21 days of owning Bitcoin… this is what I think I’ve learned so far.
I bought some bitcoin 21 days ago. To be precise, I bought some BTC, a bit less ETH, and even less LTC. That’ll be Bitcoin, Ether and Litecoin to most people (but the codes are important, given there are tons of Cryptocurrencies you can buy). I bought them after speaking to a friend, who had bought some BTC back in the summer and had already doubled his money in 3 months. I had read up on cryptocurrency and blockchain previously, but stories of people having their wallets stolen and hacked put me off quite a bit.
I thought I’d share some of my observations and experiences in the short 21 days since I made this modest investment, speaking not as an expert in this field but as an interested novice with a small bit of money riding on this whole thing being a success. It does though, help if you know a bit about how it all works. Someone recommended I watch this video, I’d recommend other people to as well. It has really old school graphics but seemed to explain to me really clearly. For the rest of this article I refer to “Bitcoin” for simplicity — there are lots of different cryptocurrencies, so it’s long word to type, so I’m generalising when I say Bitcoin.
The whole decentralised thing is technically true, but doesn’t feel it.
So one big thing about blockchain technology is that everything is decentralised, every “node” on the network verifies all transactions, and everything is transparent to everyone else to see and download as open source information. But I’m not a node on the network, and I’m not seeing all these transactions. I still feel like an average punter while others are in control.
The real nodes on the network are the miners, they are the ones verifying transactions and creating more Bitcoins with their powerful computers, and keeping the whole currency running. Some of these miners have crazy amounts of computers, creating hundreds of Bitcoins — and these are the people voting on new protocol, breaking off into new currencies when they don’t agree on the way forward. As a buyer of Bitcoin, I don’t feel liberated into a democratic world of transparency. The feeling is you have even less control over proceedings than if you spent time trading on the stock market.
Buying it feels fairly legit.
I signed up through a trading platform (Coinbase — the largest one in the US), and the sign up process was pretty robust. I had to provide ID, and it was clearly explained to me what options I had for loading my wallet using “real” money. I could pay lower transaction fees and buy unlimited amounts of Bitcoin if I wanted to, I just had to transfer my money to a bank in Estonia and wait 3 working days for it to appear on the other side (no thanks). Or pay around a 4% fee, and use my debit card. And then my bank would verify the payment as if I was buying some shoes online. It made me feel slightly better knowing my bank was processing the money to Coinbase, as if I might get a call from Barclays saying “who the hell is Coinbase??” if it wasn’t OK. Everything went smoothly and within 15 minutes I owned a small fraction of one BTC. Even though the idea of Bitcoin is to get away from the centralisation of things like banks, it felt good to let my bank in on it.
It runs on a fragile confidence in it’s value.
It might be decentralised, but some people appear to be more equal than others. When you look at the price fluctuations over short time periods, and the recovery that comes with it minutes later, it looks like big holders in Bitcoin are able to control the volume and the price through their activity. If some big holders decide to sell, this technically pushes the price right down, often very quickly. Coindesk.com has all the historical price data to view for BTC and ETH. If those same people buy big again as the price dips, the price recovers, again very quickly. If you’re a miner, or you bought a fair few Bitcoins in the early days (even 11 months ago, Bitcoin’s value was 10 times less than now), you would have a substantial holding to trade with. If you look at the price charts of Bitcoin online, even in one day you can see the price swing violently in the course of a few hours, sometimes minutes.
As I write this, there has been a huge price drop on Bitcoin, which has now started to recover again in the morning. The image below are the prices of BTC and ETH over the last 24 hours, as of Wednesday evening (29th Nov 2017). Each one saw a historic peak this afternoon, around 2pm. At around 6pm, both started to fall, and by 7.35pm BTC had fallen from £8,472 to £6,638. Most of that drop happened in a 15 minute period. By 10pm, Bitcoin had come halfway back up again. The price changes aren’t for the faint hearted.
But this price dip was a bit different to the others, because it coincided with one of the biggest Bitcoin exchanges going offline. One problem with Bitcoin is everyone is deeply suspicious of each other — so when an exchange goes down and the price drops (I don’t know if one thing caused the other, or just a coincidence) people tend to lose their minds, like this:
Most of the replies to this outage notice were panicked comments saying they thought they were being scammed. The problem is, people are so nervous of holding Bitcoin when it “inevitably crashes” to zero (there seems to be as many people in finance predicting it as the future as there are predicting it will soon crash), any sign of a dip in value gets people selling their stash as quickly as possible. People jump onto their exchanges to sell, see it’s gone offline, and they can’t sell their Bitcoins. The irony is that by stopping everyone from selling, these exchange outages probably rescue the dip, and save the whole thing from crashing to nothing. Thinking back to the idea of decentralisation, it does seem that large holders of Bitcoin have a responsibility to the rest of us to look after the system in some way.
People will have to start spending soon, or it may all fall down.
The system is driven by activity in the market funding the Miners and the Exchanges (who might be the same people, I’m not sure), as they rely on people trading Bitcoins to generate transaction fees. As the price fluctuates, the buying and selling that ensues keeps money coming in to the people creating Bitcoin (whom you rely on, if you own some currency) through these fees.
But if we hold onto Bitcoin and do nothing with them, it basically hurts the overall system in the long term, the growth of cryptocurrency depends on people actually using it to purchase things. Imagine if everyone held their Bitcoin and didn’t spend it on anything — that would render Bitcoin worthless (another irony when everyone is holding it because it’s so valuable). It’s the equivalent of making furniture out of rolls of bank notes, and using some other means to buy our food — it would make real money pointless. One thing that needs to catch up quickly is retailers and / or payment systems, maybe even a Bitcoin credit card backed by a financial institution (which seems to go against the ethos, so is unlikely). At the moment, I’m not entirely sure how I would go about spending my holding in Bitcoin (I do know it’s possible), so all I do currently is check my holding value every day, and read news about Bitcoin. I’m not really a consumer of it.
Bitcoin might run out, and no-one knows what happens then.
The other upcoming issue is that Bitcoin is finite, like Gold (a deliberate design feature of the original Bitcoin). As the current protocol is right now, there can only be 21 million Bitcoins (BTC) in existence. And it’s estimated that the founder of Bitcoin owns 1 million of them him or herself. Today’s value of one Bitcoin was about $10,000, so their holding is worth about $10,000,000,000. That’s not bad going.
But when there’s no more Bitcoin (specifically BTC) to mine, the Miners won’t make any money, and it’s their computers that validate transactions and make the blockchain function. The only money to be made from running the system will be in transaction fees, made when people trade, or spend. According to Blockchain.info, as of today there have been 16.7 million Bitcoins mined, and no-one really knows what happens when Bitcoin #21 million is created (not for a while yet).
So overall, I’m not sure that the things I’ve learned are helping me see the future of Bitcoin and all other cryptocurrencies. As I hit publish, I can see the price of BTC falling sharply again (lunchtime on Thursday 30th Nov), and low and behold my Coinbase wallet is offline and inaccessible.
Someone is in control, all I know is — it’s not me.
