Bitcoin has always been underestimated and this is probably always the case . I try to convince people who refuse to buy some to become aware and learn and it works pretty well because once we’ve gone around the problem we understand that this is the only rational choice facing the almost irreversible nature of this phenomenon.
You have to keep an open mind and be wary of analogies with the past. Bitcoin has emerged spontaneously from the digital world and has experienced a viral spread so strong that most people start adopting it without understanding exactly what it is.
The problem is not whether bitcoin is good or bad, but rather whether or not to consent and to what extent? Bitcoin is the story of the creation of a digital substitute for gold. Its success has been initiated by the function of digital money for practical and ideological reasons but because of its current success is only for what it has become: gold 2.0
Consensus is growing whether we like it or not, we do not have a say . Unlike the gold whose consensus on its status of reference has been inherited from our history, bitcoin is a gold in the making , so it is cheap compared to the price it would have in a world where its status of digital gold would be indisputable.
Just over a year ago, such a consensus was perceived, especially by the nocoiners, as improbable and its value was therefore mainly dependent on its usefulness, which is to carry out transactions beyond censorship.
But bitcoin has the distinction of being inspired directly from gold. There is a limited amount that is extracted progressively by mining. Bitcoin has a value that can not be exactly zero because it has utility for at least some, and paying miners with bitcoins helps fund network operations.
The fact of having arbitrarily limited the quantity, which was not a necessity, means that when demand increases due to need of use the price also increases according to the laws of supply and demand. It is therefore advantageous to speculate on bitcoin when anticipating an increase in demand and it is now the digital gold function that is taking over.
This mechanism makes the value of bitcoin increase rapidly when there is speculation but if prices rise too fast in relation to the speed of adoption and it becomes difficult to sell without having an impact on the market then the conditions are in place for the emergence of a panic movement bursting the bubble and bitcoin returns to a level more in relation to demand for its utility than for its gold function.
The speculative bubbles on bitcoin have already occurred several times but what we are seeing today is a radical change in the market structure . After having reached a certain critical mass, the demand for bitcoin no longer comes essentially from speculation about the increase in usage as a means of transaction but speculation about its future use of digital gold .
This changes everything because if it happens the price of bitcoin could easily go 10 to 100 times higher than what it is today and to consider that this option is credible is a self-fulfilling phenomenon . More people are positioning themselves to benefit from this scenario as we approach its realization. It is also very easy to consult online traffic figures related to the use of cryptocurrencies to anticipate a shortness of breath. Currently the CoinMarketCap website is one of the most visited in the world and it keeps progressing every day. Since the movement is accelerating, it encourages everyone to participate, it’s a real gold rush .
It is extremely simple to see that we are in a one-way scheme and that the true value of bitcoin is not its intrinsic value but its value as a digital gold . The restoring force towards a stable state is not towards a value almost zero like for the tulips but a value so great that it is very difficult to estimate it and that is why one goes there at a high speed. Looking at the graph in logarithmic scale, we see that it is accelerating .
The more people adopt bitcoin, the more its digital gold status becomes obvious and the more the restoring force towards its price as a global store of value becomes stronger . At this rate, the time it takes for the price to be multiplied by 10 will be much shorter than the time that has elapsed since the time when bitcoin was worth only one tenth of what it is today. It is perfectly understandable to talk about a bitcoin price in millions of dollars whereas today it is not even worth $ 20,000.
We are still in a learning phase and once this reasoning is clear for all actors, the bases will be solid so that there is a nice speculative bubble that will put the price in levitation and when the less greedy will want to cash out the bitcoin will drop at a level that will certainly remain above one million dollar.
We are still far from this situation and talking about millions for a single bitcoin that was trading for pennies a few years ago seems too good to be true. This is not the case, this is what we observer day by day and it will certainly not happen without causing problems but the runaway has been triggered and is now inevitable unless there is an exceptional event such as a switch to another cryptocurrency supported by public authorities in order to reinforce fairness. Without such scenario a consensual way out it will be very hard to stop this movement which few people take measure of its strength.
Is it convincing enough to buy ? With such obvious potential if it’s not you it will be your neighbors and you’d better care about the risk of this actually happening. It would be foolish to miss out on what is perhaps the most important phenomenon of the century, and it is difficult to convince oneself of it until you have observed and lived it.
Here is a critique of some arguments that are preventing many from buying. You have to understand them to avoid spreading fear that often gives bad advice:
It is a Ponzi : bitcoin looks like a Ponzi because the money of new buyers inflates the price and produce a huge gain for early adopters. But even if it’s unfair, it’s not a fraud, the operation is known to all (open source) and people are happily buying digital gold knowing that it has no intrinsic value. The mistake is to think that the final value is zero while the value of cryptocurrencies comes from their use as as store of value (digital gold).
It’s a bubble : the bubble occurs when the price rises too fast in relation to demand and it is no longer possible to exit. We are not at all in this scenario, the demand is growing exponentially and the market is the broadest ever known. All types of investors with varied interests rub shoulders, which gives exceptional resilience to panic movements.
This is backed up by nothing : a currency is backed by trust. It is clear that a secure private currency without inflation, without debt and without governance inspires more and more confidence in relation to state currencies that are supported by nothing but trust that is imposed by violence.
At this price it is too expensive : the price does not matter and is dependent on the unit used. A mBTC is worth only about $20. What matters is the total value that is currently about $ 300 billion. In comparison with other masses of money it remains a drop of water. So it’s actually cheap, and since it’s divisible you can only buy for a handful of cents.
An investment can not yield so much : bitcoin is not an investment, it is a wealth as if today we discovered a new precious metal. We would have no idea of the price in advance and have to let the market decide the price. If buying bitcoin gives you the impression to yield so much money it’s because sellers don’t know they are selling it off.
It is a tool for criminals : it has been in the past because it is poorly understood and impossible to censor. Now it’s a very bad tool for privacy and competing cryptocurrencies like Monero have focused on this market. The proportion of criminal activity on bitcoin has become marginal and it is illegitimate to seek to prohibit the use of a service on grounds that a minority is misusing it otherwise it would open the door to a number of prohibitions.
It’s not so useful so it is worthless : the utility is questionable but not zero so it’s worth at least something and that was necessary to make its success possible. Again we must not look for intrinsic value but see the value of use as digital gold. Many of the great successes of the digital age have a value that comes from the use of the network. Facebook creates no content, Uber does not own vehicles, Airbnb does not own real estate, Alibaba does not have inventory, …
It is a danger for the economy : the recognition of bitcoin as a digital gold makes it wealth and the purchase of this wealth is a transfer of money from one individual to another. At this scale, it has no impact on the economy, on the contrary it improves money velocity. In the longer term, this will cause disturbances that will not necessarily be bad and that will eventually happen, it is better to accompany the movement.
The energy consumption is delirious : the figures are impressive but misleading with regard to the type of energy used and the service rendered. The proof-of-work mechanism used by bitcoin to secure the network is a necessary evil but it does not have to use that much resources to function. The problem with bitcoin is that because of price growth, it is economically advantageous to build specialized processors farms (ASICs) for bitcoin mining. This is not a reason to abandon cryptocurrencies but rather to try to improve them.
The government will stop it : governments have no fundamental interest in banning bitcoin knowing that criminal use has shifted to specialized cryptocurrencies. Not only is it technically impossible to prevent the use of the system and people have to be tracked to be punished a posteriori, but above all it is difficult to justify and therefore complicated to build consensus. The irony is that a state intervention seeking to destroy this digital wealth will initiate the transfer of money from the last investors to those who have already cashed out. It’s like if the state was forcing average people to make a donation to some lucky ones including criminals. Such an intervention will effectively turn the system into a Ponzi, an organized robbery. If some states make this decision it is likely that it will be canceled later when they observer how it works in other countries.
The market is manipulated : as a market free from regulation, bitcoin has been much manipulated but as it grows, manipulation opportunities are disappearing. On alternative smaller cryptocurrencies, some manipulations are robbery, and we can expect the implementation of rules to improve fairness on trading platforms. This will clean up the market, and kill bad projects to good ones thrive. Currently there are many projects whose existence is possible just because the price can be manipulated.
You can be stolen / hacked : the risks are not necessarily higher than in real life. On the contrary, it is a good reason to learn about good security practices, which is becoming an increasingly important risk in our lives. Cryptographic keys, double authentication, … With your money at stake you immediately become more receptive. A good reason to offer bitcoins to children.
It is too risky : the risk of losing money within a few months is likely to be actually lower than with many other assets such as a poorly managed company stock. But you can’t measure it and you must never forget the risks that we do not see. The price of bitcoin is volatile but with strong returns which must you make think about how to optimize your asset allocation. Never forget best practices: remain diversified and expose yourself relatively to your level of understanding. In the case of cryptocurrencies, there is a learning curve and it is reasonable to start small and observe.
It’s not going to change my life : a reasoning of a person thinking he missed the boat shutting himself in his mistake. It is not because we did not anticipate something that we should not be interested. Bitcoin may still have the potential to impact your life, and it might be because your friends are getting richer but not you. You have to insure yourself against the regret and in exchange, you will only be able to learn.
We must invest in blockchain not in bitcoin : we must begin by explaining what the blockchain brings to measure the potential. The blockchain uses cryptography, already widespread, to sign and encrypt data. As part of carrying out transactions, the classic scheme is that you sign your transaction with a private key and for it to be recognized by all, a trusted intermediary verify it with your public key and validates it. The revolutionary part of the blockchain is to overcome the need to have a trusted intermediary by creating a framework where actors have an economic interest to participate in the proper functioning of the system. If the blockchain makes it possible to remove the third-party it is because it solves the famous problem of double spending, which would consist, for example, in selling twice your one bitcoin without anyone knowing which transaction to choose. For this it is necessary to be able to timestamp transactions. In theory everyone could be satisfied with the existence of a single blockchain secured by a proof-of-work mechanism and whose sole purpose would be to provide a timestamping associated with an identification code impossible to predict. This would be the only blockchain that has an economic cost to maintain which would be paying miners maintaining the network infrastructure, and for the moment it is the bitcoin that best performs this function.
Transaction fees are too high : this is a problem that slows down the adoption and for which it is necessary to reach an almost unanimous consensus to improve. It as has just happened with the SegWit update. Some take this as an opportunity to create a scam by making poeple believe that the value comes only from the utility and not in the robustness of the network. Bcash is the perfect example, it usurps the name to present itself as the real bitcoin under the pretext that its fees are similar to those that existed on bitcoin when a lot less people were using it. It’s made possible because of a small tweak that can also be brought to bitcoin and especially because not many people want to use the fake bitcoin. To succeed this scam offers access to a compatible copy of the mining system, and it tries to steal the computing power by artificially inflating the price, which is in fact paying miners to abandon the bitcoin for trying to help the scam replace bitcoin. The scam could have worked and collapsed not only the bitcoin but also the itself at the same time. This did not happen because most people saw this coming and bitcoin’s success was already too strong for the cost of doing this to be sustainable. We must never forget that trust is the value and this scam is still alive because of misunderstanding.
If you make money without working it is because there is a problem : you must not be naive, the opportunity that so many people can earn a lot of money without working will not be without consequences. The result of this great redistribution will inevitably be very unfair, and the only consolation is that the redistribution will be different from what we are used to see. Young people who inherit our debt will have a competitive advantage to take advantage of this.
In conclusion, the mechanics of bitcoin is very simple. Demand is increasing, price is rising, confidence is growing and we are starting over. It is easy to verify that demand keeps growing and hard not to participated. This is hyperdeflation, a situation unknown until today. Everyone is encouraged to accumulate bitcoins and avoid spending them. It is normal to try to be insured against of the risk of becoming poorer relative to others. It will probably be difficult to escape hyperdeflation and we must not rejoice too soon because if total adoption really takes place it will pose problems of social cohesion. We have not even realized collectively that the progression of bitcoin is inevitable. We have hardly any idea of the longer-term consequences.
Fred
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