Bitcoin - The Original "Crypto" Currency And The World It Was Built To Create...
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If you didn't hear about "Bitcoin" and its blistering price rises over the last quarter of 2017, you must have been on Mars or something. One of the biggest "bull" markets in history - the price spiked near the end of December.
The bottom line is that "Bitcoin" is what's known as a "crypto" "currency" (disputed) which has been "trading" higher & higher, with prices presently at around $17,000 per coin.
Whilst it's easy to get caught up in the hysteria of "easy money", if you're looking at this from the point of view of a rational investment, there are several factors to consider...
Overview
Bitcoin is NOT a "currency" (explained in a second) - it's a means of transaction (basically the equivalent of Paypal or VISA). This is vital in understanding the "true" value of the system, and its eventual application in the world.
It has very little "intrinsic value". This is essentially its "food exchange value" - if a nuclear apocalypse happened tomorrow, how valuable is the product compared to food. Its "intrinsic" value is essentially how much food it can be traded for.
Not many people are actually using it. This might not sound like a big deal, but in terms of how "valuable" it is - the core metric to follow is adoption. Adoption is how much, and often, the system is going to be used. Facebook's adoption was off the scale. Bitcoin's? Not so much (right now at least).
The real value lies in the technology behind it ("blockchain"). Blockchain is the real star of the "Bitcoin" show, and this article will really aim to highlight its importance and what it could mean for the future. It's actually quite important.
In this tutorial, we're going to explain the basis of Bitcoin (where it came from etc) and then examine the various attributes it has - where they could fit into the world and what it means (generally) for technology...
⦁ If you want to understand "Bitcoin", you need to look into Blockchain
⦁ Most people have no idea about they're buying/selling. This is a HUGE red flag - ignore the hype and focus on the core elements of the system ONLY.
Although we can't give financial advice, and this is not designed to be a financial/legal article, there are a number of things to understand about the "Bitcoin" hype. Mentions are not recommendations or endorsements - if you are looking at this from a "finance" perspective, you'll want to talk to a professional financial adviser before considering any investments.
What Is Bitcoin?
Market Cap: $275bn
Price: $16,750+
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Bitcoin was developed in 2009 off the back of the "blockchain" database system (developed in 2008). Famously introduced by the anonymous "Satoshi Nakamoto" - a pseudonym adopted by the original proponent & developer(s) behind the "Bitcoin" system.
Whilst the idea of a "crypto" currency has existed for several decades, "Bitcoin" was the first system to bring all ideas together in a usable system that everybody (with access to the Internet) had the opportunity to use.
To clear up any confusion, "Bitcoin" it not a "currency" - it's a means of transaction between two or more parties. Its big differentiation is that it's an entirely decentralized system which means that if you have a unique ID number for someone (equivalent of an IP address), you'd be able to "send" or "receive" money with them.
The way "Bitcoin" works is off the back of the "blockchain" database system, which basically removes the need for a "central" data processor/provider. Simply, instead of requiring the equivalent of "Facebook" or "Google" to retrieve data, the system is able to pull it from 100's or 1000's of systems around the world. This is explained more in a second.
The most important thing to understand about "Bitcoin" is that it's representative of a "new" way to dealing with monetary transactions. Rather than requiring a central processing facility, such as a central bank or government, the system proposes the idea that you'd be able to deal "directly" with other people anywhere in the world.
To facilitate this, the "Bitcoin" system has created a "publicly accessible financial ledger for transactions". This ledger is just an itemised list of all the transactions performed between two or more parties, and gives the ability for different people to "send" money to each other, regardless of whether they're in China, Russia, USA or Australia.
The most important thing to consider with "Bitcoin" is that it uses cryptography (hence the term "crypto" currency) to "hide" the transactions in its database. So... whilst its ledger is available for "anyone" to download, they won't be able to "read" it unless they have a "token" with which they're able to create or edit particular parts of the Bitcoin "ledger".
These "tokens" are known as "coins" (yes, the thing that people are paying $17,000 for) and are basically just a file with decryption settings inside (public/private key).
Everybody "buying" the "coins" have been mislead. They're actually buying "files" which have very little value in themselves. The hype and hysteria about the "Bitcoin" phenomenon has all the hallmarks of a "bubble". Whilst this may be obvious, the big difference is the technology that's powering it.
This is really what people are getting excited about, and is what you should be looking into...
What Is "Blockchain"?
Blockchain is the technology subset on top of which "Bitcoin" (and other "crypto" currencies) are built.
Whilst the majority of people have been blinded by the "Bitcoin" hysteria, the real magic behind the scenes is Blockchain. In order to discern the importance of this, we need to explain how it works.
Most specifically, "blockchain" is a decentralized database system, which means it runs on 100's, 1000's or even millions of servers around the world. This means that instead of having one central data provider, any system which supports the software can join a "network" committed to the serving & processing of a particular set of data in its own "blockchain" system.
Each "system" running with blockchain technology is often referred to as a "decentralized application" due to the way in which the network of systems committed to keeping it running are responsible for processing new additions (called "blocks") to its data. This is where the "mining" stuff comes from with "Bitcoin" and the like.
To fully understand how it works, we need to start from the beginning.
Blockchain isn't new. It was developed in 2008 (so it's almost 10 years old) and was released as open source - meaning that it's absolutely free for anybody to view and edit the source code. Despite this, it wasn't really taken seriously until "Bitcoin" became a hit.
Blockchain is the amalgamation of two other pieces of technology - "Torrent" files and "GIT" (source code management system). These come together to create a system which can be built around to form "decentralized" applications.
The way it works is actually quite simple.
It has two elements - "chains" and "blocks" which are used to store and manage different types of data. Like EVERY application developed for computer systems, the core of the system is a data-set. However, unlike most other apps (which run on the "client/server" paradigm), "blockchain" applications run "peer-to-peer" (more explained in a second).
Instead of having data stored on a central server, "blockchain" data is stored on servers all around the world. They are then "processed" by various systems within that network (called "miners" who receive "bitcoins" in return for processing new "blocks" for each chain).
To describe how "blockchain" works, it's best to use an example.
If you take a telephone directory - in today's world, the data has no "history". If you update it, the updates are deemed permanent and you're unable to change them. The data is likely stored in files which are "standalone"... meaning they have no version and thus people who are changing/editing the directory will constantly have to check for the latest version.
With the "blockchain" system, the directory's central files will be stored in what's known as a "chain". This keeps track of ALL the changes that may be carried out on the files inside it, keeping track of these changes with something called "blocks".
Blocks are used to create "versions" of the new data. So, you may have a central "excel" file for the telephone directory - this file will be tracked by the "chain". Each time you change it, you may wish to create a new "block" which essentially timestamps a new version of the excel file and saves it to the "blockchain" database file. This is then shared with the other parties using the database, to give them access to the latest version.
As mentioned, this works exactly the same as the "GIT" protocol for programming (where "chains" are "repositories") and the system also employs the "torrent" protocol for sharing the data across the Internet.
Why Is It Worth So Much?
At the moment, the only reason why "Bitcoin" has become so valuable is the promise of returns for those who own them. As mentioned, the system itself has no "intrinsic" value, which means that it doesn't "store" value as a country's legal tender would.
Whilst most of the loudest proponents of the "Bitcoin" system are only focused on the "idea" of a "decentralized" currency system (which cannot be manipulated or controlled), the core thing they have forgotten is the basic economics behind the craze.
Whenever you have a commodity, it has a "value" in the world. This value is sometimes referred to as the "tradeable value" - IE what & how much you'd be able to trade the commodity for with other people.
A good example of something with tradeable value was salt. Salt was used as a form of currency in the 17th and 18th centuries predominantly because of its use-value to housewives, who used it to preserve meat. The term "worth your salt" comes from this.
The point is that what people see as "worthless paper" today is actually a store of value - backed by a country's economic influence. The USD is accepted pretty-much everywhere on the planet because you know that at some point, you'll be able to trade it for food.
Consequently, when you come to "Bitcoin" and other "crypto" currencies, you find something intriguing. They have almost no tradeable value. Nobody wants the "coins" to use - only to "trade".
It's a bubble.
The REAL value of "bitcoin" and all the other "currencies" is the way in which they're able to facilitate cross-border transactions. Today, sending money overseas requires central processing services (banks), which not only cost money but also have to reveal their details to regulators & governments.
The new "decentralized" systems bypass that - allowing people to transact with others directly - giving everybody the opportunity to
Because "Bitcoin" is basically just a central ledger (itemised list) of financial transactions, each time money is transacted between two-or-more parties, it's recorded in the list. There is no way to "save" the money from each transaction... you're basically just using the platform to send fiat money to someone else.
And therein lies the point that most people are slowly discovering...
Bitcoin Is The New VISA... NOT The New USD...
VISA and Mastercard are transaction-processing systems which can handle up to 24,000 transactions per second (they only deal with 1,700 per second presently). Bitcoin's network can handle 10 per second.
Neither service actually stores money - they are solely focused on taking money from party A and sending it to party B. Bank accounts are still required and the "technology" behind the processing systems are still required.
Whilst new "Internet" powered transaction handling systems have been created (Square etc), the main issue facing them is they are still tied to the central banking infrastructure (which leaves them open to attack or regulation).
The boon of "Bitcoin" lies in its ability to forgo this requirement. By operating completely independent of any central authority, the system is able to facilitate transactions between anybody, without revealing their details. This puts "Bitcoin" (or any "crypto" currency) squarely in the camp of "21st century chequing system", rather than a currency in itself.
In other words, the "price" of "Bitcoin" does not reflect its value. In investment circles, it would be considered overpriced in its current form.
Should You Buy It?
This leads us onto the crux of the matter - NO.
The ONLY way that people have "made money" with "crypto" currencies is by buying them for a cheap price & selling them for a higher price. The people they "sell" the coins to are generally other "speculators" looking to repeat the process.
The trick to understanding whether the system is "worth" the price is to look at its adoption rate. Adoption determines how many people have started using the system for their own personal, or business, use. It ensures that you're able to discern the "true" value of a system.
Unfortunately, "Bitcoin"'s adoption has slowed, despite its price rising.
This is due to several reasons - some technical and some economic -
- Poor Quality Network
The most important is that its only available after a transaction has been "processed", which has become extremely difficult due to the way in which its backend system has been set up.
Today, Bitcoin's system is ONLY able to process transactions in about 10 minutes... with the entire network only able to handle 10 transactions per SECOND.
This is a major problem as it highlights one of the core technical issues besetting the system - no central processing system means it cannot scale effectively. Any limit inside the system is just going to get worse with growth, not better.
Whilst there have been a number of attempts to fix this (notably in the form of the "Bitcoin Cash" and "Bitcoin Gold" hard forks), the issue persists & is getting worse.
- No Central Leadership
The next issue is there is no central leadership guiding the development of the system. Even the creator vanished in 2010.
This is a problem highlighted by the recent "processing" issues on the network.
Because there is no central "committee" who is able to determine an overall strategy for the application, it's entirely up to the community to fix. As such, when a problem is presented such as "processing times", the only thing that can be done is to create new "forks" and generally dilute the system.
Like the likes of Ripple and Stellar (two very good "blockchain" systems), Bitcoin would benefit massively from a central leadership committee and advisory board... but it won't happen. So its growth will stagnate.
- No New Developments Planned
Finally, there are no "new" developments planned.
Technology moves quickly and - as we've already seen - a number of other "crypto" systems have come to the fore. Whilst these have nothing on the "Bitcoin" phenomenon, they are much better organized and (in some cases) funded than the original.
Therefore, when considering whether to "buy" the coins, you have to understand that it's highly likely that the "Bitcoin" system will become obsolete the minute a new one is released (probably backed by governments). This will not only burst the "bubble" but also prevent many people from being able to regain any losses they had taken.
The underpin of this is that if you're going to "buy" a "crypto" currency, the sole reason you're going to do it is because you hope it's going to increase in price, so you can sell it for a profit.
The harsh reality is that this is likely going to be a short-lived experience, as the "profit" curve shortens dramatically the higher the price of the asset. For example, buying at $3,000 per coin puts you in great profit to sell at $15,000... but if you buy at $15,000, you're going to need the "coins" to reach $30,000 to realize anywhere near the same returns.
The main source of capital that "crypto" coins have presently is coming from truck drivers' savings accounts. In other words - don't buy any "Bitcoins" - the market is due a correction.