Tag Archives: cryptocurrency

Bitcoin breaks the limits of natural division, being deflationary isn’t a bad thing

Naysayers have remarked that Bitcoin is a Ponzi scheme. And that it will ultimately fail for various reasons.[1] Of course, take what I’m about to say with a grain of salt, as I have most definitely drank the crypto Kool-aid. (And it tastes really, really good!) If Bitcoin is a Ponzi scheme, then so is every stock market exchange on the planet. In some, limited ways, I suppose I do agree. These exchanges, especially the more unregulated they are, can be environments where the strong pray on the weak. Value is not created out of thin air in these markets. When someone profits off their market positions, it’s directly due to the loss of someone else’s position. It’s not entirely bad, but you can see how this environment can represent a sort of “Ponzi scheme” where wealth transfer goes from one group of people to another. It becomes a full-fledged “scheme” when those big players attempt to manipulate the market and influence price swings in their favor.


The Slate article I linked above is rather old, but I wanted to address specifically one point the article makes: that Bitcoin’s inherently fixed supply is a bad thing. Bitcoin has a maximum supply of about 21 million units, all of which won’t be released until¬† around the year 2140. I disagree with the Slate article because I feel the author fails to understand the beauty of Bitcoin as a completely digital currency. Because it is digital, it is represented using mathematics. It is not tied to physical limitations, like how many times you can split a gold nugget until it cannot be perceived as valuable by the human eye. Today, a Bitcoin can be split to fractions of 10^8. Most people who transact in Bitcoin today (at the end of 2017) don’t deal in whole Bitcoins. Today, a single Bitcoin would run you about $8,200.00 USD. This means that if we used Bitcoin for day-to-day transactions, like buying a coffee at Starbucks, it would cost you about 0.00061 BTC (~$5 USD). That might seem like a silly fraction, and it might be difficult for people to work with numbers represented that way. That’s why the classical metric prefix system exists! You can express this same quantity as 0.61 milli-BTC. Or maybe even 610 micro-BTC. Because Bitcoin is currently split with up to 8 digits of precision, this allows it to gain in value without reducing it’s ability to be used for smaller value transactions.

It is certainly possible that a single whole BTC will reach astronomical values. If this happens, it may be necessary to change the software algorithm to allow for more significant figures. While not trivial, it is definitely something that is possible to do. Bitcoin is not a static technology, it is constantly being worked on and improved. If the time comes that more significant figures are needed, they will most certainly be added. In this hypothetical future, we could be transacting in amounts of 0.000000001 BTC (or 1 nano-BTC). Let’s run with this for a moment: what if a $5 USD coffee costed 1 nano-BTC? That would place the value of a single whole Bitcoin at $5 billion dollars. Okay okay! Before anyone bites my head off, I’m not suggesting this will be the valuation of Bitcoin any time soon. I’m just providing a hypothetical scenario which is easily decades away, if it ever came to be.

But what about hoarding? The theory goes that in a deflationary currency, it is a problem because the value of the currency increases, while the cost of goods and services decreases. This could cause individuals to hoard the currency, because it will be worth more tomorrow than it is today.[2] Sure, there is definitely some truth to this, but I believe the one difference here is exactly what I explained above. We have never had a system that can so naturally adjust to using a smaller and smaller precision of numbers until now. Even when the House of Medici, the historic Italian family which created one of the most prosperous banks in the world which made use of novel book keeping and accounting methods, there was still a natural limit to what they would record. At the end of the day, they were recording physical things: 1 gold, 5 silver, 10 copper. 4 eggs, 1 cow, 20 loaves of bread. Each of these has a slightly different limit of “natural division” that can be applied to it. In terms of precious metals, you could divide them up quite a bit, but you’d eventually want to stop at a size that you were able to hold comfortably. Any smaller than that and it could be lost too easily. All of these concerns are now¬†gone with a system of accounting like Bitcoin.

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.