Is it time to start taking Bitcoin seriously as a new global currency?
A few years ago I remember chatting to a friend who was threatening to throw a few quid into bitcoin as a fun speculation. That was early 2014 when there was a lot of news coverage about this new phenomenon of block chains and cryptocurrencies. I told him that he must have too much cash too burn if he was willing to throw his money away on such an obvious bubble that was going to pop at any time. The price then was around $500. Yesterday Bitcoin smashed through the $1,800 mark for the first time. Below is a graph of the market price.
Warning: Everything that follows is purely for informative and educational purposes, this is not in any way an encouragement to go out and buy Bitcoin. In fact I’d really emphasise that the returns of the last year are unsustainable and very reminiscent of the dotcom bubble where people had a sense that this was the next big thing and threw money into terrible ideas. No one should put more money into this stuff than they can afford to lose in its entirety.
And if it does completely blow up in a few week’s time you can say that you heard it here first.
Forget about speculating, is it actually useful?
A Layman’s Guide to Cryptocurrencies:
One thing is clear I don’t know much about anything when it comes to Bitcoin so I decided that I would talk to the top Irish expert that deals with cryptocurrencies. Working in high finance by day you will find him trawling crypto related sub-reddit forums and submitting letters to the SEC by night. Depending on the day that you ask him and the price of the coin he is a crypto advocate, critic, commentator and speculator. Rodger Delehanty CFA has been kind enough to provide Digital Chief with slides of a recent presentation he gave on the subject and I have picked out some highlights that shed a little light on the subject. You can View All slides here.
The Basics of Bitcoin
Most simply it can be thought of as programmable cash. Ideally, bitcoin will be to money as the internet is to information.
• Open Source — Anyone can view all the underlying code or propose tweaks.
• Decentralised — No one is in charge. No central bank. Very difficult/impossible to censor.
• Peer to Peer — A la cash. No intermediaries as with visa/mastercard.
• Permissionless — Anyone can build an app on top of the network. Anyone or anything can have a wallet — be it someone in the 3rd world with no id, a 13 yr old, a self-driving / owning car or a terrorist group. The network is dumb and it does not discriminate.
• Trustless — Every node on the network can independently verify all transactions.
• Immutable — Once bitcoins are transferred they cannot be charged back. Once something is posted in the chain it cannot then be edited later as everything is sequentially dependent.
• Public — Everyone can see the details of all transactions on the blockchain.
What will Bitcoin be when it grows up?
Bitcoin is and has been different things to different people:
Gold 2.0 — For 21st century goldbugs and libertarians. To them BTC is a crypto-asset that replicates all the positives of gold, (limited supply, independent of central banks, fixed supply / known monetary inflation etc) without the negative of being very hard / expensive to store and transport.
21st Century Cash — The potentially tiny transaction fees can enable widespread uses / applications (see disrupting ebay, paypal in the complete slides) which aren’t economical at current money transfer expense rates. BTC would also enable easily transferring money across borders — i.e. remittances to the 3rd world.
Banking as an app and providing financial services to the unbanked where the only pre-requisite is a mobile phone.
Speculation Vehicle — BTC has had very volatile returns in last number of years, largely very positive. In many ways the blockchain/crypto space is like another dot-com bubble. People feel that ‘this is the future, I want a piece’ but don’t understand the fundamentals. All crypto-currency mkt caps ~ 12 bln $.
Some Long Term / Idealised Visions for Bitcoin
- Disrupting lawyers. Smart contracts — BTC programs can write contracts that only execute when certain conditions are met — A trust “deliver 1,000 btc to my daughter’s address when she turns 18” or that the address that represents ownership of my house automatically transfers if my name and a certain unique message appears on state death notice website.
• Disrupting Accountants — Recording every transaction from a given address on the blockchain. If you or a business did most / all commerce on the chain, then all accounting could be automated.
• Every block on the chain has a verified timestamp — you could include a message with a transaction which is a hash of a text file that describes a patent, research paper proving you were the first person to do something, first reporter of a story etc.
• Disrupting investment banking — Very easy to issue shares on a chain that represent equity in a firm, opens the idea of an IPO to much smaller companies. This has already started happening on the Ethereum blockchain — “ICOs”Word of warning from Delehanty — Even if any of this stuff comes to fruition the development of the infrastructure will take many years.Check out his full slides here: A guide to BTC by Rodger DelehantyKeep it digital,
P.s. I would still firmly believe that the market price is crazy at the moment. However I am fairly bullish on the idea that cryptocurrencies in some guise or another are definitely here to stay.
p.p.s. If you are interested to learn more, this post is surprisingly easy to read and seems to make a lot of sense: reddit:BTC the circle of competence
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If all that talk of Bitcoin has left you feeling a bit frazzled, here is a Friday feel good video guaranteed to put a smile on your face. If you have not seen it before, it is well worth taking a few minutes out of your day to have a look.