THE NEXT DISRUPTION: SEPARATION BETWEEN MONEY AND STATE

The Best Introduction To Blockchain & Bitcoin

I have decided to write the following article, because we are about to experience a socio-economic revolution, yet most people know nothing about it. In the coming years, this technology will transform our lives, yet I cannot find a document that explains the subject in a friendly, one single article.

We will introduce you to the Blockchain in plain English. It was written for the individual who has had limited or no exposure to this subject. This includes every investor, physicians, lawyers, technicians, engineers, scientists, housewives, nurses, etc.

For many, this will be a life changing article. It will take you about 40 minutes to read it, so put down your phone — you will be intrigued and I hope you share it!

Happy reading!

The Start of The Era Of Individual Financial Sovereign

An ingenious technology is about to transform our lives. According to Marc Andreessen, creator of the first web browser, this is “the most important invention since the internet”.

How disruption happens (adapted from Dr. Mike’s Math Games For Kids)

Legend says that, in ancient times, a farmer once saved the emperor’s daughter from a cruel enemy. The emperor was so grateful, that he asked the man to choose a reward. As rice was the “currency” at the time, the farmer said: “My wishes are simple. Let’s get a chessboard. I just want you to give me one grain of rice for the first square of the chessboard, two grains for the next square, four for the next, eight for the next and so on for all 64 squares, with each square having double the number of grains as the square before”.

The emperor agreed, amazed that the man had asked for such a small reward — or so he thought. After some time, his treasurer informed him that the reward would add up to an astronomical sum, far greater than all the rice that could conceivably be produced in many centuries! (the answer is 2⁶⁴ -1 grains of rice).

We are all like the emperor in some ways. It is really hard for us to grasp how fast functions like “doubling” makes numbers grow — these functions are called “exponential functions” and are actually found everywhere around us — in compound interest, inflation, moldy bread and populations of rabbits.

Disruption often follows an “exponential function”. That is why it is so hard to see them coming — it happens just like a tsunami. In the blockchain world, we are arguably “in the first couple of rows” of the chessboard, so it is way too early for us to appreciate the impact that it will have in our society.

What is blockchain?

Blockchains are “an open, distributed ledger that can record transactions between two parties in a verifiable and permanent way” By design, blockchains are inherently immutable — once recorded, the data in a block cannot be altered retroactively.

Here is an analogy (from an answer on Quora from Tim Lea, author of The Blockchain — Down the Rabbit Hole)

Imagine I steal your mobile phone…

To establish the truth about my stealing your phone, both of us would typically go to court. A judge, with perhaps the help of a jury, would pass judgement based on the evidence, circumstantial and otherwise, presented from both prosecuting and defending counsels. The truth would be established based on the evidence provided, which would fundamentally be based on your word against mine.

Let’s now imagine the evidence we present to the judge is from 5,000 independent photographers who have taken a photograph of me stealing your phone. This almost becomes incontrovertible proof that I stole your phone. If I wanted to prove my innocence or try to falsify the facts, I would have to persuade at least 2,500 of these independent photographers to change their images. That would be a significant challenge. After all, I would have to speak to each of them individually to convince them to change their photographic images of me stealing your phone — and without any incentive for them to change the facts, why would they bother? This evidence becomes very strong, unless of course, I had deep pockets and a silver tongue. That said, let’s make the ability for me to change that evidence even harder.

Imagine that I have to persuade 50% of all the independent 5,000 photographers to change their images of me stealing your phone in the space of 10 minutes. Because at the end of 10 minutes all the photographs they have taken are going to be locked away in a bank vault and permanently sealed. This is going to make it even tougher for me to change the evidence. My chances of getting that elusive job of being the in-house restaurant critic at the local prison have just increased.

The final coup de grace is added when we put a combination lock on that bank vault that now houses the 5,000 images of me stealing your phone. This combination lock has more combinations on it than there are grains of sand on the planet. It would take me an estimated 650 million years to randomly crack the combination lock of this bank vault that has the 5,000 images. Clearly, it is now all but impossible for me to change the facts that I stole your phone.

Finally, let’s install a video camera that is connected to the internet that lets anyone see all the images that have been taken and permanently locked away. Not only is the act of my stealing your phone stored on photographs that are permanently locked away, but also there is complete transparency to view the evidence by anyone with access to view the images.

That is how the blockchain works in plain English. It is the “ultimate truth gatekeeper”. Blockchain is sometimes referred as “shared ledgers” or “distributed ledger technologies” (DLT).

The birth of the first blockchain

For decades, computer scientists, economists and cryptographers — i.e. scientists who code and decode messages in a secure way — had tried to conceive a form of “digital money”. One of the biggest problems was avoiding the “double spending problem”, where people would copy money in the same way they duplicate a digital file.

Amidst the summit of the financial crisis in late 2008, an elegant solution to the problem was found. The first blockchain was conceptualized by Satoshi Nakamoto and implemented as a component of the digital currency bitcoin.

Satoshi Nakamoto is the name used by the unknown person (or persons) who designed bitcoin and created its original implementation. He published an online public white paper named “Bitcoin: A Peer-to-Peer Electronic Cash System” and quickly attracted the attention of other scientists, who began communicating on online discussion forums.

Satoshi went to great lengths to ensure his anonymity. In January 2009, he sent 10 Bitcoins to cryptographer Hal Finney, creating the first transaction on the bitcoin blockchain (later that year, Hal was diagnosed with ALS, or amyotrophic lateral sclerosis, and died in 2014). In May 2010, the first purchase with bitcoin was made: Laszlo Hanyecz bought two Papa John’s pizzas paying 10,000 bitcoins, roughly valued at $25 total at the time. Just seven short years later, today the same 10,000 bitcoins are valued at over USD 10 million. And you thought your last dinner was expensive…

Satoshi last online post was in late 2010. He then disappeared and bitcoin grew mostly among computer geeks. Wikileaks started accepting bitcoin for donations and it did not take long for criminals to also start using it. In 2013, Silk Road, a dark website that sold all kinds of illegal drugs, products and services, was shut down by the FBI and its alleged owner, Ross Ulbricht, was arrested.

In late 2013, the value of one bitcoin reached over USD 1,200. In early 2014, MT Gox, the Japanese Bitcoin exchange (an exchange is a company that allows you to trade your regular local currency into bitcoin) that handled around 70% of global Bitcoin transactions, was hacked, and left customers with an estimated loss of USD 450 million. Mt Gox CEO, Mark Karpeles, was later arrested in Japan. The value of one Bitcoin dropped and was under USD 200 in 2015.

Being associated with “crime” and “hackers” did not have a positive impact on bitcoin’s reputation, as it generated a lot of FUD — fear, uncertainty and doubt. In the past couple of years, the growing acceptance and better understanding of the technology have been positive for bitcoin. As of February, 2017, one bitcoin is valued at just over USD 1,000.

Two quick definitions:

1. Bitcoin — with capital “B” — is used when describing the concept of Bitcoin, or the entire network itself; while bitcoin — with lower case “b” — refers to the token as a unit of account; often abbreviated as BTC or XBT, and also referred simply as “coin”.

2. Digital currencies are also named virtual currencies or cryptocurrencies (since they rely on cryptography for security).

How bitcoin works — a simplified explanation of the technology

Bitcoin is an open source project, meaning anyone can see the code. It is also completely decentralized, and anyone can run a computer with the bitcoin code. Once transactions are made, they are validated and each computer in the network records them in a shared public ledger that anyone can see.

The ledger records the sending address, the receiving address and the amount of bitcoin transacted. Each address is associated with a “wallet” — the equivalent of a bank account. It allows you to receive bitcoins, store them, and send to others. Each address is an identifier of 26–35 alphanumeric characters and it is public — i.e. anyone can see transactions associated with it.

In order to spend bitcoins from an address, you must “sign” the transaction with your “private keys” (also referred as “secret keys”). When you open a wallet — which anyone can do online in less than two minutes for free — you receive your “address” (also known as “public keys”). Your wallet contains your “private keys” which must be kept secure by employing a strong password.

Once transactions happen, they are grouped together in a “block” with many other transactions. Each block also contains a timestamp and a “link” to the previous block, forming a chain of blocks — hence the name “blockchain”. Using an online block explorer, you can track all blocks ever generated up to the very first block, known as the genesis block.

By design, a block can currently contain up to ONE megabyte. Once a block is created, which happens by design at an average of 10 minutes, computers in the network compete to “validate” this block. Validating a block consumes a lot of computing power, and it involves solving complex mathematical puzzles. The first computer to solve the puzzle communicates with the network so all other computers also validate the work. The winner of this “mathematical race” receives some bitcoin (currently 12.5 BTC per block) as an award. This process is known as “mining” and the method for validating transactions is known as “proof of work”. Finally, there are also voluntary “full nodes” spread across the network, which are responsible for enforcing all rules of the network and keeping a copy of the updated blockchain. This brilliant engineering design is at the heart of bitcoin and is what keeps the network secure.

How bitcoin works — a simplified view of the economics

Bitcoins are not linked to any central bank or issuing authority. It has no central governance. The code rules it all. Bitcoins can only be created by the “mining process”. Currently there are roughly 16 million BTC in circulation, valued at just over USD 1,000 each. The issuance of bitcoin is limited by “definition” at 21 million coins and this will be achieved roughly in year 2140.

Approximately every four years, the bitcoin mining reward is cut into half in a process known as “halving”. The first halving happened in 2012 when mining rewards were cut from 50 to 25 coins per block and the second halving happened in 2016, leaving the current reward at 12.5 coins per block. The next halving to 6.25 coins per block is expected sometime in year 2020. Satoshi conceived this mining process to resemble mining gold — it gets harder and harder over time.

Besides mining bitcoin, miners can also make money by charging small fees to process transactions. In fact, after year 2140, transaction fees will be the sole source of revenues for miners. You can send as many bitcoins as you want in a single transaction and one bitcoin is highly divisible. The smallest unit is one hundred millionth of a bitcoin and it is known as a “Satoshi” (=0.00000001 BTC).

So why does this matter? A brief history of “money”

A medium of exchange for carrying transactions is as old as humanity. A clearly identifiable object of value that is generally accepted as payment for goods and services is considered money. In ancient times, feathers, rocks, and others objects were considered money. Humans developed written ledgers to track “who owns what”. Later, precious metals become money in the form of standardized coins. Banks were born. Paper notes that represented debt began circulating in the economy.

A formal gold specie standard was first established in 1821 in Britain. The gold standard is a monetary system where a country’s currency or paper money has a value directly linked to gold. With the gold standard, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price.

After the Second World War, a system similar to a gold standard and, sometimes described as a “gold exchange standard”, was established with the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the U.S. dollar and central banks could exchange dollar holdings into gold at the official exchange rate of USD 35 per ounce. All currencies pegged to the dollar thereby had a fixed value in terms of gold.

In 1971, the Nixon shock was a series of economic measures undertaken by US President Richard Nixon. The most significant measure was the unilateral cancellation of the direct international convertibility of the United States dollar to gold. Now, control of money supply in the economy — known as “monetary policy” — was entirely left to Central Banks. In the USA, this is the Federal Reserve, commonly referred as the Fed.

The monetary authority controls the supply of money in the economy, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency. Further goals of a monetary policy are usually to contribute to economic growth and stability, to lower unemployment, and to maintain predictable exchange rates with other currencies. Since the 1970s, monetary policy has been formed separately from fiscal policy, which refers to taxation, government spending, and associated borrowing.

Fiat currency is legal tender whose value is backed by the government that issued it. The U.S. dollar is fiat money, as are the euro, yen, yuan, and most major world currencies. This approach differs from money whose value is underpinned by some physical good such as gold or silver, called commodity money.

What are the characteristics of money?

According to the “Money Project”, money must be a medium of exchange, a unit of account, and a store of value:

· Medium of Exchange: Can be used to intermediate the exchange of goods and services.

· Unit of Account: A standard numerical unit of measurement of value for goods, services, and transactions.

· Store of Value: Maintains its value over time.

The seven attributes of money are:

· Scarce (Limited in Supply): The supply of money in circulation ensures values remain relatively constant.

· Durable: An item must be able to withstand being used repeatedly.

· Divisible: Can be divided into smaller units of value.

· Acceptable: Everyone must be able to use the money for transactions.

· Fungible: One unit is viewed as interchangeable with another.

· Portable: Individuals can carry money with them and transfer it to others.

· Uniform: All versions of the same denomination must have the same purchasing power.

How do different types of money compare?

We can now attempt to score each attribute. Let’s use a scale from one to six points (1=worst and 6=best) to compare different types of money. For instance, here is my personal version:

Evaluating the “moneyness” in each form of money.

Although these scores are highly subjective — hence controversial — it shows that bitcoin is arguably the “best form of money ever invented”. In other words, bitcoin intrinsically has more “moneyness” in itself than other forms of money.

Why bitcoin matters?

Here are some characteristics of the Bitcoin economy:

· Fixed and transparent monetary policy: The money supply is known from the start and issuance of new coins decreases every four years. Only 21 million coins will ever be created by year 2140, which makes it almost inconceivably scarce. It is a low-inflation system that transitions to a zero-inflation system.

· It is outside the system: no banks, no governments, no thieves, nobody is able to control bitcoin. Nobody can freeze or seize bitcoins without private keys. Bitcoin simply exists as code running non-stop in thousands of computers around the globe.

· It is decentralized: there is no single point of failure. Computers can enter or leave the system at will. Since the ledger is distributed, operations continue smoothly. Bitcoin has been running for over eight years uninterruptedly.

· It is global: once you have your wallet in your phone or computer, you can transact with anyone in the world. Transactions are confirmed typically within 10 minutes. It is like email for money; it is as easy as sending a picture.

· It is permanent: nobody can shut down Bitcoin, unless you turn off the entire internet or the electricity grid in the world. Just like gravity, it cannot be extinct.

· It is permission-less: anybody can download a free wallet in one minute and become her own global bank; no permission required. Transactions happen peer-to-peer with no reliance on third parties.

According to research by the Bank of Canada, the emerging Bitcoin economy has many similarities with the economy based on gold standard.

What are the uses of Bitcoin?

Bitcoin currently has three (3) main uses:

1. Store of value: investors who want to store wealth in bitcoin.

2. Remittances: these are transfers of money by foreign workers to individuals in their home country.

3. Payment network: these are payment transactions made with bitcoin. They can be in large amounts; for instance, the purchase of a car; or they can be small (also known as micro-transactions); for instance, buying coffee or a piece of gum.

Besides these three financial uses above, blockchains can also be used for many other purposes. For instance, you can record and store valuable documents — e.g. marriages, births, deaths, healthcare records, land titles, insurance policies, etc. Only people with the correct “keys” are able to access the details. Hence, the blockchain revolution will reach well beyond the financial system.

What is the potential impact of bitcoin in the economy?

The short answer is nobody knows. There are many factors at play that can influence the extent and speed of bitcoin adoption. Some factors are “endogenous” to Bitcoin — e.g. technological advancements can be further built on Bitcoin. Other factors are “exogenous” to Bitcoin — e.g. user behavior, reaction from banks, government regulations.

Let’s first see some interesting figures:

· The money supply of bitcoin as of Feb 17 (sometimes referred as market cap) is the equivalent of USD 16 billion (= 16 million coins at ~ USD 1,000 each).

· Total global wealth as of 2016 (source: Credit Suisse) = USD 260 trillion, with 10% of all adults in the world having more than US 70,000.

· World Gross Domestic Product in 2016 = USD 75 trillion led by the USA = $18 trillion, China = $11 trillion, Japan = $4.7 trillion; Germany = $3.5 trillion, UK = $2.7 trillion.

· Global stock exchanges market cap = over USD 70 trillion (data from early 2016); New York Stock Exchange leads with $18 trillion; NASDAQ = $7.5 trillion, Japan Exchange = $5 trillion.

· Market cap of some companies in USD as of Feb/2017: Apple = $700 billion, Alphabet (Google) = $600 billion, Microsoft= $500 billion, Visa = $200 billion, Citibank = $170 billion, Pay Pal = $50 billion, Deutsche Bank = $27 billion; Newmont (Gold mining) = $ 20 billion, Western Union (money transfer) = $10 billion.

· Total global currency in circulation (as of 2008): over USD 4 trillion.

· Total global sovereign debt (2016) = USD 220 trillion, according to the Institute for International Finance.

· USA Federal debt (2017) = USD 20 trillion, up from $10 trillion in 2007.

· Hedge Funds market size = $2 trillion.

· Global electronic payments = USD 2 trillion per year.

· Global e-commerce market = USD 1 trillion per year.

· Remittance market = USD 600 billion per year.

· Global financial assets of households = $100 trillion (source: Gabriel Zucman, The Hidden Wealth of Nations).

· Wealth in tax heavens = estimated at USD 30 trillion (source: Trace Meyer, from RunToGold).

· All gold in the world = USD 7 trillion; with over 200 million people owning some gold.

Now let’s see some demographics for the USA. Here is the median net worth (= assets — debts) per age group including equity in real estate (U.S. Census Bureau, 2015, per individual):

· Less than 35 years old = USD 6,700

· 35 to 44 years old =USD 35,000

· 45 to 54 years old =USD 85,000

· 55 to 64 years old =USD 140,000

· Over 65 years old = USD 170,000

As expected, older people tend to be significantly wealthier than younger ones.

There are currently an estimated 2 billion people (roughly 25% of global population) that are “unbanked”, meaning they have no bank accounts, and no credit cards. They are excluded of the financial system. By 2020, there will be an estimated 6.1 billion smartphone users on Earth. Bitcoin means every one with a smartphone can be connected instantly into the same ecosystem and transact directly with each other, with no third parties involved, no permission required, anywhere in the world.

Let’s now revisit the common uses for Bitcoin.

1. Store of value: Bitcoin has started to attract part of the gold market and some of the wealth stored in tax heavens . Also, as the population ages, the wealth will trickle down from the older to the younger generation and it is reasonable to assume that younger people will be more receptive to bitcoin. Hence, bitcoin is well-positioned to succeed as an instrument for store of value.

2. Remittances: there are an estimated 250 million workers who send money home to their families. This is one of the largest financial inflows to developing countries. Most of these people, both on the sending and receiving side of a remittance are “unbanked”, meaning they do not have access to a bank account, typically because there are no banks where they live or because they do not qualify or can afford fees associated with a bank account. Companies and banks that serve this market typically charge 8% to 10% of a typical remittance and the transaction may take up to ten days to conclude.

Bitcoin (or some other digital currencies) will likely dominate this market in less than a decade because its value proposition is vastly superior. Fees are much lower and transactions take only minutes to confirm. Bitcoin start-ups like Abra (goabra.com, the “Uber” of remittances) enable a transfer directly from a phone to another phone, with no long forms to be completed. It is more effective and convenient, and it serves a market where people are in real need.

3, Payment network: Bitcoin has potential to grab share from payment networks like Visa, MasterCard, PayPal and others. Although Bitcoin transactions take some minutes to confirm, they are credited to the merchant account immediately, and there are no charge-backs due to a fraudulent or disputed transaction, making it very attractive to merchants. Credit card companies typically keep anywhere from 2% to 5% of a transaction and take over 30 days to pay merchants.

The current problem is that the Bitcoin network can handle only about 3–5 transactions per second (tps) while VISA handles around 2,000 tps and is able to process up to 56,000 tps, if needed. Several technologies to scale Bitcoin already exist, but it may take a few years before they are implemented (to learn more, you want to search about segregated witness, lighting network, bitcoin unlimited, etc.).

So, at this point, Bitcoin is better positioned to process high-value transactions where transaction fees around one US Dollar are not an issue. However, until Bitcoin scales, small payments (like a cup coffee) may be an ineffective use of bitcoin. Other digital currencies stand a good chance of dominating this segment, especially for small daily transactions — more on that later.

Hence, for each of these uses, there is a significant potential for bitcoin price appreciation. Some people in the industry even estimate that one bitcoin will be valued at over USD 1 million per coin in a decade (which will imply a market cap of approximately USD 20 trillion) — I personally find this too optimistic, albeit possible.

Disadvantages and risks of bitcoin

1. Electricity consumption:

Unfortunately, securing the bitcoin network is not very ecological. Miners use specific computers (known as ASICs) and the bitcoin network currently runs at 400 megawatts (Feb/2017), which is enough to power about 300,000 US homes. These computers also generate significant heat and need to receive proper cooling. Because electricity is by far the main cost for mining bitcoins, miners usually seek locations with cheap access to electricity and cooling.

2. Network attack:

In order for hackers to successfully attack the bitcoin network, they would need to control over half of the computing power of the network — this is known as a “51% attack”. If they succeed, during the attack, they can create double spending transactions and they can prevent transactions from confirming. But they still cannot reverse transactions from long ago, they cannot create new coins out of thin air, and they cannot steal coins from other people’s wallets. The computing power of bitcoin has been growing exponentially, so the network is increasingly more secure. It would take well over 500 times the computing power of Google to perform a successful attack on the network. The attack cost is estimated at least USD 1 billion in hardware and over $2 million in electricity per day. The economic incentives for the rational attacker are to collaborate rather than to attack.

3. Regulation:

Bitcoin is “outside” the traditional financial system, hence it is not regulated — at least, not yet. The US government currently considers bitcoin property; hence gains due to bitcoin price appreciation are taxed as capital gains and must be reported. Also, any income in bitcoin must be reported. Other countries are also studying how to regulate Bitcoin. China is always on the news due to their frequent meeting with bitcoin exchanges and implementation of new rules.

Governments have been developing a love-hate relationship with bitcoin. They hate the fact that it is something out of their control, and they cannot kill it. They may even outright ban exchanges from trading bitcoin from/into fiat money, or limiting their interactions with banks. If this happens, there is no question Bitcoin adoption and value will suffer. In Venezuela , bitcoin was recently banned, but people still use it anyways, due to the un-precedent deterioration of the economy. Nobody trusts their currency, but they trust gold and bitcoin.

On the other hand, rational governments understand the potential of bitcoin and realize that it can be a competitive advantage if they can properly regulate it. There is also game theory at play here: if other countries embrace bitcoin, countries that banned it will lag behind in the global economy. Here is an interesting quote: “Money has a powerful network effect. The first country to embrace bitcoin will tip the rest of the world and end up fabulously wealthy”.

Even though this may be exaggerating, governments are probably better off attempting to properly regulate bitcoin in the coming years. In fact, the most probable scenario is the one where governments will launch their own version of “fiat money in a blockchain” — like a “bitdollar”, for example. It will still be controlled by central banks and will co-exist with bitcoin and other “independent” digital currencies.

So, do not be surprised if you are able to pay your taxes with bitcoins in the near future! Did you think you would escape?

4. Bugs:

The bitcoin software is open source, so anybody can check the code. In 2010, there was a bug, which was quickly resolved and, ever since, the bitcoin network has been reliable. A serious bug in the code is possible, but unlikely.

Some scientists believe that future advancements in quantum computing — where computers will be able to do exponentially more calculations per second than today — may allow hackers to break the cryptography of Bitcoin (and most other networks), rendering them useless. Although this is certainly possible, Bitcoin can also take advantage of these computing advancements to revise its cryptographic algorithms, staying ahead of hackers.

5. User mistakes:

With Bitcoin, there is no call center to ask for help if you have a problem. The user has no recourse. Moreover, on a psychological level, we have always been conditioned to trust an institution to take care of our money instead of ourselves. So using bitcoin and becoming your own bank requires a mindset shift. The younger generation seems eager to deal with this shift — a recent white paper pointed out that 92% of millennials firmly expressed their distrust in banks.

With bitcoin, the user must take full responsibility for securing and using the funds. If not careful, users are subject to theft. Also, if an user sends funds to a wrong address (say you send it to Alice’s address, but you meant to send to Bob’s), the transaction is irreversible, so you must ask Alice to return your funds. So, do as your mom said and be nice to Alice…

6. Reputation:

So far, despite all its benefits, bitcoin has been heavily associated with hacks and illegal uses. When an exchange is hacked (like Mt Gox in 2014 or Bitfinex in 2016), the entire ecosystem suffers. Theordinary person believes that the “bitcoin” network was hacked, when in a fact, it was a company using bitcoins that was hacked. This is like saying “they robbed the US Dollar”, when in fact they should say “they robbed a bank that carried US Dollars”.

Also, criminals unfortunately use bitcoin just like they use fiat currencies. There are way more cases of legitimate use for bitcoin than obscures ones. However, public perception suffers when controversial websites (like Silk Road and Wikileaks) accept bitcoin. There are also numerous scams that involve bitcoin and pray on naïve users — more on that later.

Finally, because the user interface on some older bitcoin wallets was not exactly super-friendly, some users found it hard to use. Fortunately, user interfaces are improving fast.

7. Privacy:

Transactions using bitcoin may not be entirely private. While the network only tracks sending address, receiving address and amounts, if you ever associate your name/ID with an address (for instance, by using an exchange), then a determined technically-savvy person can track your transactions. Thus, we say bitcoin transactions are pseudo-anonymous. There are services (like coin mixing) that allow you to enhance your privacy, but they come with risks.

Other cryptocurrencies

Bitcoin is eight years old and has been quite successful. It has a current money supply (commonly referred as market cap) around USD 16 billion, with approximately 16 million coins now available, each valued around USD 1,000. The annual inflation rate of bitcoin is currently around 4% (=12.5 bitcoins per block every ten minutes, thus ~ 660,000 new bitcoins per year). This inflation will always decrease as more bitcoins are created and the mining rewards are cut in half roughly every four years — next having will be around 2020. Over 75% of all bitcoins in existence (21 million around year 2140) have already been mined. The volume of bitcoin traded globally often surpasses the equivalent of USD 200 million per day.

Following the success of bitcoin, there are currently over 600 known “altcoins” or alternative cryptocurrencies (see coinmarketcap.com for more information). While some are legitimate, many are outright scams that target naïve investors. New cryptocurrencies are launched often.

All cryptocurrencies combined currently have a market cap around USD 19 billion, thus bitcoin holds about 85% of the total crypto market. Let’s see a few altcoins.

Ethereum

Ethereum is a couple of years old. It was created by the prodigy Canadian Vitalik Buterin. It is an open-source blockchain designed to be broader and more flexible than bitcoin. It is a decentralized computing environment, and unlike bitcoin, it is NOT designed to be “digital money”. Its main goal is to offer an environment to develop and host “smart contracts” — i.e. contracts that self-execute provided that specific conditions are met. As a simple example, if you are buying a house, you can program the contract into the blockchain and, as soon as all signatures and requirements are met, the funds held in escrow in the blockchain are automatically released to the seller. Ethereum contracts will have enormous implications for banks, trading, insurance, real estate, healthcare, identity, voting, and many other uses, since they can be faster, cheaper and more accurate than traditional contracts.

With Ethereum, you can create applications with a decentralized architecture. Imagine a future Facebook or Google like service, but instead of having centralized company servers (with the current client-server architecture), you would have the service completely decentralized, so nobody would own your information.

The Ethereum network has a token (or coin) to power it, named Ether (ETH), similar to bitcoin BTC. There are currently almost 90 million Ether in circulation, with a new 18 million tokens mined every year; hence a 20% current annual inflation which will decrease every year as supply increases. Sometime in 2017, Ethereum intends to switch from Proof of Work to a new Proof of Stake consensus algorithm, named Casper. Casper will require less mining efforts, so the creation of new coins will be revised down and its inflation rate may decrease significantly.

In the summer of 2016, a prominent project on Ethereum, the DAO — Decentralized Autonomous Organization, was hacked. The hack was later reversed by the Ethereum community in a controversial decision that ended up originating a different blockchain, named Ethereum Classic with a different token, Ether Classic (ETC). Now Ethereum Classic and its token Ether Classic (ETC) co-exists with the original Ethereum chain and its token Ether (ETH).

Ether (ETH) currently has a market cap of around USD 1 billion, with about 90 million coins in circulation, each valued around USD 12.

Litecoin

Litecoin was inspired by Bitcoin and is technically nearly identical to it. Its creator, Charlie Lee, is a former Google, and now Coinbase employee. He created Litecoin in late 2011, with the goal of improving on some aspects of Bitcoin. It has a decreased block generation time (2.5 minutes vs 10 minutes), increased maximum number of coins (84 million vs 21 million), and a different cryptographic algorithm that makes it easier for regular computers to mine it.

About 60% of all Litecoins (50 million) have been created and its current inflation rate is about 11% per year. Litecoin has faster confirmations and is considered the “silver” to the Bitcoin “gold”. Litecoin, known as LTC, has a market cap of around $200 million with 50 million coins available, each valued around $4.

Monero

Monero is a cryptocurrency that focuses primarily on user privacy. Unlike most cryptos, all Monero transactions are not trackable, meaning that you are not able to know the address of the sender, nor the address of the receiver. And not the amount of the transaction either. As of right now, it is truly anonymous, and for that reason, it has been the top choice of users performing illegal activities. Monero, also known as XMR, currently has a market cap of around $190 million, with roughly 14 million coins in circulation, each valued around $14.

Dash

Dash is about three years old and intends to become “digital cash” for our society. It has features that enable transactions to be “fast” and “private”, should the user choose so. Although it had controversial mining beginnings, it has been performing very well in recent months. Dash (DASH) currently has a market cap of around $160 million, with 7 million coins in circulation, each valued around $23.

Converting from one crypto to another

Since bitcoin has a much larger infra-structure than all other coins, bitcoin has become the “reserve currency” of all cryptocurrencies. In other words, if you want to purchase other crypto, you will likely need to purchase bitcoin first before you can transform them into other crypto. Services like ShapeShift.com, Changelly.com and trading websites allow you to easily convert from one cryptocurrency to another.

Scams

There are many dishonest people taking advantage of naive users. Here are some common scams that you should know:

· Cloud mining scams: these are companies that will charge you a monthly fee in cryptocurrencies or fiat money, promising that they will mine cryptocurrencies for you on their “powerful computers” and deposit in your wallet. Most companies in this segment are outright scams. They often keep your money and your mined coins — be careful. An exception that I know is Genesis Mining, which is an honest company. But even so, the math generally does not work in your favor — i.e. by the end, you may receive fewer coins than what you put in.

· Investing scams: these are companies that ask you to send them cryptocurrencies and promise an outrageous daily/monthly return. They are usually Ponzi schemes, multi-level-marketing scams and they will keep your money.

· New cryptocurrencies scams: these are people who are launching new currencies (or online projects) and want to attract investors for a “pump and dump” scheme, meaning they will artificially drive the price up and then sell very rapidly, leaving coins almost worthless and often abandoning the project.

There are also other types of cryptocurrencies that are designed only to steal money — OneCoin.eu is an example of a scam that left many people with losses and is still active. Stay away!

· Fake wallets: some people create wallets that promise to hold your money. And, while they allow you to deposit your money and view your balances, they never let you withdraw your money. For instance, Dash-wallet.com is an online Dash wallet that is a well-known scam targeting Dash users.

(by the way, Dash team, you should alert people about this scam in a much more prominent way).

· Ransom-ware: this is not directly related to cryptocurrencies, but it has been increasing exponentially in the past years. Hackers will attack a network (typically a company, hospital, university, but sometime individual computers) and will encrypt the content of the network, leaving users unable to access their own information. They usually demand a “ransom” to provide you the password to un-encrypt the network, and that ransom is usually demanded in cryptocurrency. So, always back up your data, use a firewall and anti-virus software, and never run a suspicious program.

Unfortunately, if you fall victim of one of these scams, you have little to no recourse. So, let’s talk about acquiring bitcoins, using them and staying safe — which is not that hard, and way better than storing money under the mattress.

How to acquire cryptocurrencies

You can acquire bitcoin (and other coins) through mining, receiving payments in bitcoin, or just buying it. In the beginning, mining bitcoins required just a simple computer, but these days are long gone. Today, it rarely makes financial sense for an individual to mine bitcoins. Bitcoin mining has become an industry with specialized and well-funded companies, most of them located in China.

You can download a bitcoin wallet for free and then request payments in bitcoin to be sent to your wallet address. Or, you can use your fiat money (USD, EUR, YEN, and others) to buy bitcoin from other people, at localbitcoins.com, for example. You can also trade your fiat money for bitcoin using a bitcoin ATM — there are over 1,000 bitcoins ATM’s spread across the world. Or you can buy OTC (over the counter), typically directly from a miner or institutional seller.

My favorite method for individuals is through an exchange. They are similar to online banks and they allow you to trade your fiat currency for bitcoins. You can use your bank account, wire transfers, credit cards and debit cards. Exchanges must comply with government rules for AML — Anti Money Laundering — and KYC — Know Your Customer — rules, so they will ask you for many documents -like drivers’ license, proof of address, etc. — before they approve you. For law abiding citizens, these requirements are not a problem, they just take a little effort. Some exchanges will even insure your funds. There are over 100 Bitcoin exchanges, serving virtually every country. I’d suggest using a reputable, well-funded exchange, incorporated preferably in your country. In the USA, there are Coinbase, Kraken, Gemini, Xapo, ItBit, and more. That said, just like any bank, exchanges can be hacked, disappear, freeze or seize your money overnight. Thus, I’d suggest avoid “parking” your money in an exchange. We will talk about some best practices soon.

If you ever decide to purchase bitcoins, I’d suggest to “start small”. Buy just a fraction of one bitcoin, see if the acquisition method — e.g. the exchange you used — is reliable, learn to download and use your own wallet, transfer some funds between wallets, and learn to properly secure your wallet. After doing all that, you are ready to buy more bitcoins!

How to use your cryptocurrencies

While investors in bitcoin follow the “buy and hold” approach, some people want to spend their bitcoins. For them, there are some merchants who accept bitcoins directly like Microsoft, TigerDirect, Dell, Overstock, etc. You can also use Purse.io to make online purchases at Amazon with discounts around 15% or more.

There are also services that allow you to load bitcoin into an online account where they convert your balance to USD (or your local fiat currency), and you can use a Visa or MasterCard debit card linked to that account for everyday purchases anywhere Visa or MasterCard are accepted. That includes ATM’s fiat withdrawals in most countries. ShiftCard (from Coinbase), BitPay, Xapo and other companies offer this service. It works seamlessly and with very low fees.

Finally, when sending bitcoins, I strongly recommend people to be very careful, especially on the first dozen transactions, when they are still learning how to use a bitcoin wallet. Transactions are irreversible, so ALWAYS triple-check the address and the amount before signing the transaction. And, before you send the transaction, I’d also suggest including a reasonable fee for the miners (currently the equivalent of USD 0.80 is plenty, think of it as small tip) just to ensure that your transaction confirms within the hour — more on that later.

How to secure your cryptocurrencies

Becoming your own bank is a powerful thought, but it comes with great responsibility and requires a shift in our mindset, since we have been conditioned to delegate this task to banks. Bitcoin is very secure, but you cannot be sloppy.

Bitcoins are not a file on your computer or phone. All the information is on the blockchain. The only information you need to “spend” coins is the “private key” associated with a “public address”. Also, you can reconstruct a public address from the private keys, but the reverse — reconstructing a private key from a public address — is impossible. It is a one way street! Hence, as long as you have your private keys safe, you are good!

You always store bitcoin in a wallet, and there are several types of wallets. Most are free and easy to use. Let’s see them from the least to most secure, in my personal opinion:

· Exchange wallets: while exchanges offer convenience (some even offer insurance) to trade bitcoins, they are always a target for hackers (see Mt Gox in 2014 and Bitfinex in 2016) as they are always connected to the internet. Moreover, they can disappear overnight and freeze/seize your money. Just like a bank, they are also subject to regulation as they are part of the fiat financial system. So, as soon as you can, I’d suggest you move your bitcoins to another type of wallet.

· Mobile wallets: it can be very convenient to have a few bitcoins on your phone. But, it is subject to theft and hacking. There are several great wallets; I personally like Mycelium and Jaxx where I keep just a few dollars’ worth of bitcoin.

· Online wallets: they are also convenient with acceptable safety. But they are vulnerable to hackers, and they may shut down their business overnight. Blockchain.info is a great online wallet with excellent security features.

· Desktop wallets: these are software that you download and run on your computer. They are safe and I personally recommend Electrum, which offers many features. The downside is that, if you leave your computer connected to the internet, they are vulnerable to hackers.

· Brain wallets: these are wallets where you memorize a set of words in a correct sequence, and as long as you remember the words and their sequence, you can later restore your funds. The problem is that if you forget the words, your bitcoins will remain forever in a limbo, so I do not recommend them.

· Paper wallets: these are great wallets to “park” your coins and it is free. You can use a service like bitaddress.org to print your wallet on a piece of paper and then you store it offline, away from hackers, preferably somewhere that is water and fireproof. The downside is that if anybody comes across your paper wallet, they can wipe out all your funds with your private keys. And please, do NOT take a picture of a paper wallet and store it on an online computer, as it will be subject to hacking, which is exactly what you are trying to avoid. You may store a picture of the paper wallet on one (or several) USB pen drives — preferably encrypted with a password — and keep them offline in a safe place.

· Hardware wallets: think of them as an insurance policy for your funds. They generally cost around USD 100 or less and are very user friendly. They allow you to you store your coins inside a USB drive-like device that is protected with a PIN/password that you keep offline away from hackers. If someone steals your hardware, they still need your PIN/password, so you are safe. If you ever lose your hardware wallet or if it malfunctions, you can still recover your funds using a recovery seed. KeepKey, Trezor and Ledger are well known hardware wallets.

When your wallet is online (i.e. connected to the internet), it is vulnerable to hackers. This is known as hot wallets or hot storage. If your wallet is offline (i.e. disconnect from the internet), it is not vulnerable to hackers, and it is known as cold wallets or cold storage.

You should always back up your wallet and, when possible, you should also enable two-factor authentication — which requires a password and a code in your phone before you can log in. This is especially true for exchanges and online wallets. And, please always protect your computer and phone and never install a program that seems suspicious.

Most wallets provide you with a mnemonic recovery seed. This is typically a set of 12 to 24 words that you must write down in the correct sequence and store offline in a safe place. Anyone who sees this seed can access your funds. Again, NEVER store seeds online where it can be hacked.

You should also plan on how to transfer your bitcoins to somebody in case you die. If you do not leave instructions on how people can retrieve them, they will be forever in a limbo. There are several cases of people who were sloppy with their bitcoins, especially in the early days when bitcoins had little value, and lost them forever. There are estimates that up to 1 million coins may be lost forever and never spendable. There is a well-known case of one person who mined about 7,500 bitcoins in the early days and accidently threw the hard drive in the trash with no back-ups and no recovery seeds. He searched for it extensively in the dumpster, but never found it. This is about USD 8 million gone! So, do not be that guy! Lost bitcoins are removed from the bitcoin economy, so the actual number of bitcoins in circulation will be less than 21 million in year 2140.

There are additional ways to secure your funds (e.g. multi-signatures wallets), but we will not discuss them. Storing your own bitcoins is very safe and relatively easy, but you must be somewhat paranoid about security.

Bitcoin recent developments and near future

The pace of innovation in all blockchain-related topics has been astounding! In the past few years, blockchain businesses have attracted about USD 1.5 billion in investments from venture capital funds (VC’s). Coinbase, a US based exchange, raised over $160 million. Bitfury, a mining company, received over USD 60 million. 21.co received over $100 million. According to Coindesk, companies like Google Ventures, Andreessen Horowitz, Winklevoss Capital, Kleiner Perkins and individuals like Sir Richard Brason, Redi Hoffman and Ashton Kutcher are investors in blockchain-related companies.

The blockchain industry has also been attracting brilliant minds from diverse fields. There are academics from Ivy League schools working on research, former developers from companies like Google and Microsoft, previous bankers from Goldman Sachs, JP Morgan Chase, and ex-management consultants from McKinsey, Boston Consulting Group, and Bain.

Bitcoin (and other crypto) will integrate with the Internet of Things and Artificial Intelligence. A decade from now, imagine that your fridge will find out what you need to buy, and it will automatically place an order to the supermarket for your groceries. A few minutes later, a self-driving car (or even better, a flying drone) will drop your groceries at your doorstep. The fridge wallet will automatically send the correct bitcoin amount to the grocery store and to the self-driving car. You will receive a notification on your phone. The entire process will happen automatically while you enjoy a glass of wine!

There have been intense discussions on how to scale bitcoin, so it can process more than the current five transactions per second limit. At some peak times, the network has more transactions than it can handle. Thus, transactions with low mining fees are taking too long to confirm, sometimes many hours. That is the reason I’d suggest always including a reasonable mining fee when sending transactions (around 80 cents of a dollar is plenty to ensure your transaction will likely confirm in less than one hour).

In the scaling discussion, there are four groups of miners: one group signals that they want to scales using an improvement named SegWit (segregated witness), another other group signals they want to scale using Bitcoin Unlimited (which would increase the block size), some miners want no change, and some miners want both. As long as the majority of the mining network does not agree, there is no change. This scaling debate has been going for well over a year with no solution in sight. This shows that the design of bitcoin is a blessing and also a curse at the same time.

It is a blessing because it proves that Bitcoin exists by itself — it is truly autonomous and immutable. Nobody can control it, even if it is to improve it. It just sits there, doing its own thing…

And it is a curse, because there are several technologies that will make it better. They are tested and ready to be deployed. Yet people operating the mining network refuse to reach an agreement. Thus, the network becomes stagnant, not because of lack of technology, but because humans cannot cooperate and compromise. It is frustrating…

That opens a door for other cryptocurrencies to eat Bitcoin’s lunch. If Bitcoin cannot scale soon, fees for small transactions will become too high, undermining its feasibility as payment method for small transactions. Few people will want to pay $1 in transaction fees for a coffee that costs $3. Other cryptocurrencies — maybe Litecoin, which has plenty of excess capacity and will likely implement SegWit soon — will fulfill this vacuum left by Bitcoin. Bitcoin may still succeed as a store of value and as a payment method for large transactions, where paying a small transaction fee is not a problem. Another crypto will capture the value as a payment method for small transactions. So, I would be surprised if another crypto disrupts bitcoin at least for some use cases…

Nowadays, most of the bitcoin trading is happening in Japan while most of the mining power is concentrated in China. The People’s Bank of China (PBOC) — China’s Central Bank — has frequently been in the news due to implementation of new policies for local bitcoin exchanges, with Anti-Money Laundering (AML) and Know Your Customer (KYC) rules. Some people see this as good news, since China may be trying to integrate bitcoin. Other people fear that PBOC’s intervention will slow down the advancement of bitcoin. While it could be a huge blow to short term adoption, it would also clearly demonstrate China’s fear of bitcoin’s potential, making it even more attractive …

In the USA, throughout 2017, the Securities and Exchange Commission (SEC) is expected to either approve or reject three bitcoin exchange traded funds (ETF’s) proposals. The first decision is about the ETF’s proposed by the Winklevoss twins (the ones from Facebook, who currently own the bitcoin exchange Gemini) by early March. If a bitcoin ETF is approved, investors will be able to use the traditional financial system (through brokerage accounts, retirement accounts, etc.) to invest in bitcoin, and we can expect a significant inflow of capital. While a bitcoin ETF certainly is a nice option for investors, the ETF money is kept within the current financial system tracking the performance of the underlying asset (bitcoin). Hence, if you want funds “outside” the traditional system, you should buy “real” bitcoins and store in a wallet that you fully control. If the SEC rejects the ETF, it just proves how “alien” bitcoin is to the traditional financial system. Again, one could argue this makes bitcoin attractive…

Finally, Bitcoin is an experiment that, within a few decades, will probably have a binary outcome: either it will fail spectacularly or it will reboot our socio-economic system.

Should I invest in bitcoin?

I do not know. It depends on your investment goals, your risk tolerance, your understanding of the technology, your view on global economics, your faith in the current financial system, your world views… So, you need to answer this question for yourself.

There are estimates that Satoshi mined over 1,000,000 coins in the early days. Time for a fun fact: if the price of one bitcoin ever reaches USD 1 million, Satoshi can become the world’s first trillionaire.

There are also rumors that the Winklevoss twins own about 1% of all bitcoins, which would be around 150,000 BTC’s. Redwood City Ventures, estimates that only about 400,000 people own more than one bitcoin. This is less than 0.01% of the world’s population, so there is definitely a long way before bitcoin reaches the ordinary investor. But I would not be surprised if, in 5 to 10 years, this number multiplies by 10 or even 100 times. Because of the still limited adoption, there is a common saying among bitcoin believers: “Remember the dawn of the internet in the 90’s. That is where Bitcoin is today — it is not too late. The best time to consider bitcoin was in 2010, the second best time is now”.

Since the financial crisis of 2008, many people are losing confidence in the financial system. Between 1913 and today, due to inflation, the US Dollar has devaluated over 98%. It means that $100 today is worth less than $2 just over 100 years ago. People are increasingly concerned about the fractional reserve banking model, where you deposit your money, and the bank makes loans or investments with it, holding only a fraction of your deposit, as reserves. The current US reserve requirement is 10%, meaning banks can loan or invest the remaining 90%. Thus, if many people decide to withdraw their money at the same time, banks are just not able to honor their customers’ deposits. That is why, during the 2015 crisis in Greece, you could only withdraw up to EUR 50 per day!

In most countries, debt levels have been rising much faster than GDP — Gross Domestic Products. In many regions, we are seeing near zero interest rates or even negative interest rates in the banking system. To fight the financial crisis, central banks had to print new money “out of thin air”, in a process known as “quantitative easing”. In the USA alone, federal debt doubled from USD 10 trillion in 2007 to $20 trillion in 2017, with no signs of reversion in this trend. Similar stories are true for most countries, and the return of high inflation is again a real possibility.

The Eurozone and the sustainability of the Euro currency are again threatened by the resurgence of the debt crisis in Greece and an apparently unsolvable banking crisis in Italy. China’s growth bubble is again a global concern and economic stimulus from the Bank of Japan has not been working in decades.

There has also been what is known as “war on cash” or demonetization in places like Europe, which removed the EUR 500 bills from the economy in 2016. More importantly, last November, India declared that, the two largest bill denominations the 1,000 rupee (worth about USD 15) and the 500 rupee (= USD 7.50), which represented over 85% of the physical money in circulation, were no longer legal tender. The intent was to combat tax evasion, but this action generated a “race to the banks” and innumerous social problems. Hence, all these growing economic uncertainties are increasingly attracting investors to bitcoin, who want “protection” against “failing governments”.

You can find articles that argue that bitcoin belongs in a well-diversified portfolio, suggesting that investors allocate anywhere between 1% and 5% of their liquid investments to bitcoin. In its short history, bitcoin’s price has been very volatile (i.e. it changes rapidly and unpredictably), and it has been an “uncorrelated asset”, meaning that it does not follow the performance of other assets, like gold, currencies, stock market, and others. No other asset in history has evolved from concept to billions of dollars in stored value so quickly. And, no asset has followed such a predictable supply trajectory.

Bitcoin also offer investors “asymmetric returns”: it may go to zero and investors may lose about USD 1,000 per BTC (this is the maximum you can lose); but it may go to USD 100,000 per BTC (or more), offering investors a 100 times return (there is no maximum on what you can gain).

Using data from the last two years, there is one simulation where a fictitious Alice has a portfolio composed of 70% bonds, and 30% stocks. Bob has a portfolio with 70% bonds, 29% stocks and 1% bitcoin. It turns out that, in this particular simulation, Bob’s portfolio offered better expected returns with lower volatility than Alice’s; in other words, a higher Sharpe ratio, which is desirable.

As someone once said: “Do you know what is crazy? Investing all your money in bitcoin. Also crazy? Investing nothing in bitcoin”. Bitcoin is risky because it does not belong in the traditional financial system. Ironically, this is exactly why it is so valuable. In the future, some people believe that bitcoin may attract not only institutional investors, but also governments’ investments. That remains to be seen.

Bitcoin is no longer only for nerds, it may belong to an investor’s diversified portfolio. So I’d suggest you perform a careful and independent research before you invest in bitcoin (or any other cryptocurrency). If you consult your financial advisor about bitcoin, just be aware that he may not understand it (feel free to give him this paper), he cannot sell it, nor can he receive a commission from it. Just saying…

Final thoughts

Bitcoin is complex because it is two things at once: it is a payment system (like Visa) and token/currency (like the US Dollar). But just like you do not need to be a mechanic to drive a car, you do not need to know all the mechanics of bitcoin to use it properly. We all use Google on a daily basis, without knowing about search algorithms.

Bitcoin is permission-less, anybody can use. I consider it a freedom enhancing tool. It is about choice, about inclusion, about trust, about individual financial sovereign. Just like religion is separated from the state in many countries, now money can become separate from the state. Bitcoin resides outside the traditional financial system away from controls of Central Banks.

In the past, technical jargon, bad actors, price volatility, and sensational media may have kept much of the masses away from bitcoin. Now, demographics will play a key role in the adoption of cryptocurrencies. CNBC reports that, over the next few decades, we will experience the “great wealth transfer”, where “Baby Boomers”, the wealthiest generation in American history, will transfer about USD 30 trillion to their heirs. Furthermore, kids will be able to use cryptocurrencies as soon as they start using a smartphone. When they become adults, they may have no interest in a bank account or credit card. Imagine explaining to them “APR’s — Annual Percentage Rates”, or “overdraft fees”, “monthly account maintenance fees”, “minimum required account balance”, “no transactions on weekends”, or the fact that it takes “several business days to clear a transaction”. Banks may need life support…

Cryptocurrencies may advance its adoption either “top-down” or “bottom-up” — likely both at the same time. We have been seeing wealthy individuals using bitcoin as a store of value — this is top-down. And, it may also happen bottom up, as it attracts the “unbanked” and enables more effective transactions in remittances and micro-payments.

Cryptocurrencies were ingenuously engineered from the scratch to be a better form of money in our age. It is “gold with a tele-transporter”. Bitcoin moves the equivalent of 45 tons of physical gold every day with less than 0.01% in transaction fees. Bitcoin is the “de-facto reserve currency” of all cryptocurrencies today. This may change, as bitcoin itself is susceptible to disruption. It is definitely possible that another cryptocurrency — maybe not even invented yet — will surpass bitcoin one day.

In the next decades, cryptocurrencies will likely co-exist with fiat money, issued by Central Banks. In fact, within a decade, I’d expect bitcoin to become a top 10 global currency, along with the US Dollar, the Euro, the Yen and the Yuan. There is no point in extinguishing other currencies to be successful — they can just co-exist. Some economists expected the Yuan to surpass the US Dollar as the global reserve currency by 2050; now we should ask ourselves whether a cryptocurrency could do so.

Finally, cryptocurrencies may be slowed down but, by design, they are like gravity — impossible to stop them. They will change the power structure in our society. As security expert John McAfee says “the Pandora box has been opened — and there is no going back.” Game theory tells us that rational governments likely have more incentives to cooperate and prosper than to combat and suffer. There will surely be “bumps on the road” and high price volatility, but slowly and surely, cryptocurrencies should grow. We are now on the first couple of rows of the chessboard of disruption, somewhere around the “early adopters” phase on the S-curve model. In the next years, the “early majority” should follow.

Bitcoin is a fascinating fusion of disciplines: cryptography, computer science, economics, mathematics, sociology, game theory, philosophy, engineering, psychology. And, quoting Andreas Antonopolous: “Bitcoin is not money for the internet. Bitcoin is the internet for money.”

Important clarifications

In this paper, I talk primarily about bitcoin, which is currently the most relevant cryptocurrency. It has a clear first mover advantage and benefits from increasing network effects. However, many of the comments above apply to cryptocurrencies in general. As mentioned before, a different crypto may one day even surpass bitcoin and become the new “crypto-standard” for the world.

Let’s now recap what I am suggesting in this paper:

· I encourage you to perform your own research, and take your time to learn further. It took me over a couple of years between first hearing about bitcoin and then buying my first bitcoin. From what I hear, many people have similar stories. Once people understand bitcoin and its implications, many become obsessed and cannot stop thinking about it. If this happens to you, you are not alone.

· If/when you choose to invest in bitcoin, do not rely on this article to support your decision. You must do your own research using other sources and arrive at your own conclusions. I am NOT qualified to give investment advice.

· Never invest more than you can afford to lose. It may go to zero overnight. Many people are comfortable investing anywhere from 1% to 5% of their liquid assets in cryptocurrencies.

· Be vigilant. As we saw, there are scams and hackers that will target naïve users. If it looks too good to be true, it probably is fraudulent. I also discourage carrying any significant amount of cryptocurrencies on phones. Always put your security first.

Who is Satoshi?

We do not know. Satoshi made great efforts to preserve his anonymity. It can be one person or a group. In the past, there were rumors that Satoshi was Craig Wright, an Australian computer scientist. Some believe Nick Szabo, a cryptographer known for his research on digital currencies, could be Satoshi, but Nick himself has explicitly said “I am NOT Satoshi”. The magazine Newsweek once believed Dorian Nakamoto, a Japanese American living in California, could be Satoshi. And some people believe Hal Finney, deceased in 2014, could be Satoshi. Thus, we can only speculate about his identity. Whoever Satoshi is, history will recognize him as one of the most brilliant minds, ever!

Further resources

This paper is only an introduction to the fascinating subject of cryptocurrencies. There is a plethora of resources to learn more. Here are some tips:

· Search for videos, books and articles. I’d suggest Andreas Antonopolous (my favorite, he can get a dead cat excited about bitcoin –definitely watch his talks on YouTube), Erik Voorhees, Tuur Demeester, Sean Walsh, Charlie Lee, Don Tapscott, Alex Tapscott, John McAfee, Roger Ver, Tim Lea, and others.

· Video Documentaries: Banking on Bitcoin (on Amazon), Bitcoin -the End of Money As We Know It (Amazon), Magic Money (Vimeo), Bitcoin Gospel (Amazon), The Rise and Rise of Bitcoin (Amazon).

· TED talks and innumerous videos on YouTube.

· Books: all bitcoin books by Andreas Antonopolous, Tim Lea, Don Tapscott and Alex Tapscott, and others.

· Websites: follow experts on Quora, Medium, Twitter, visit Bitcoin.com, Coinmarketcap, Coindesk, The Merkle, Blockhain.info, and others.

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About the author

Serge21 is a former global strategy consultant for top-tier company. He was also a financial derivatives consultant with expertise in Foreign Exchange and Interest Rate instruments. He runs his management consulting business for portfolio companies of private equity firms. He has also started a company to assist high net worth individuals and family offices to invest in the crypto-space.

Full disclosure: the author currently owns part of his investments in cryptocurrencies.

References:

· Wikipedia.

· ARK Research — Bitcoin: Ringing The Bell For a New Asset Class.

· Sean Walsh — Redwood City Ventures: Bitcoin’s Killer App.

· Dr Mike’s Math Games for Kids.

· Tim Lea — author of Blockchain: Down The Rabbit Hole.

· Satoshi Nakamoto white paper.

· World Bank.