country’s currency, don’t have faith in the value of your currency, you might look at converting that cash into something else. Bitcoin has become attractive because it is not controlled by any governments, and thus is not tied to the general success or failures of those governments.

What are Bitcoin, Cryptocurrencies, and Exchanges?

There are a lot of foreign concepts in the world of Bitcoin. I’m going to attempt to give you a super brief crash course. You likely don’t even need to know all of this in order to get started, but it’s not a bad idea to start trying to understand it, if you’re going to seriously invest your money into it.

Bitcoin is one of many different cryptocurrencies that exist. Cryptocurrencies are entirely digital units of value which are backed by a massively distributed ledger which records ownership and transactions. This distributed ledger is operated by miners, which include regular people like you and me, who run a small piece of software on their computer in order to help validate the blockchain. The blockchain is simply the term that refers to the distributed database running across all the different computers in the network.

This all works because of several fundamental key aspects of blockchain technology. Perhaps the most important is the immutability of past transactions. Once a transaction is recorded in the blockchain, it can never be changed. This is because every computer in the blockchain network has to validate new transactions against the blockchain, so to try to forge an older transaction, you would have to rewrite the blockchain, and also get a majority of the computers in the network to accept your new blockchain. This is an incredibly difficult thing to do with intent to change an existing transaction.

Exchanges are a common vehicle used in stock markets to trade units of stock. So, a Cryptocurrency Exchange is simply a way for you to trade cryptocurrencies! Many exist, and not all are created equal. The price you pay (or get) for a Bitcoin will be determined by the exchange you participate in.

How can I buy Bitcoin?

Buying Bitcoin has become as easy as online banking. You first need to choose a cryptocurrency exchange. There are dozens, perhaps hundreds, out there. You want to select an exchange that is easy to use, has good trading volume, and is respected/trusted by the community. Trust is important when using exchanges, because at some point, they will be in control of your money. If you can’t trust them, then you’ve just signed away your fortune.

I highly recommend Coinbase for both new and old Bitcoiners, and I use it often. They’ve made it so easy to buy and sell Bitcoin that it really doesn’t feel any different from moving money around in an online savings account. Coinbase also has industry leading protections, such as FDIC Insurance on your USD Wallet equivalent to what you get with US Banks. ($250,000 insured) They also have general insurance protecting against cyber attacks, hacks, and employee theft. This is all very important, even though it’s probably the last thing you want to think about!

Click above to sign-up for a Coinbase account using my referral link and you’ll get $10 worth of BTC after you fund your account with $100 or more.

 

What about Ethereum and other altcoins?

You may have already heard about “competition” to Bitcoin by the likes of Ethereum or perhaps another cryptocurrency. These are grouped together to be known as the “altcoins” (alternative coins). Coinbase allows you to trade in Ethereum and Litecoin, in addition to Bitcoin. Each cryptocurrency has a wealth of information and community behind them, and they are not all the same. For example, Ethereum aspires to be more than a cryptocurrency. It seeks to provide a distributed platform for “smart contracts”, which are basically small software applications, that run when certain conditions are triggered. This allows for a much more flexible exchange and ownership of anything valuable, such as titles and deeds. If you want to explore other cryptocurrencies, you should do your research just like you would if you were researching a company to invest in stocks of that company.

Where is all of this going?

Bitcoin seeks to provide a viable alternative for using fiat currency. It can already be used to buy goods from thousands of merchants online and in traditional brick-and-mortar stores. It’s still in its infancy in terms of being a widely used payment mechanism, but the future looks bright with change. As more tech companies work to make the technology easier to use and more accessible, more and more people are adopting it. Each of the other cryptocurrencies seeks to fulfill some other purpose, all of which are just starting to explode now.

If you’re simply interested in the speculative nature of the Bitcoin price, you can easily find analyst opinions saying anything from Bitcoin reaching $4000 by the end of this year, to hitting rock bottom instead. Yes, it’s possible that Bitcoin and the other altcoins can lose some, or all, of their value. It’s an open, global market, just like any other. But as long as there is demand for it, the price will continue to rise.