Tick, Tock. . .

By James Hill on ALTCOIN MAGAZINE

James Hill
Nov 3 · 7 min read

Tik Tok is not just the newest app out of Silicon Valley designed to zombify us through thoughtlessly sitting around for hours on end watching short-form videos, instead it’s the noise I hear every day when I wake. Tick Tock, the noise of a ticking time bomb that becomes increasingly louder every day as global debt continues to pile up and economies around the globe begin to slow down.

As each day ticks over it seems another global event comes to light. Protests in France over high living expenses that have been ongoing now for over 12 months. The citizens of Hong Kong are protesting to protect their basic human rights against an extradition bill to China and several other countries including Venezuela, Lebanon, Spain, Egypt, Serbia, and Romania are going through periods of unrest. It’s hard to stay across all of these issues mounting around the globe, especially when mainstream media seems to give little if any attention to these stories.

Global Debt is now reportedly $240 Trillion (240,000,000,000,000). Government debt alone has ballooned to over $65 Trillion, which is double what it was during the GFC in 2008. Non-financial corporate debt sits around $72 Trillion, financial sector debt is $60 Trillion and Household debt $46 Trillion. These figures alone are enough to make you cringe, yet we continue to live in this high time preference, debt-fueled society in which we continue to buy things we don’t really need with money we don’t really have. With Trump, the leader of the free world, ranting and raving on twitter amidst a trade war, forcing markets lower while implying for over a year that a deal with China is “close” causing markets to rebound. This charade has been going on for too long and it seems China is fighting back by putting tariffs on US agriculture products. This tit for tat “game” for them, may well have severe consequences for the global economy. Slowing global growth, ballooning global debt teamed with Trump's unpredictability are creating a recipe for disaster.

Your savings are under threat as global economies begin to slow down, the risk of recession rises and catastrophic policies like negative interest rates are being implemented. There are already several countries on negative interest rates including Japan, Sweden, Switzerland, and Denmark. On top of that, there is approximately 16 Trillion of negative-yielding debt, for those playing at home that is $16,000,000,000,000. Normally an investor in bonds (debt) would typically get a periodic interest payment called a coupon. This coupon is normally paid annually at a specific rate. For example, a 6% coupon would earn you $6000/year on a $100,000 bond until maturity. So, over 10 years your investment would yield a total of $60,000. Moving forward into this crazy world, bond investors and pension funds can expect a negative rate of return straight off that bat! The same $100,000 bond with a -1% coupon will give you a loss of $1000/ year for 10 years. Come maturity you will be paid back $90,000 from your original $100,000 investment. That’s a loss of $10,000!

Who in their right mind would do this? Agree to a contract in which they are willing to lose money? The short answer is EVERYONE, for two main reasons, first, it will become the new normal. An individual looking to store wealth may choose to lock in a rate of -0.5% knowing next year the rate may be -2% or lower. The second and most important reason is that pension funds are forced to buy bonds as they are perceived as a “lower risk” asset compared to equities. Pension funds often hold at a minimum 1/3 of the fund in bonds, while others may be obligated to hold up to half the fund in bonds due to liquidity requirements. These negative interest rate policies have been designed to encourage spending and punish those who choose to save.

Countries like the US and Australia are not immune to these negative rates. Trump has been pounding the federal reserve to cut rates in the United States in hopes of stimulating the economy further. Trump tweeted “The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt”. Dr. Lowe, the Governor of the Reserve Bank of Australia has also stated:

“Some central banks have gone negative, that’s one possibility.”

While all this sounds fantastic, what about an alternative to holding depreciating banknotes and negative-yielding bonds that are stealing your wealth from right under your nose? The solution in my mind and many minds around the world is Bitcoin.

Bitcoin is likely one of, if not the most misunderstood asset in the world. Bitcoin, at its most simplistic form, is a digital peer-to-peer network allowing users to send value directly from one person to another without the need for a bank or institution. Bitcoin was created by a pseudonymous online character known as Satoshi Nakamoto, who released the Bitcoin white paper in 2009. How does one begin to create a decentralized network with users in different countries and time zones around the world, yet keep everyone on the network in agreement? This complex problem is known commonly as the “Byzantine Generals Problem” which has plagued computer scientists for decades. Bitcoin exists today due to Satoshi creating a solution to this very problem, which we call “Proof of Work”. Ultimately it’s all about “consensus” making sure that everyone using the network complies with the Bitcoin protocol.

Why would you choose Bitcoin to store a portion of your wealth? It is a well-known fact that the US, along with every other government around the world, continues to expand their monetary bases by printing billions of dollars year after year. The expansion of the monetary base further devalues your dollar and its purchasing power. This is one of the main value propositions for Bitcoin. There will only ever be 21 million Bitcoin in circulation with a near-zero chance of expanding the supply. The reason I say near zero chance is that technically it would be possible, however extremely improbable that everyone on the network would agree to expand the supply of Bitcoin. This is where the game theory comes into play in Bitcoin. Not everyone using the network would want to issue more as it would devalue their existing Bitcoins, hence the reason to leave it a fixed amount. In order to change the supply of Bitcoin, every node on the network would have to come to a consensus. This means for the first time ever we have an asset that has a fixed supply which makes it unlike any other asset in history, not even gold!

The second and equally valuable feature in the Bitcoin protocol, is the Mining difficulty adjustment. This is what keeps Bitcoin on its issuance schedule by producing a new block with new coins roughly every 10 minutes. In short, miners expend energy hashing to guess a number equal to or lower than the previous block header. The chances of hashing an input and getting an output lower than the previous block header are extremely hard (likened to winning the lotto). Once a miner guesses the correct number they can commit a block to the chain which in turn gives them a reward of new Bitcoins. Every 2016 blocks or roughly every 2 weeks, the network calculates the time taken from mining the first block to the 2016th block then adjusts the difficulty accordingly. If the difficulty is adjusted higher than it will be harder for miners to guess correctly and produce the next block if adjusted lower the opposite is true.

The 18 Millionth Bitcoin was mined in October of this year (2019). This means there will only ever be 3 million more Bitcoin. This may sound like a lot however due to the difficulty adjustment and the issuance schedule these will be mined from now until 2140. To say the supply of Bitcoin is drying up would be a complete understatement, that’s 3 million Bitcoin distributed over the next 121 years. The demand for Bitcoin only needs to stay constant or even rise slightly for it to appreciate in value. As people start to understand the true value of Bitcoin, the only way to buy a Bitcoin or a portion of will be from existing holders willing to sell. Around May of next year (2020) Bitcoin will go through another halvening, the process in which the reward for mining a block is halved. The Bitcoin protocol currently permits 12.5 Bitcoins per block mined, after May the reward per block mined will drop to 6.25. The supply of Bitcoin is dramatically slowing down… Tick, Tock!


ALTCOIN MAGAZINE

The best damn place to read and write about crypto and blockchain.

James Hill

Written by

ALTCOIN MAGAZINE

The best damn place to read and write about crypto and blockchain.

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade