This time is different

I’ve been asked so many times to write something about the bitcoin craze, blockchain and markets that I finally sat down and started writing. I will try to keep it simple and not use too many technical terms so everyone can follow the read, because the fact is that everyone is getting into crypto even without understanding it, so I find it fair to make it understandable.

The first thing I want to say is that I knew about bitcoin in early 2014. I read Nakamoto’s whitepaper, I understood it, I believed on it. Then I did some research and I think everyone needs to know about it, because it’s not just a payment system like Paypal.

But then… What is a Bitcoin?

It’s a file. Just like a notebook. For example: bitcoin.doc. And on this file you write “I transfer this file to John”. That line is a transaction. Many transactions make a Block. If you send the file to John by email you send it with copy to Mary and Mike, and they agree that the mail has been sent. John then sends it to his father and writes “I transfer this file to Dad”. And the verification process is done again. And the interesting fact is that… These transactions, once they are verified and added to the blockchain, they can’t be changed!

And where did this start?

Bitcoin is a cryptocurrency, so I’ll introduce what does the “crypto” prefix stand for. Because that’s the important part.

Alan Turing was one of the Cryptography pioneers, and what cryptography is about is to find codes to send messages from one end to another and not letting the intermediaries know how to read the message. The cryptographs were by that time a bunch of “crazy mathematicians”, people didn’t care too much about them.

Then back on mid 1988, some cryptographs were getting into groups with one thing in mind: change the status quo and rule a cryptography world. The Cypherpunks were thinking all the time about it and at the “Crypto-88” conference, a guy called Timothy May read the Crypto Anarchist Manifesto, with an opening that shouts “A specter is haunting the modern world, the specter of crypto anarchy” (1988).

So now you know that the goal of the most pure cryptos are to defeat the current Status Quo, not to collaborate.

This feeling grew in hubs, conferences, mailing lists like the Cryptography Mailing list, and on closed forums. The world kept on ignoring them but this cryptographs started thinking about building a money system, they begun with B-Money (1998) and the protocols: http://www.weidai.com/bmoney.txt and more and more threads of topics, investigations and each time the Anarchist feeling grew more powerful and their will to change the world was stronger than ever: http://www.metzdowd.com/pipermail/cryptography/ .

Until one day, on the Cryptography Mailing list, a guy (or a group) under the name of Satoshi Nakamoto published “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party” (2008). And the first 50 bitcoin were made! http://www.metzdowd.com/pipermail/cryptography/2008-October/014810.html

Bitcoin was born!!

Then a few geeks used it, they were just curious about it, Nakamoto’s paper talked about transactions, Timestamp Servers, and introduced the concept of Proof of Work, which implied the creation of Blockchain. Nakamoto did some calculations and found out that with more nodes, the probability of bitcoin being attacked dropped exponentially, so it was a really secure way for transactions to be made.

Blockchain is the underlying technology behind bitcoin, and what is really interesting about it.

So Bitcoin started with a purpose of revolution, but it introduced an incredible advance, we could trust a peer-to-peer community for a financial system. And that was just brutal for that time. The Bitcoin network started growing, Satoshi disappeared and the Bitcoin started to grow “on its own”.

Vitalik Buterin then thought that it would be a good idea to add some space on the “notebook” where you could write something, some code maybe. So when you send the file to John you could write “I send this file to John” and you can add “John, you owe me 5 bucks from that pizza”, and create what it’s known as Smart Contracts. And Ethereum was born!

A Smart Contract is just nuts! For example, you can hire someone and make them sign a smart contract so it’s immutable and you can code it so it automatically pays your employee, or you can integrate the Internet Of Things. Possibilities are endless!

But what has happened now?

Now I’ll introduce some ideas that some people might find controversial, because although Bitcoin’s idea was great, the product Bitcoin is worth nothing. Why?

It’s true that Bitcoin started something big, but Bitcoin can process 3–4 transactions per second. And I don’t think that can hold the world’s financial system. Visa processes 17.000, just some data to benchmark.

Also, Bitcoin is based on mining, and what’s that? Remember the Proof-Of-Work? The copy email to Mike and Mary? They work to validate that transaction, and they get rewarded for their job with a bit of money. In real Bitcoin, the miners solve mathematical problems, encrypting the transaction, and with that work they are rewarded some bitcoin. So the miners mine bitcoin.

You have to know that bitcoin has a limited supply of 21 million Bitcoin, and on a economist mind that links to an interesting word: DEFLATION. Which sounds great because if you hold one of this coins, the value will keep on increasing (I will not get into the consequences of deflation on commerce), but as an investment it’s the dream investment!

But then diving into it, you will think… “If there is a limited supply… What will happen to the miners if they can’t mine more?” That’s the black side of the coin.

Because Bitcoin was born to kill banks, but you need mining to operate and a “wallet”, you can have your own wallet on your computer, but most people have got into it via Coinbase or other exchanges, and that’s the closest definition of a Bank (a physical/virtual place where you hold your money and to whom you have to pay a fee).

So the only way for them to survive will be applying fees, and there we go back to traditional banking. When I go on internet and see an advert “New ICO! 150% return on 3 months! Invest now!!” It just reminds me of the “Shoot 3 iPhones and win one!” adverts. “Irrational Exuberance” — Robert Shiller

What’s my feeling about this?

I feel upset, I believed in Crypto, but again the Irrational Exuberance of financial markets has killed it. I hope someday this goes back to it’s original idea, I hope the world at least uses the Blockchain technology to empower people and drive change, and I hope no one says again “This time is different”, because those 4 words have killed great ideas, great projects and it seems it will do a lot of harm to Cryptos and Blockchain. There are really impressive projects, I’ve invested in some of them, but please, don’t speculate, do your Due Diligence, read the whitepapers, and don’t look for fast money, drive development.

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