6 Inches Wide, a Millimeter Deep
There have been many articles written recently proclaiming the death of Bitcoin. While we are not suggesting the U.S. dollar is going away anytime soon, we would like to discuss some of the key points these articles bring up and why they might be wrong.
There is a lot of confusion about what Bitcoin actually is. In 2014, “What is Bitcoin” was the top 10 most searched “What is” term on Google.
Put simply: Bitcoin is an open source, decentralized, peer-to-peer platform to send value — digitally, quickly, easily, and efficiently — anywhere in the world with low fees and no middlemen.
All of these transactions are recorded on a ledger everyone has access to, known as the Blockchain. At its core, it is an open source accounting system that is incorporates: computer programing, mathematics, and cryptography.
Belief 1: The price of Bitcoin crashed therefore it is irrelevant
We agree Bitcoin has not been a good store of value and has been too volatile to become a worthy currency so far. Being new, Bitcoin was subject to a mania as many other new technologies have been in the past. We believe the currency will stabilize over time and will become viable.
While it is true that Bitcoin did reach manic levels, this does not make it irrelevant. Many would argue that technology stocks reached extended levels in 1999 and real estate in 2007. Others say that bonds are in a bubble right now with the U.S. Treasury 10-year note yield going under 2% recently and yet others say bubbles do not exist.
Belief 2: It’s not safe to hold Bitcoin because of what happened at Mt. Gox and general security issues
It was not safe to hold Bitcoin, but now it is. A lot has changed in just a year. We now have credible, venture-backed U.S. companies like Coinbase in San Francisco, which is working to abide by U.S. banking laws. Recent Coinbase investors include well respected venture capital firm Andreessen Horowitz, the New York Stock Exchange, USAA, and BBVA Ventures, a subsidiary of Spanish bank BBVA Compass.
Hackers have stolen Bitcoin in the past and will continue to in the future, but hopefully to a lesser extent with these new security measures. Any traditional bank account or Bitcoin wallet can be compromised if someone gets access the password or private key. Recently, it was announced that over 100 banks were hacked and almost $1 billion was stolen.
Belief 3: Bitcoin merchants immediately convert Bitcoin into dollars which drives the price down and that makes it a Ponzi scheme
We agree that this is a problem that needs to be addressed, but not immediately and disagree Bitcoin is a Ponzi scheme.
The most important thing is that consumers are getting used to paying for products and services in Bitcoin. Eventually, merchants will want to hold it just like they would hold any other currency. Companies choose to hold or sell currencies based on various factors. The fact that a large U.S. conglomerate is paid in Euros and decides to sell them for U.S. dollars, does not make the Euro currency a Ponzi scheme.
Some have gone so far to call the U.S. quantitative easing program a Ponzi scheme. It is interesting that the Federal Reserve currently owns more than $4 trillion of U.S. Treasury debt, which is roughly equally to two of the largest international debt holders — China and Japan at about $2 trillion each.
One element of Bitcoin is the amount of currency in circulation will be fixed, unlike U.S. dollars which can be created or printed to conduct open market operations to influence interest rates. Ben Bernanke went on 60 Minutes and said that the Fed has not “printed” money. While it has not actually printed paper money, it instead creates it in a computer as credit.
Some money mangers like David Einhorn have been critical of this unprecedented policy, but time will who is right as the Fed winds down its balance sheet. Others have hailed quantitative easing as the best thing to happen to modern society and that it could have stopped the Great Depression.
Belief 4: People do not want a virtual currency that is difficult to use and understand
We agree the masses want a system that is easy to use and understand. However, most people do not understand how HTTP (Hypertext Transfer Protocol) works or what a URL (Uniform Resource Locator) is, but they still use a browser and the internet. Several years into the world wide web, only nerds used it due its difficulty.
We believe Bitcoin is the missing protocol as Pantera Capital has said and it is becoming more user friendly.
Most people think the Federal Reserve is a full government entity and conspiracy theorists think it is a completely private and secretive collection of banks. The real truth lies in between as a quasi-government equity where the president appoints the chairperson and its dividends are fixed, but its powers are far-reaching.
Belief 5: Bitcoin is not real money
The definition of money includes three things and so far Bitcoin only has two. It has proven to be a great medium of exchange and unit of measure, but it has failed as a store of value.
This brings up a good question: what is money?
Fiat money is currency which derives its value from government regulation or law. It differs from commodity money that is based on a good; often a precious metal like gold. We would suggest that Bitcoin is digital money that derives value from the trust and technology of the Blockchain.
Bill Gross published some thoughts on this here and here while still at PIMCO. His commentary brilliantly discusses how debt created so much prosperity — but asks the question: What if Tuesday never comes?
Belief 6: Bitcoin is like digital gold
Some have said Bitcoin most resembles gold since it has many of the same attributes. We see parallels between gold and Bitcoin, with a few important differences.
Howard Marks, of Oaktree Capital Management explains gold: “The supply of gold is finite…gold is tangible, meaning you can take delivery and store it…Gold has no financial value other than that which people accord it…but there’s no analytical way, in my opinion, to value an asset that doesn’t produce cash flow.”
Another interesting note is that the Federal Reserve Bank of New York stores gold bars in their basement as a service for the U.S. government, foreign governments and other central banks. It is the single place in the world with the most gold — even more than Fort Knox. One day, securing and storing Bitcoin could be just as important as gold is today.
Belief 7: Bitcoin is only good for criminal activity
Yes it was and sometimes still is used for that, but so is cash. The mafia and other organized crime organizations deal in cash to avoid detection. Some small businesses only accept cash to avoid taxes. Drug dealers use gift cards to launder money.
While it’s true that Bitcoin was being used for unsavory purposes, that is mostly gone away with the take-down of Silk Road and with new regulations and services.
Belief 8: I don’t care about Bitcoin
The reason you don’t care about Bitcoin is because you don’t understand it. And that’s because you haven’t taken the time to learn about the benefits of it.
It takes time and effort to learn just like any subject matter and most people don’t want to put work in. To your credit, it can be confusing at first since there has never been anything like it before — a black swan. The benefit of owning Bitcoin is holding your own money without a third party such as a bank stepping in intervene.
If you want to take the time to learn, Nick Custodio explains Bitcoin to you as if you were a 5-year old child in this six minute read.
If you’ve seen the movie The Big Lebowski you may remember when The Dude wrote a check for $0.69 cents for some half-and-half at Ralph’s. Older people still use checks and refuse to use a debit card or ATM machine since they are scared of the technology. Millennials use Apps like Venmo to send cash all the time. This has parallels to the current thinking about Bitcoin.
Belief 9: Everything has a flaw. Where does Bitcoin fail?
The way Bitcoin fails with the technology is mainly in two ways: a 51% attack on the network or the breaking of SHA-256. A 51% attack is when someone gains this percentage of the network. Next, Bitcoin is based on security built with SHA-256 encryption. If quantum computers were to come out or the NSA were able to break this code then the currency would be in trouble.
Belief 10: The Blockchain technology is more important than Bitcoin
Many bankers have been quoted as saying they like the idea of the Blockchain, but not Bitcoin. In fact, they are just being politically correct since the Blockchain itself can’t exist as a tamper-proof global ledger without people (miners) authenticating these transactions. These miners are rewarded with Bitcoin which has value.
Many believe that the real future resides in the Blockchain — for things like contracts and voting. It is one of the most important technologies of our lifetime and one that we haven’t had up until 2009.
There is another project called Ripple which leverages the Blockchain technology, but makes some changes to the problems Bitcoin has. Ripple is built more for institutions to make transferring value easier and has its own currency called XRP. The company concedes that our current system is not broken, but just outdated and their system works within the current framework of the monetary system to improve upon it.
Large banks including Wedbush have supported the Blockchain technology too.
Belief 11: Bitcoin should be used to speculate
You should not speculate in Bitcoin thinking that you will get rich or through day trading it. Bitcoin is complex since it is a currency that is built on a technology and has an investment competent built in. One could say you “invest” in U.S. dollars by owning them and Bitcoin should be no different. It is still unclear if bitcoin will be used as an investment in the future as a form of a “store of value.
Belief 12: Bitcoin has no backing or central authority
Bitcoin is backed by nothing more than the full faith and integrity of the Blockchain. Bitcoin is backed by Math. It has no central authority since it is decentralized.
The fact that it has no backing is similar to the U.S. dollar which has not been backed by gold for many years. This is not a bad thing. The fact that U.S. dollars are worth nothing more than the paper printed on them does not matter — as long as there is trust in the currency.
Of course, U.S. debt is backed by the full faith and credit of the U.S. Government. The U.S. has never defaulted on its debt, but it has come close due to political posturing.
Any currency is only as good as the belief that it will hold value and can be used to exchange for other goods. This reminds us of a funny scene in the movie “Dumb and Dumber” where Jim Carey suggests that IOUs are just as good as money.
Belief 13: I wouldn’t know how to start
It’s never been easier to own and start using Bitcoin. There are several places to setup a Bitcoin wallet and most newcomers use Coinbase.
Most professionals suggest you start small and we agree. Use Bitcoin to pay a friend back for lunch, tip for content online with ChangeTip, buy a Starbucks gift card with Gyft, buy on Overstock, or book a vacation on Expedia. Get comfortable using it and see how it feels to have complete control over your own money.
Belief 14: But Apple Pay has x amount of users
In a recent piece called “A Mile Wide, an Inch Deep,” Ev Williams discusses an article where he basically said he did not care what Instagram was doing in relation to Twitter. This is because they are two different platforms solving different problems.
This has parallels to Bitcoin and Apple Pay. It’s Apples to Oranges. Apple Pay will have a hard time dominating since it must run on an Apple device and this leaves out a lot of Android users. Bitcoin is platform agnostic.
As long as the Blockchain is intact and people are making transactions with Bitcoin, then we don’t care what other payment processors are doing. Apple Pay and others do not innovate; instead they use the same network of credit cards and debit cards on the phone.
Belief 15: Bitcoin and the Blockchain are dead
Bitcoin is not dead, it is only just beginning.
Our message to all the skeptics out there — don’t declare the death of Bitcoin or the Blockchain just yet — in our opinion, they are still alive and well with the best days still ahead.
Buy1BTC.com educates consumers and companies on the benefits of bitcoin. This article is for educational purposes only and not intended as investment advice or an offer to buy or sell securities, investments, or currencies of any kind. Follow us on Twitter @Buy1Bitcoin and tip us on @changetip if you enjoyed this article.