Lots of the same questions come up over and over again, so I decided to write an unbiased examination of the currency intended for new people. It is released under the Creative Commons 3.0 Share-Alike, so it can be reposted in part or in full, used in commercial projects, whatever. I just ask that you credit me (Adam B. Levine, mindtomatter.org)
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We should talk about Bitcoin
Examining the New Currency Crazeby
Adam B. LevineDisclosure: At time of writing, the author owns 15btc
Have you heard of Bitcoin? Imagine money with rules encoded in a completely transparent system powered by voluntary, incentivized participation. Nobody can tamper with the rules unless at least 51% actively think it’s a good idea and go to the trouble of switching to a new version of the software which supports the change. So the rules are pretty secure and automatically enforced. You can’t bribe the protocol.
In recent weeks we’ve seen the value of these digital assets skyrocket, today on April Fools day, Bitcoin breaking the $100 USD barrier per coin for the very first time. Truly a momentous day, but will the joke be on us? With over 1000% gains since the beginning of 2013 it seems obvious that a correction is in order. So why do some Bitcoin proponents look at me like I’m an idiot, incredulously explaining the eventual profit potential of
And they’re not wrong if you buy the premise. It goes like this:
“Bitcoins are better money than what most people use today. As people realize this fact they move value into Bitcoins and out of their local currency” (Dollars, Euros, etc.)
Advantages:
More Divisible
You can send someone .000000001 of a bitcoin if you wanted to, try that with a dollar.
Very Low Fees
which actually go to finance infrastructure - The default fee for a transaction in bitcoin is .005btc, it gives you a little warning if you try to send something below that - But that was set when the value of a bitcoin was about a dollar, so you can expect normal fees to retract to .00005btc soon I imagine.
Internet Cash -
Credit cards suck, identity theft is common (Twice myself in the last few years), and we give vendors of digital goods way too much information. Bitcoin with its unlimited wallets gives you quite a bit of anonymity in your transactions without jumping through any hoops.
Faster Cheaper Borderless
Have you ever sent a wire transfer? It costs $20, takes at least 3 days. If you’re sending money that needs to be changed to local currency you can multiply your cost on the number of banks you go through, and each one of those institutions has a record of what they did for you and who you sent it to next. To send a Bitcoin to someone in another country is as simple as sending it to a computer sitting next to you. It can take as long as 3 hours to clear and your cost even at the current “high” default is $0.50 USD - Technically anyone can see your transactions, but if both parties use new addresses (as simple as clicking a button and giving it a name for context) there is literally no way to know who in the world is sending what to who. You’re hiding in plain sight because every other person to person transaction looks exactly the same as yours.
Whew! Those are some compelling advantages Bitcoin winds up fielding over legacy currencies. With these features in mind those bitcoin advocates explain:
“…And now people are waking up to the fact that their money isn’t safe after the mess in Cyprus, so they’re exchanging their paper money for Bitcoins. “So is it a bubble?”“No! It’s just a revaluation because as value flows out of dollars and into Bitcoins, it’s people looking at their options and deciding Bitcoin is a better fit for what they need.“But, it really REALLY looks like a bubble”“Well, I’m not saying the price will never go down again - Markets don’t go straight up and to the right forever, but one thing is different about Bitcoin than any other asset market - People are trading REAL bitcoins, no financial derivatives. No leveraged promises to bitcoins that don’t exist. The price is defined by the actual value people are willing to pay for the rare asset, which is very different than in a market like Gold or Silver where at least 100x as much paper instruments trade as the actual physical metal.”
But what are its disadvantages?
Irreversible
Don’t Screw up! If you make a typo in your address and wind up sending coins to the wrong address or an address that doesn’t even exist, you’re screwed. There is no “Undo” button, there is no bank you can call to put a hold on the transfer.
Bitcoins are cash so once they’re gone they’re gone, I don’t know if that’s a good or bad thing but it’s definitely something to keep in mind! Low fees and distributed systems mean nobody is being paid to sit on the other end of help line if something goes bad, so the responsibility is on the individual user (that’s you!)
Uninsured
If your bank goes out of business, you probably have deposit insurance which swears it’ll replace up to a certain amount (100,000 in the EU 250,000 in the US). On the other hand, if you’ve only got your bitcoin wallet stored on a computer that requires a wipe, chances are really good you’re screwed.
This is very avoidable by copying your wallet.dat to a safe backup location but we all probably know someone who will make this mistake at least once, and at these prices it’s an expensive mistake.
Unaccepted
The value of those dollars in your wallet are guaranteed to you by the fact that the US sits in a dominant world position, and therefore they’ll be accepted anywhere the US has legal jurisdiction. With Bitcoin there are no such protections, and in fact given their volatile market price it’s quite dangerous for a well intentioned merchant to accept payment in bitcoin without immediately converting it to whatever their local currency is.
There are services that provide this service at a low price, organizations like Bitspend.net describe their service as “Send us the URL of any product you want to buy, we’ll send you an invoice in bitcoin, buy it from the vendor in their local currency and have them ship it to you.
Bitpay.com takes the other side of the coin, partnering with vendors to let them accept bitcoins and receive some or all of those moneys directly into their bank account in their local currency. With over 4000 customers brought online in the last 6 months, they just lowered fees last week to 1.1%
So is it a bubble? This reporter initially thought so, but after doing a little math now I’m not so sure.
The US monetary supply is about 10 trillion dollars, the maximum amount of bitcoins there will ever be in existence is 21 million. So lets divide
10,000,000,000,000 divided by
21,000,000
You get a rate of $476,190.47/BTC
How would you even use a bitcoin if they became that valuable? Luckily, this has been thought-out and there is a plan: As Bitcoins become more valuable, people will use smaller amounts to perform normal transactions - At prices like those above you’d be buying at least one house with a single coin!
As the value of Bitcoin reaches certain thresholds (with $10,000/BTC probably as the number where this becomes an issue), new versions will be proposed that move the decimal point.
So 21 million coins (the maximum that will be created) becomes 210 million, and 0.1 of a Bitcoin becomes 1 bitcoin. This trick can be performed as many times as necessary to keep every-day transaction amounts from being preceded by three or more zeros, and it doesn’t affect the currency itself since everything remains in balance.
If most people using bitcoin don’t think it makes sense to move the decimal, they won’t bother upgrading and the change won’t take effect.
Lets go back to the number we got when US money supply when converted into Bitcoin - That’s a big number. But is that realistic? Lets take a look at a small country like Cyprus, what would the price of Bitcoin be if they fled the euro at least partially for this new currency?
GDP in Cyprus is about 24.69 billion USD. Let’s assume only half of the country switches - That adds about 12 billion USD in new value to Bitcoin, which currently has a market cap of one billion - That little country would result in prices above $1000/BTC given the amount going into the system without any increase in the supply.
So are Bitcoins in a bubble at $100? Maybe temporarily, but in the long term if any country or large group of people decided to switch some of their value into Bitcoins, $100 will seem very inexpensive and far away.
Should you buy now? I have no idea. I’m not, but that’s a response from seeing so many bubbles in normal markets… Bitcoin is a whole other animal, powered entirely by market forces, wild and free and without any baby proofing or safety handles. The greatest challenge in its future is without doubt improving the user interface, which clearly was designed by engineers who needed something, anything as the front-end for this innovative protocol.
If you’re already holding some Bitcoins, you’ll want to ensure you’ve chosen to encrypt your wallet with a password. With the USD value kept in bitcoin wallets suddenly seeing exponential increases it only makes sense we’ll see Bitcoin-Centric viruses and trojans start circulating again as malware operators retarget this new and very valuable niche.
One thing proponents of Bitcoin champion is the unique circumstances in which is can be useful: For example, at the end of a journalistic article, the writer could put their bitcoin address and if people found their article useful and wanted to encourage them to write more of that type of content they could send some bitcoins their way.
With paypal you wouldn’t ever want to send twenty five cents, the fees would be more than the person you wanted to support would receive!
Not so with Bitcoin.
Ahem
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