In April 2011, I had initially made a post about the new technology, Bitcoin, which was initially created in October 2008. At that time I had only recently become aware of it, and I had even bought and mined some prior to making this post (don’t worry, not enough to be rich).
Looking back on those days I recall reading many news stories, almost all coming from the technology press about Bitcoins. The articles were universally incorrect in most, or all, of their statements regarding Bitcoin. Darkweb miners are minting electronic currency using the power of electricity and what not was the general feel of these articles. It took until probably 2014 before I recall the press taking the subject seriously and giving even somewhat accurate description of the technology in question.
Seeing that we are months away from the ten year anniversary of this post, twelve years since the inception of Bitcoin, and as of this writing Bitcoin is trading against the USD at an almost all time high (18,939.70). I thought it would be a good opportunity to look back and figure out what I had correct and incorrect with my very early understanding of this technology.
Bitcoin is a peer-to-peer crypto currency. Peer-to-peer means that no central authority issues new money or tracks transactions. These tasks are managed collectively by the network. BitCoin has garnered quite a bit of attention of late. What is it? Why use it? I’ll try to answer this below.
Correct so far, except I had not learned the correct casing for Bitcoin, I was trying to use camel case, same mistake appears throughout the rest of the post.
Why BitCoin? With all money there is the problem of double spending. With electronic representation of money in the modern age, it is easy for a financial institution to say that it has your money and then loan it to someone else, then loan it to someone else, etc. The only solution to the problem is heavy government regulation of financial institutions, and we have seen how good that works especially recently (think the Federal Reserve). BitCoin has solved this problem.
Not all money has a double spending problem, cash, coins, or anything physical doesn’t have this problem. But the rest is correct.
How does it work? There is a BitCoin application that you install on your computer. Each computer running this application operates a peer node in the BitCoin network. All the nodes in the network effectively keep account of all of the transactions that take place in the system. The individuals making the transactions are known only by a long number but the transactions themselves are ‘confirmed’ by other clients on the network. New BitCoins are slowly entered into the system in the following way: each client has an option of mining. When a client is mining it will make attempts to solve the next block in a chain; this is really just a long sequence of a mathematical problem. This chain keeps track of the history of all the BitCoin transactions. When a node solves this problem it is rewarded with a set about of BitCoins, over time this amount is more and more slowly decreased. It is extremely rare to get rewarded. Given the current difficulty, a standard desktop would have to mine for something like a year before it might randomly solve one of these problems.
You could expand this explanation out to a book, but more or less correct. Though the mining difficulty has increased exponentially since then. In stead of the magical handwaving, I could have been more specific about a ’long series of mathematical problems’ and talked about hashing, difficulty, and block chain.
What are the advantages of this system? With our monetary system the only value that the dollar or any other fiat currency has is the faith that you in the issuing institution. BitCoin is completely transparent and open source, so you don’t have to trust it, you can look for yourself at the code and the transactions going on. I KNOW that there are only 5 million BitCoins currently in the world, and I know that there will only be 21 million or so total (in about 100 years), because of the mathematics behind it. Right now, you can trade USD, AUS, RUB, or EUR back and forth for BitCoins. There are people accepting BitCoins in exchange for goods and services.
This is also still entirely true, although there are current around 18.5 million that have been mined and a some percentage of that are lost.
What are the disadvantages of this system? I worry about BitCoins recent run up; they have gone from around 30 cents a BitCoin on November of 2010, to, as I write this at the end of April, to almost 4$ per BitCoin. On the surface that sounds great, but with a huge upswing in value it is very likely to have a huge downswing at some point soon. Ideally you would want to see a lot more stability around something like this for more widespread adoption. Another problem is that governments may try to make it illegal. Money and monetary policy is the central means by which governments exert power. BitCoin would take away much of that power. You could make the argument that by its nature it would be hard to get rid of, and you would be correct. But, the vast majority of people would probably not use it if it were to become illegal.
I still agree 100% with these statements, although the value at that point compared to now is almost comical. Shortly after this post the price reached 32$ and then crashed back down below 1$. At that point I thought Bitcoin was over. My wife had encouraged me to purchase more after that first crash (I did not).
The difference in my thinking now, is that by naming it Bitcoin you have made the assumption that this thing is going to be a currency in some traditional sense. And I still see people taking about Bitcoin as a store of value, which is one of the traditional definitions of what a currency is. But with the wild fluctuations of it’s value versus traditional fiat currencies, I still do not believe that the average person should have any faith in Bitcoin as a store of value. If you put value in a ‘store of value’ you have to have some confidence it will be worth near the same value when you go to use it later. I believe if you are using cryptocurrency as a currency you should really only hold it long enough to transact. If you are buying an holding you are really speculating (an argument could be made you are investing, and I’d agree if you are knowledgeable on what you are investing in).
You could say the same thing about the US dollar. If I ‘buy’ the dollar today and hold it for ten years its going to have a different value in the future same as Bitcoin, but the chances are, from a historical context, it will be closer to today’s value in ten days, ten months, or ten years. It has been historically stable. Compare that to Bitcoin, and who knows what the value will be in ten years?
What is most likely going to happen? I think BitCoins are going to part of our future. I doubt that I will be able to use them one day to fill up my tank at a gas station, or tip a server at a restaurant. But the real promise is the Internet. Newspapers are going out of business because no one will pay money for access to a news website, because there is so much free news. But, consider if there was a way to pay 2 or 3 cents to view a story from a reputable news source. I might be willing to pay that, but how do I get the money to them? I’d have to enter in my credit card information, but I am not going to do that. Even if I could, the credit card transaction fee would make it a losing scenario for the seller. But what if there was an easy way, built into the browsers to send cents or even fraction of cents to wherever without transaction fees? BitCoin has that potential. My hope is that they will become the de-facto recognized currency for certain things on the Internet, and solve the micro payment problem once and for all.
I think here my thinking was the future was going to be in micro payments. And I still there there is an unexploited opportunity for micro payments to become a thing in the future, though I doubt Bitcoin can scale in this regard. Perhaps another cryptocurrency can do this? I don’t know. Spending Bitcoin now is much easier now than 10 years ago, with a proliferation of apps, and business accepting them, however I do not believe I can easily fill up my gas tank or tip a server with Bitcoin though perhaps its possible somewhere.
And by the way, if you like my website or have found it usefully, why consider sending me some BitCoins at this address 173mvmf9Cw2AUKCKf35yG7dPNXN8oySZ3X
Still a valid address.
Taking everything into account, I think I was more correct than incorrect in the early days of Bitcoin. I wish I had listen to my wife and bought more at that time, but you cannot live with regret forever.