(Pete’s second post on Bitcoin is a sequel to his original post and my followup — JB)
So how does Bitcoin actually work?
It works by the voluntary association of peer-to-peer computer nodes all around the world, much like BitTorrent. Except whereas BitTorrent each carry slightly different files on them, each Bitcoin node carries the exact same data on its SSD, namely, a full history of all the Bitcoin transactions that have ever occurred on the network dating back to 2009. Having each node store all the transactions provides redundancy and decentralisation, while the fact that the overwhelming majority of nodes have their software tailored to the specific needs of their users provides ecosystem diversity in the face of Heartbleed and other 0 day exploits.
Within each full transaction history on each node, transactions are chunked into “blocks” that are no more than 1 MB in size with a median transaction being 227 bytes in size. There are now over 500,000 such blocks that are indelibly linked together to form a “blockchain,” which can be thought of as an append-only registry that keeps track of all the bitcoins in existence. Since this registry is public, Bitcoin “ownership” is therefore simply the ability to use one’s private key to demonstrate control of a piece of the blockchain by cryptographically signing a transaction. He who owns the keys, owns the kingdom, as it were. Once the transaction is signed, it’s broadcast to the other nodes on the network who ultimately relay the transaction to a miner. If the miner likes the look of the fee attached to the transaction (there is a competitive fee market, currently around $10 for a median-sized transaction), the miner incorporates that transaction into the next block he “discovers,” which is then appended to the longest chain.
The security for the blockchain is provided by the “miners” who cryptographically “mine” bitcoin (by brute-force hashing SHA256 problems generated automatically by the software) in exchange for block rewards and the aforementioned transaction fees. Miners are currently rewarded with 12.5 BTC for every block they “discover” before anyone else on the network and their newly minted coins constitute the programmatic money supply into this nascent financial ecosystem. New blocks are “discovered” every 10 minutes on average and the software automatically adjusts itself every two weeks to respond to increases or decreases in the number of computers trying to “mine” in any given period so that the 10-minute average is maintained. Transaction fees currently make up about 30% of a miner’s revenue and this proportion will continue to increase as block rewards logarithmically decay from their initial 50 BTC level until the last 0.00000001 BTC (aka 1 “satoshi”) is mined around the year 2140 (that’s in 112 years, not the 12 years you’ll mistakenly see written some places). Mining rewards halve every four years and we’re currently in the third such four-year period.
As you might have gathered from the reward structure, Bitcoin (and to a lesser degree its imitators) is therefore the only predictably scarce asset on the planet. There will only ever be 21 million bitcoins and almost 17 million are already in circulation. It will take over 100 years to mine the remaining 4 million meaning that the gold rush is very much afoot. Bitcoin has been the largest computing project in the world for the last five years and the network is currently doing more math than the entirety of humanity combined over the course of the millennia up until 2009. Every. Single. Second. That’s all the Roman bureaucrats and all the NASA launch calculations and everything else in between. Again and again and again. Even compared to the world’s most powerful supercomputer – the Sunway TaihuLight with 93 PFlops/s – the Bitcoin network is >150x more powerful and growing fast.
Why is Bitcoin a big deal ?
Bitcoin is a big deal because it allows for broadly practicable, almost mass individual sovereignty. Previously, the power to be sovereign was tied inextricably to the power to fight neighbouring bodies with physical force. Valuable assets such as gold, silver, real estate, and fine art have always been large and cumbersome, meaning that their protection (in quantity) always required standing armies and some sort of castle. Bitcoin takes the idea of these same highly sought-after assets – namely that of knowable scarcity – and resolves the “bug” of their physicality with cryptography while leveraging the peer-to-peer nature of online networks to provide ultimate portability. The result is lightweight, flexible, and highly, highly disruptive.
What are the limitations of Bitcoin ?
Bitcoin is far from perfect even if it seems to be better than just about every alternative. It’s technically complicated to operate safely and even more complex to understand with any degree of confidence. Most of the basic software used to run nodes (all the way down to the kernel) is poorly written, which makes digital security a continual sore spot for even the most advanced users. The Bitcoin codebase is constantly being improved upon but there are limitations to these efforts given the patchwork legacy that Satoshi left us. A full rewrite is inevitable but few if any are capable of such a Leviathan task.
Furthermore, the incentive structure within Bitcoin is incomplete (viz. relay nodes are not paid to transmit transactions between senders and miners, and therefore relay nodes must serve the network altruistically). Miners also appear to be selected for rampant short-term idiocy but this problem also appears intractable. Other limitations include “price” volatility. Even though a bitcoin is a bitcoin is a bitcoin, the unknowable numbers of dollars in existence make the exchange interface between the two continually troublesome. Stocks, options, and other wagers priced entirely in BTC terms have worked well for years and years but anything parlaying between fiat and crypto worlds inevitably burns one of the parties involved. See the story of Mt Gox. Still other limitations include human psychology itself and its poor familiarity with deflationary assets bearing such extreme opportunity costs.
What does Bitcoin mean for me ?
Probably not much. Bitcoin isn’t competing with dollars, pesos, or euros so much as rare art, collectibles, precious metals, and luxury real estate. Unless you own a penthouse overlooking Central Park, a Ferrari 250 GTO, or Salvator Mundi, chances are that your investments will be unaffected and your life will go on as it always has. You might experience a little more inflation in the years ahead but that’s QE-Infinity’s fault, not Bitcoin’s. If you’re an individual looking to diversify from a steamy stock market or a bland bond market, the best time to plant a tree was 20 years ago, the second best time is today. Hup to it. Even still, you shouldn’t expect to understand Bitcoin in less than 200 hours of dedicated research. Anything short of that and don’t beat yourself up if it doesn’t click.
Recommended primer reading includes David Graeber’s “Debt: The First 5000 Years,” Nassim Taleb’s “Black Swan,” and of course Satoshi Nakamoto’s Bitcoin White Paper.
What are Bitcoin’s imitators and can they threaten its dominance ?
Bitcoin’s main imitators at the moment are Ethereum, Ripple, Litecoin, and Bitcoin Cash.
Ethereum was marketed as a “smart contract platform” but that has proven to be grossly exaggerated after the DAO hack in early 2016 (you can google it but suffice to say that a smart contract was used to create millions of dollars of new tokens quite legitimately but that the Ethereum “community” objected and so “undid” the “bad” transactions by hardforking the project). It’s now clear that Ethereum is a centrally managed cryptocoin that offers none of the advantages of Bitcoin (decentralised development, limited coin supply) and all of the disadvantages of fiat (centralised development, unlimited supply). It currently trades at about 0.06 BTC.
Ripple is also a centralised banking product with serious limitations in that it requires blind trust, is premised on 0% interest rates, and creates fatal fungibility between unequal parties. It currently trades at about 0.0002 BTC.
Litecoin is a less secure version of Bitcoin with a few magic numbers diddled to no apparent benefit. It was marketed as “silver to Bitcoin’s gold” and “ASIC-resistant” but neither promise has born fruit in the last few years. It’s founder also recently claims to have divested his entire ownership stake in the coin. It currently trades at about 0.02 BTC.
Bitcoin Cash was an attempt to hard fork from the main Bitcoin blockchain in an effort to “listen to the community” by providing larger blocks with which to accommodate more transactions per minute so that user fees could be lower. Miners have not adopted this fork very broadly and neither have many users. It currently trades at about 0.2 BTC.
Bitcoin has significant first mover advantage in the space, the best security in the business, the most robust infrastructure around, the most liquidity, and the brightest minds behind it. For all intents and purposes, its crown is unassailable. Other coins might have more media pizzazz at any given moment but none has the durability, reliability, and proven track-record of Bitcoin. Over the next 10 years, one or two of the thousands of “altcoin” competitors might edge out Bitcoin’s performance but your guess is as good as mine which of those it may be. Bitcoin is the surest bet in the space.
Why are all Bitcoiners such insufferable pricks ?
Most aren’t. Most are congenial, hard-working introverts who yearn for independence from overbearing governments. Almost all are idealistic to a fault. This idealism can, however, lead Bitcoiners to the bleeding edge and beyond, which is why we’re likely to either offend you or bankrupt ourselves (if rarely both). Those who enter the space being “nice” and stay that way tend to be too weak of stomach for the insane volatility or they get scammed left, right, and centre, but either way they’re selected against in the long-run. Those who stick around can handle a hundred daily dips of 30% in their net worth, likely experience periodic bouts of paranoia, but aren’t afraid of much you can say to them, so sometimes they’ll push other boundaries just for the experience. This can come off as prickish, and it’s hard to argue that it isn’t from a certain lens, but it’s very rarely personal.
If I buy Bitcoin today, will I be able to buy an M3 or Huracan in 10 years ?
Depends how much you buy, but if it’s a decent chunk and you secure it properly, I wouldn’t bet against it.
Where can I buy my first Bitcoin (or fraction thereof) ?
Try localbitcoins.com. Most Bitcoin deals happen person-to-person in cash. Meet in well-lit cafes. Avoid Coinbase.
Where do I store my first Bitcoin (or fraction thereof) ?
In order of most secure to least : paper wallets, TRB node, “Core” node, blockchain.info webwallet.
Any final words of wisdom ?
These are still early days. Remember what I said about planting trees.
I may not be 1 in a million smart like our host but I do test in the 99th percentile. I’ve read all three articles and I still don’t understand how it works or why it should be treated as something with value. Sure, value is determined whenever any kind of mutual transaction is made but it still seems a bit like spinning gold from straw to me.
It took me ~6+ months to understand why it is valuable. Reading Debt: The First 5000 Years helped a lot.
Reading Jack’s piece on the hash, plus the link he added and the white paper (I have a hard copy here) has made for that click moment. All the pieces of the puzzle are in place now 🙂
The place Jack linked explains in detail and in layman terms how the whole lot works. But you won’t get anywhere without reading that white paper first.
Not a bitcoiner, myself, but it seems like an alternate currency to me. I suppose the point it is like a fixed pile of gold, having 21 million pieces in this case. We’ve agreed to store value (work, Huracans, black market kidneys, cocaine) using this medium. The problem, to me, is liquidity. How good in the market for converting bitcoin to fiat currency? You know, so I can pay a light bill or buy the aforementioned Huracan. The advantage would seem to be that no government can monkey with the currency by simply printing more bitcoin. Of course, Krugerands have the same function.
The market helps those who help themselves. If you don’t want to use cash as a transactional intermediary, you’ll have to put in a little more sweat equity in the form of persuasion, but it’s eminently doable either way.
Economists, over the years, have identified eight qualities of money, as might be acceptable. Bushels of wheat don’t make it; and, later, tulip bulbs don’t, either.
Bitcoin is a construct. The dollar is a construct, also? Yes. But the dollar is backed by, at least, legal obligations of the Federal Government to pay its bills. It is also shrouded in the good credit of the US – which is now being abused.
It’s not either/or here. The dollar, recklessly inflated by insane printing, may be poor and dangerous currency today…and BTC may be even more dangerous.
Is more dangerous, IMHO.
Those who want to buy in…have at it. I’m staying on the sidelines on this one…I have $100,000 in precious metals. They don’t perform; but they will endure. Long after this series of binary digits is recognized (IMHO) as the scam it is.
Thanks for this, Pete. Can you elaborate on why we should avoid Coinbase?
Coinbase has a nasty habit (and a terribly long history) of cancelling orders when the price is skyrocketing, blocking doubleplusungood addresses, and snitching to the IRS on its users. They’re some of the biggest crooks in the space.
This, very much so.
That said, coinbase has served an interesting function in my opinion. By effectively stopping any transactions through it due to “technical difficultiues” anytime there’s a major swing in price, I think you could craft a reasonable argument that they’ve stopped a crypto market crash.
The way they’ve done it would be criminal if there were any laws about this stuff though, during bit dips in the BTC/USD exchange rate, their “displayed” price while they’re not allowing any transactions is usually 1000-2000 higher than the prices you’ll see on bittrex/poloniex/etc.
Calm the market and close the bank.
Just jumping into Nassim Nicholas Taleb’s “Black Swan” probably isnt going to clearly lead to better understanding of bitcoin, but It will illuminate Taleb’s other books, “Antifragile” and “Skin in the Game” which is I think would be more relevant to what is happening. Id recommend all of the above as reading for anyone, beyond helping understand cryptocurrency.
“Antifragile” and “Skin in the Game” are particularly important, because for years people walked away from “Black Swan” thinking they could or were now better equipped to predict Black Swans, therby falling into the very same fallacies and logic traps he tried to illuminate.
The prospect of currency without government is admitedly an enticing one, but as it stated, Bitcoin is predictably scare. Country or no there is a still potential for competition (potentially even more so) among populations/groups/factions to control the resource even if it isnt physical. The virtual always finds expression in the real, or at least interfaces with it.
So the existence of a currency without a government represents, to me, only a further dilution of power of the Westphalian nation-state. I am not as optimistic that the outcome will necessarily be widespread individual mass sovereignty. There isnt a direct reciprocal relationship existing between nation state exercise of power and power of the individual . I agree that “it allows for” mass individual sovereignty, but getting to there from here is not guaranteed.
Cryptocurrency is a big deal, it will and has disrupted the system, but both the system and the what we do with cryptocurrency will both change as they interact with one another, and the outcome is beyond our knowledge.
Taleb has recommended against trying to short the “Bitcoin bubble”, but I doubt he would recommend betting on what the world of cryptocurrency will look like in 2140.
Thank you for this article, I am far more interested in Cryptocurrency now. You have inspired me to learn even more and focus on this a little more.
I also forgot to mention in my already longwinded response was that, to me, the concept and use of blockchains is what seems to be the fundamental disruptive aspect here. People will apply and synthesize blockchains into all kinds of transactions and in potentially novel ways, that is what I meant about the system being changed in other unpredictable ways.
I could even imagine blockchains growing to a point where cyptocurrency isnt even the “right” way to conceptualize it. With enough transaction ledgers and computing power, what might evolve is an infinitely complex system of barter that is largely invisible to us.
Its all fun to speculate and hypothesize about.
Taleb said that there is no reliable way to short it. This doesn’t mean that he thinks its not a bubble, but that there is no good way to make money from it popping.
Thanks for the write-up, but I’m still confused about what the point of all this activity is for. Precious metals have been a traditional store of value, and held by people that tend to believe they are the safest form of wealth to have when everything goes to hell due government mints running wild (hyper-inflation), WWIII or major Meteor Strike, or some other major calamity. Fine art is less durable than a brick of gold, but offers beauty as a secondary benefit. What’s bitcoin offer? If I understand it correctly, its mostly electronic so has no inherent beauty, and potentially threatened by hackers (there is always a way), or an EMP from a nuclear attack, while my gold bars and Picassos will still be in my vault along with my automatic rifles, 50,000 rounds of ammunition, 5 years of bottled water and freeze-dried meals and other survival gear. If the primary benefit is to thwart government control, then it will soon be taken over by criminal/terrorist entities (if it hasn’t already) as a way of hiding/transferring/exchanging ill-gotten wealth, and government crackdowns and control will follow. So who exactly is supposed to benefit from this besides terrorists, criminals, and speculators hoping to get out before the Bitcoin bubble bursts?
@stingray65 There’s no skirting the reality that anyone who takes Bitcoin and its implications seriously, and invests skin in the game, is likely to be branded as a “criminal white supremacist terrorist” or similar at some point in their lives. If you want to play it safe, this isn’t the space for you. Stick with weed stocks, as Bigtruckseriesreview suggested.
As to the advantage of BTC over Picassos, ammo, water and gold, it comes back to my paragraph about “Why is Bitcoin a big deal” : portability. If you wanted to move to Singapore or South Africa tomorrow because there’s plague/war/etc in your backyard, what does taking all those bulky physical objects look like ? Bitcoin is the ultimate gypsy (or Jewish) currency, but screw braiding it in your hair, you can just store it in your head as a string of numbers and letters.
Other advantages over gold include automatic verification of authenticity (you can’t fill a bar of BTC with lead) and known maximum supply (no “Cortez moments” where the known global supply doubles overnight). Granting that there’s nothing particularly aesthetic about Bitcoin in the visual sense, certainly compared to fine art, it’s arguably blindlingly beautiful in the intellectual sense, like the solution to the Fermat’s Last Theorem.
As to government “crackdowns,” as mentioned in one of my previous comments, Bitcoin is beyond that now. You really needn’t fear the bumbling bureaucrats in Washington (or anywhere else). It’s they who need fear us. And they do. This is a nuclear missile headed straight for their jugular.
Lastly, the only bubble that’s bursting is that of USD hegemony as global reserve currency. Sovereign wealth funds, pension funds, hedge funds, and every other large pool of assets would rather trust a piece of software cobbled together in C by a pseudonymous cryptographer than the Bernanke, Yellen, or Powell. Software is eating the world, etc.
If you live in the US, where your everyday business is conducted in the world’s reserve currency and the banking system is stable and relatively competitive with respect to banking fees, it’s hard to see it. But venture outside the US/EU. The currencies are volatile and not quite so fungible into other currencies, so if you’re buying goods from someone in another country there’s a lot of pricing risk and challenges. There are also taxes on all sorts of transactions that we don’t have in the US. I’ve had the distinct displeasure of trying to import goods from China to Brazil, both countries with capital controls. Nobody in China wants to get paid in Brazilian Real. Nobody in Brazil wants to buy any Chinese yen. Both countries put a big tax bite on any wire of US dollars in or out, even if you’re just wiring money between two accounts that you own. What the hell currency do I even *want* to pay in? And that was on a very high-margin product where a 10% swing in the relative currency didn’t kill my business case. The great masses of folks trying to bring in low-margin products to sell to people with third-world incomes? Good friggin’ luck.
Also, in places outside the US/EU there aren’t nearly as many banks, and the banks are … well, mostly what we would refer to here as corrupt, although they usually don’t think of it in those terms. So the fees are ridiculous and they may not even execute your transactions if they don’t feel like it.
So in large part, what’s happening here is that lots of people outside the US used to do business in US dollars instead of in their national currency. Since 9/11, and even more so since 2008, the US has made it a massive pain in the ass to do this. The US government has made virtually all foreign banks arms of the US surveillance apparatus, which seems like a good idea if you’re American and “the government is the good guys,” but in most countries outside the EU, there kind of aren’t any good guys. Anything that the US government uses to spy on you, the local government will also use to spy on you, and then you get taxed all kinds of ways that make your life impossible.
Foreign banks have used this as an excuse (“due to increased transaction costs for foreign transactions”) to raise fees quite a bit. Anyone who has tried to substitute another sovereign currency for US dollars in any significant way has had a bad time of it (e.g. Quaddafi trying to sell oil for rubles/euros).
So the world was searching for another currency in which to buy and sell goods across borders. Bitcoin solves a lot of problems for millions of people in this situation.
Amerieuropeans definitely don’t know how good they have it when it comes to banking. At least this latest generation. Then again, this generation doesn’t have Swiss banking secrecy anymore and the end of that era has disillusioned a fair few.
You guys should build a marijuana portfolio.
Perhaps short-term there is money to be made investing but cannabis will just become another agricultural commodity and the nutrient market is already crowded. Miracle Gro already owns General Hydroponics.
As for making big profits growing and selling, plants don’t grow on air alone. Nutrients and pesticides are not cheap. I’ve been told by commercial growers that their cost is about $30/ounce of finished product and from the prices I see advertised at the dispensaries here in Detroit, the wholesale price is somewhere between $75 and $200 an ounce, depending on potency and aesthetics. At the higher end the growers are spending more money on supplemental nutrients and that stuff can get pretty expensive.
The notion that potheads are going to embrace celebrity branded weed (Whoopie Goldberg, Willie Nelson) is absurd.
Outside of the dispensaries, retail right now seems to be $150/oz and up.
It seems to me that cannabis will be just like any other business, if you succeed you’ll about double your investment in terms of gross revenue vs costs.
I dunno, I bet I could sell the hell out of Snoop Dogg branded Chronic, were it not a federal crime.
Agreed. In the post-apocalypse scenario, people are going to want lots of narcotics. And in the pre-apocalypse scenario, people are going to want lots of narcotics. There’s no scenario I can think of in which demand for weed does not climb.
I’m a bit of traditionalist so I haven’t embraced bitcoin despite being an active investor.
Although I understand the appeal. My first instinct when I started my investing career was that I didn’t want to save in dollars, which could be printed at will.
The FRB free money is also used for all sorts of nefarious purposes, because it’s not particularly transparent. And it’s control has been coopted by people who don’t put America first, or anyone besides themselves.
My next area of interest of was precious metals. Simple to understand and at the time in a bull market. But it turns out that the unlimited supply of dollars can also be used to suppress the value of an asset. Buy establishing a robust futures market, a player can relentlessly short an asset to create downward pressure on the asset. When the player is or is implicitly backed by the FRB in this activity, they don’t care about any realized losses and can do it for a long time.
I somewhat expected this scenario to occur in Bitcoin once it’s futures market was established. However, it may not be robust enough yet.
The ultimate coup would be if the Don could purge the dual citizens and America haters from the FRB. You could possibly become a dollar bull in that scenario. Although I suspect the Don would prefer a somewhat weaker dollar but instead to use printed dollars on infrastructure or middle class supporting measures. Much better this scenario than current free money’s use on inflating the value of facebook, amazon, google and tesla. Who in turn fund all political opposition to anyone who might end this synergistic parasite.
Anyways, Bitcoin, more likely Tulip bulbs than the future, imo.
These articles have left me with more questions than answers, but no more interest in the subject.
There were just too many statements, or full paragraphs where I ended up with nothing but a “WTF.”
Such as “..limitations include human psychology itself and its poor familiarity with deflationary assets bearing such extreme opportunity costs.”
Can we have another follow up article on the
“Most Bitcoin deals happen person-to-person in cash”
I thought I was following this until that statement.
Either way thank you, while it hasn’t “clicked” for me yet, the comparison to the art market as far as a place to park wealth helps me be able to comprehend it.
@Harry A whole article’s worth of material isn’t really required to explain that statement. First, I should clarify that “person-to-person” isn’t the same as “in-person.” From there, it’s pretty simple : there’s a whole lot of cash being driven, flown, carried, and even mailed around the world in exchange for BTC. Most buyers prefer the risks inherent in moving cash around between trusted individuals to the uncertainty of online exchanges keeping their doors open long enough for transactions to be executed and the coins to be withdrawn safely (see Mt. Gox, BTC-e, Youbit, etc.) in addition to the certainty that online exchanges will leak your identifying information to the IRS at a minimum and rando hackers in all likelihood. Needless to say, in gangsta movies as in Bitcoin, cash is still king, even in a plastic economy.
Maybe it isn’t required but I would be interested?
If buyers and sellers prefer trusted individuals, the process by which they find and trust each other is interesting. The equivalent handoff
I did take “well lit cafes” literally. I think I am so ignorant of this market that the nuance is hard. I had the assumption that bitcoin was traded on some equivalent of a central public exchange or auction, and that it was used like some kind of untraceable paypal for purchases down to the size of a digital subscription. I had no reason to think that other than not doing any research.
Are Mt. Gox, BTC-e, Youbit like savings accounts, or trading accounts on etrade, or more like an art vault? And I take it things went wrong and they are no longer trusted?
BTW, this subject is making me feel like my grandparents figuring out smartphones. They ain’t dumb, but things are just different enough from the technology (maybe its just the interface?) that they are completely out to sea. Part of me wants to throw up my hands and ignore the whole thing so as not to feel like an old man before finding a gray hair. Each article in the series has shown me how little I know. They have also helped me understand why bitcoin in scarce (I had thought that there were an unlimited amount to mine but it was limited by computing capacity), why people assign each one value, and why two reasonable people can disagree completely about if it is or isn’t a bubble.
Thank you for sharing your knowledge.
@Harry “The equivalent handoff” …?
Some percentage of bitcoin transactions take place on centralised online exchanges (eg. Mt. Gox, BTC-e, Youbit) where traders send their money to the exchange (by wire, e-transfer, or bank account cash drop) and then fill out buy and sell orders in the order book before (hopefully) withdrawing their coins to wallets that they control, but this is more typically used by new and inexperienced players. Those who are a little more seasoned prefer trusted individuals whom they’ve either met in person or who have PGP keys registered on bitcoin-otc, deedbot, or another nickname-based reputation system that works not entirely unlike eBay.
The equivalent handoff was a sentence fragment I forgot about and didn’t edit.
Good reads, Pete. There’s no question about the speculative potential, and long term, if the fundamental use-case of Bitcoin as money is proven en masse, it has the potential to revolutionize all voluntary exchange. So how do you see the problem of utility being resolved? I see the future of crypto currencies as being dependent on their acceptance as money, which if I’m not mistaken is stil the main reason for their invention. Currently that acceptance seems to be a catch-22. Merchants dont want to accept payment in Bitcoin or alt-coins because they are too volatile, but the coins themselves are volatile because they are not yet widely accepted as money. What needs to change in order for Bitcoin et al to be adopted as money?
@Michael First off, Bitcoin is money. There are even jurisdictions that accept it for taxes, which is an important benchmark for some folks even if gold isn’t accepted for taxes anywhere that I’m familiar with.
Furthermore, Bitcoin has nothing to do with merchant adoption, it’s not a retail consumer technology, and the volatility has everything to do with, as I mentioned previously, Bitcoin being thinly yet globally traded 24/7/365 unlike any other “conventional” asset.
@Pete Yeah I agree that Bitcoin is money. But its crazy price swings make it terrible as money, and that is why nobody accepts it. It would make a near perfect money system if that issue were resolved. My question is, what will it take to stabilize it? It sounds like the point you are trying to make is it doesn’t have to. I disagree.
Every Forex trader knows that 24 hour open trading markets do not guarantee volatility. Trading a USD for a GBP, for instance, or any other currency pair, is measured at the thousandth decimal place, aka one pip, because the spreads are so small. Leverage of up to 200:1 is allowed to compensate. There are other reasons for BTC’s instability than a market that’s always open.
The success of Bitcoin has EVERYTHING to do with it’s acceptance, whether the parties be a merchant, a bank, an individual, or any other entity. Without stability and widespread commercial and individual use as money, BTC has no other value. Satoshi’s white paper itself is all about transactions… Bitcoin was created as a payment system first and foremost. It cannot be a “Store of Value” without having an intrinsic value. The math Bitcoin is based on is worthless unless it proves to be useful somehow. Satoshi intended for its use to be money – electronic cash, in his words.
From an Investopedia article about Bitcoin’s future value: “bitcoin’s utility as a store of value is dependent on its utility as a medium of exchange. We base this in turn on the assumption that for something to be used as a store of value it needs to have some intrinsic value, and if bitcoin does not achieve success as a medium of exchange, it will have no practical utility and thus no intrinsic value and won’t be appealing as a store of value.”
There is still a chicken and egg problem with Bitcoin. But IF its value somehow settles enough to be used in transactions, it has the potential to disrupt the entire multi-national money system, for the better I’d say, because of all of the qualities you mentioned. If it succeeds long term, the same article above reasons 1BTC could be worth over $500,000USD at 15% of the current world money supply. Sure it would have other challenges to overcome along the way such as competition from state and non-state actors, and end-user regulation.
The only other thing I found curious was the “jurisdiction” that you linked to, which is a borderless construct (much like Bitcoin), but not an actual municipality. I can only imagine the citizen uproar of a town whose government allows their taxes to be paid entirely in BTC at this stage in its development, even though the town would probably come out way ahead. However I did find a REAL Swiss town allowing up to $260.00USD of each resident’s taxes to be paid in BTC! That’s pretty cool, and shows Bitcoin is making strides in acceptance little by little.
“nobody accepts it” << You mean nobody you know. Or "not 7/11" to quote a old grumpy man. That's not what's important, however. What's important is that people can and do accept it all the time for settlement. And the numbers are growing, and with those numbers grow the network effects important for any money to work. The number of people accepting USD for settlement, contrariwise, is decreasing. See CN-RU oil deals settling in Yuan, etc.
"what will it take to stabilize it?" << Time.
"There are other reasons for BTC’s instability than a market that’s always open." << Very true. I would add that the strained banking relationships that most exchanges contend with makes liquidity on said same exchanges challenging at best, and furthermore that there's a lot of wash trading and other market manipulation happening on most every exchange by its insiders, and lastly the whole aforementioned thinly traded part.
"BTC has no other value" << I dunno why you're so hung up on this definition of money being the root of all value. Bitcoin is a better Picasso, not a better penny. Picassos aren't widely traded, they're not accepted by merchants, etc.
"It cannot be a “Store of Value” without having an intrinsic value." << There's no such thing as intrinsic value, but this discussion probably warrants an entire article unto itself.
"From an Investopedia article" << All I'm reading here is that John Kelleher has an economics degree and is confused by the world outside his models.
"There is still a chicken and egg problem with Bitcoin." << There was such a problem. In, like, 2010. It’s 2018.
“a REAL Swiss town” << This is pretty cool, actually, and arguably the tip of the iceberg.
“what will it take to stabilize it?” << Time.
The right-now speculation is terrifying. But the big picture potential is awesome. In it for the long haul.
Inevitable, this was.
Inb4 the “racial divide” articles follow suit.