Bitcoin — Blockchain — and other Crypto Currencies
Friends and family, I’ve been asked so many times about Bitcoin, is it really a passing fancy, or is there any real value. What is the technology, how do I profit from the market?
As most of you already know I’ve been playing with Bitcoin and the Blockchain since the first code came into the first source code became available. I had a mini computer cluster I built in my Garage and I thought it was fun to run the bitcoin mining code. In the early days you could do this, today bitcoin mining is a serious endeavor, with both power and computing costs that make it almost too expensive for the amateur.
A tech brief on Bitcoin and other Crypto Currencies: Each currency has two distinct parts, the secure ledger to record each cyber coin and the transaction associated with an electronic wallet where ownership is assigned. The ledger is the “Blockchain”, the cyber coin is a complex set of algorithms which when solved can be easily confirmed, these algorithms are like current encryption codes and the math is the same.
What I find most interesting is that most people including many high-level finance and banking types don’t seem to recognize Bitcoin for what it is — a Currency (“a generally accepted form of money, used as a medium of exchange for goods and services, it is the basis for trade”) I would note that I did not say Issued by a Government. This is where the misunderstanding comes in, in the early days of banking and the formation of various currencies, it was the King, or in the case of the evolution of America, many banks printed money for exchange and to promote trade.
Now it is important to understand the types of currencies that are found today, first we all know about paper money, bills, this type of money is called a “Token” based currency, as the bill or today the electronic representation of only represents value. Then there is the “Value” based currency, where the actual coin or stone has a value equal to its physical nature, i.e. Gold Coins, Diamonds, Gemstones, etc.
In the early days we had Paper Money which represented physical value, you might remember the “Silver Certificate” or “Gold Certificate” listed on the top of our money, in theory one could go to the bank and trade in the bills for actual Gold or Silver. This was all fine until WWI and the French decided to trade US Greenbacks for the Gold they represented. This created a problem because the United States Federal Reserve got in the habit of printing far more certificates than actual Gold they had in reserve.
This led to the establishment of the Bretten Woods Agreement which established how Countries did currency exchange, it also gave the other Central Banks the authority to print as much currency as they wanted. Later between 1968~1973 (my High School and College years) the Agreements were dissolved, there was an attempt at a replacement, however when Nixon removed the Gold Standard from US Currency it pretty much set the world stage for everyone else to do the same.
Now therefore the history lesson on Currency, Bitcoin is the first of what may eventually replace individual National Central Banks from dominating the world of Trade, it has always been my opinion that over time Nation States, like the United States, Australia, China, United Kingdom, etc. all give way to the evolution of City Nations which is where real economic power exists. City Nations will eventually form a mesh of connectivity and trade, giving way to a far better state of transparency, and dissolve the power struggles that attempt to control resources and individual rights (Okay my two cents on the future).
So, Bitcoin like any currency has a value based on “Nothing” is it valued on market acceptance, and faith, which comes from stability and liquidity. Owning Bitcoin is no different than holding British Pounds, or Euros as opposed to US Dollars, with the only difference in that Governments can’t control or monitor your exchanges (as long as you keep your individual holdings below $10,000. See IRS Guidance on electronic currencies Note: you still need to pay taxes on the profits from this or any transactions you do.
Bitcoin will eventually breakdown only when the cost of computing the credentials used to unlock a transaction becomes low enough, and then only when bad actors get their hands on such technology, based on current trends of quantum computing, and Moore’s Law between six and eight years ahead. By then the secondary coins will begin to mature, and include new computational formulations holding back the reverse coding of digital signatures.
In summary, I recommend placing a fair amount of savings into Bitcoin, with some distribution to Ethereum, and Light Coin. I don’t recommend playing with all the new ICO’s (Initial Coin Offering) coming on the market.
The only Exchange that I currently recommend is the San Francisco company “CoinBase” this will allow you to purchase Coins with funds from your checking account, it is an EFT so the initial transaction can take three or four days to clear, yet when you do a transaction it locks in the price you purchased it at. Once you’ve established your account you can buy and sell by moving from currency to your Dollar account for instant purchases, you can also transfer funds back into your personal accounts.
My next recommendation is to open an “Electronic Wallet” outside of CoinBase, I have tested a number of them and I like “Exodus” which supports a number of different coins, the reason I like Exodus, is that if you keep your credentials secure, you can always reload the software and pull up your wallet so if you loose your phone or computer, no harm done (unless you’re less than vigilant in keeping passwords and codes secure)
Blockgeeks has a good paper on the differences between “Hot and Cold” wallets, with a good disclosure on the risks, etc.
I use Walletgenerator to create my paper or Cold storage for my coins. Note: even if you lose the paper wallet, with secure digital copies you can always retrieve your coins.
There are many more issues to consider, and my advice is never invest anything you are unwilling to lose, there are lots of stories of people that have bet it all on Bitcoin and made lots of money, however, they also took a big risk. The same news about loosing millions of dollars in Bitcoin because of a hacker or dishonest employee or partner, so always beware.