HOW TO EXPLAIN BITCOIN TO YOUR FRIENDS AND FAMILY.

12/7/17

Introduction:

Every new technological development throughout mankind’s recorded history has been met initially with derision, protest, torture, incarceration, and sometimes war. From the Catholic Church’s restraint of Galileo, who insisted that Copernicus was correct in his assertion that the sun was the center of the solar system, rather than the Earth as center, as was the position of the church at the time, to the invention of the printing press, which contributed to  the cause of the French Revolution due to its ability to improve communication exponentially, to the advent of the personal computer, to Bitcoin, and now with the advent of driverless electric vehicles, technology advancement has always intimidated mankind when first introduced. Bitcoin is no exception.

History:

If one reads, listens to, or watches the news, one will hear repeatedly that Bitcoin is a scam, that it will go bust, it will be put out of business by competing bank’s cybercurrencies, or that governments will stop it, etc.  However, I happen to believe Bitcoin will prevail over all obstacles and thus make an attempt to predict the future. In a remark attributed to Mark Twain, “Predictions are hard, especially about the future.”

On August 18, 2008, the domain name "bitcoin.org" was registered.^[27] In November that year, a link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System^[15] was posted to a cryptography mailing list.^[27] Nakamoto implemented the bitcoin software as open source code and released it in January 2009.^[28][11] The identity of Nakamoto remains unknown.^[10]

In January 2009, the bitcoin network came into existence after Satoshi Nakamoto mined the first ever block on the chain, known as the genesis block, for a reward of 50 bitcoins.

The name Satoshi Nakamoto  is shrouded in mystery. It’s not known if it is a single person, a group of people or just a made up name. Whatever it is, it’s certainly prescient!

Public comments::

The potential, but real, threat of Bitcoin and the blockchain to the established financial order and to powerful financial elites, recently caused Jamie Dimon, CEO of J.P. Morgan, one of the world’s largest banks, to state that  “…Bitcoin…is a  fraud.”

But the man speaks with forked tongue. It’s a known fact that every bank in the world is frantically analyzing the blockchain upon which Bitcoin and over 1500 other cryptocurrencies are based because it will---and is already---changing the fundamental workings of the global financial system.  This new technology threatens the well-being and very existence of every financial powerhouse and its beneficiaries because it brings a truly distributed, democratic process to the functioning of money as a system for the exchange of value. However, only those who believe in Bitcoin will come out whole on the other side. Dimon, instead of being paid millions of dollars in compensation each year, will become the equivalent to the income level of what heretofore were the poorest people in Africa. The few assets he will possess will be his home, assuming it is paid off, and any vehicles and toys, like boats, again assuming they are paid off.

Dimon speaks from his position at the very top of the established financial and political power base.  He speaks not to the point that Bitcoin is a fraud, but rather from outright fear of the ability of this new technology to literally destroy that system he represents. Without a shadow of doubt, he FULLY comprehends Bitcoin’s and the blockchain’s threat to the banking system. Banks will become like horse drawn carriages and buggy whips---a symbol of an antiquated system. Fifty to a hundred years from now, his statement will be seen as akin to those made during the advent of the automobile.

Similarites to exsting money as a store of value and means of exchange:

Bitcoin is fundamentally no different than our current global system of finance. Each country has its own form of currency which serves as a measure of value and means of exchange. Bitcoin, however, does not belong to any country. It belongs to its owners in a fully distributed manner.

All forms of money currently in existence in advanced economies are fiat, meaning they are backed by nothing. Until 1971 the U.S. dollar was backed by gold. As a result, the government could never print more money than the amount of gold stored in its vaults. This gold backing of the dollar also served to limit the amount of dollars that could be printed or coins minted. Thus the value of money could never decrease below the value of gold.  Now the dollar’s backing exists only in the confidence and belief of people that money serves as a store of value and a means of exchange. Once people lose that confidence and belief, they will panic and there will be runs on banks as people seek to withdraw their money from their bank. This is exactly what happened in the U.S. before the Great Depression and also more recently in Cyprus.

In 1971, President Nixon removed gold as the backing behind the dollar. Since then, the price of dollars has been allowed to float freely like any other commodity on trading exchanges throughout the world. Each country’s central bank creates its money out of thin air by entering additional digital numbers in their computer ledgers.  This “money printing” has been proven time and time again throughout history to end in financial disaster. It is happening now, as we speak, in Zimbabwe and Venezuela.

Today, banks operate under what is known as the “fractional reserve system”. The U.S, Government requires that every bank hold in its vaults at least $50 million or $5% of its capital base. A simplified explanation of how the fractional reserve system works is that  people deposit money into their bank and the bank is required to keep only 5% of that money in its vaults available for withdrawal by its owners. The bank is in the business of earning profits, so it turns around and loans 95% of its deposits to others in the form of loans or it may invest in financial instruments, such as government bonds, which pay a percentage of interest.

Vslue:

We must ask ourselves what the word “value” truly and fundamentally means. The fundamental value each individual offers in today’s global society is the ability to work if one is in the working age group. For that value we are paid a wage in the currency of the country in which we reside.

Again, Bitcoin is fundamentally no different. However one key difference is in the type of work that is performed to create value. The work that will be completed by Bitcoin to create value will not be physical or mental. Instead the work that will be performed and is currently performed is digital and virtual.

This digital and virtual work is made possible by a technology named the “blockchain.” The blockchain is a computer algorithm, akin to a mathematical puzzle, but infinitely more complex. The numbers in the algorithm (actually the ones and zeros of the program), stretch to an unimaginable length, nearing infinity. Each time an algorithm puzzle is solved, a new Bitcoin is produced

Furthermore, Bitcoin is limited in quantity to 20,000,000 Bitcoins, the maximum amount that will ever be produced. No central bank will be around to create more Bitcoin and thus inflation. Bitcoin’s value will never be diminished because there are too many of them, the way there are too many dollars which ultimately leads to destructive inflation as in countries like Weimar Germany, Venezuela, and Zimbabwe.

The making or “mining” of Bitcoin is horrendously expensive, requiring vast networks of the most powerful computer servers to work incessantly, creating a Bitcoin approximately every ten minutes. Furthermore the servers create so much heat in their operation that they must be cooled at high expense to a point they can operate at their peak efficiency. This “mining” will continue until the maximum amount of 20,000,000 Bitcoin is reached. Each Bitcoin “miner” is free to keep or sell the Bitcoin they create.

The Blockchain:

The “blockchain” is a virtual ledger designed to track each and every Bitcoin mining and can be used in other digital applications as well, such as global supply chains, and financial transactions. The “blockchain” bookkeeping ledger is now virtual rather than residing on a computer or in a physical book into which account entries are made. Under all currently known technologies, the blockchain can never be hacked or compromised in any way, but that will undoubtedly change much sooner than most expect.

The virtual ledger is, in fact, a digital chain recording each transaction.  This prevents any single transaction from ever being duplicated or changed, thus it provides security along with anonymity. This latter point presents a legitimate concern held by critics. At this point, there is no known antidote. But one could also argue that such activity goes on under the current system of currencies and there is no means to prevent it. However, it seems well  within the realm of reasonable reality to expect that a virtual solution will indeed be found

Additional concerns:

In addition to the above mentioned concerns, investors say Bitcoin is nothing but the latest speculative investment, going all the way back to the Dutch Tulip Mania. They expect that a crash in price is inevitable. That will likely happen and, in fact, has already happened. No investment goes straight up, there are always up and down cycles.

Many believe another type of cybercurrency will replace Bitcoin, but there are no evident advantages under currently envisioned scenarios,

Another valid concern has recently been expressed, that 1000 people hold 40% of existing Bitcoin, so-called “whales.”. This concentration of power may allow those with evil intent to corner the market and control price. This very point confirms one point in my prediction except that I would hope those whales would have honorable intentions to help mankind in a massively positive way.

Len Ruggiero

417-793-8338

len@lamarchcapital.com