Bitcoin

Why should you care about bitcoin ?
That hasn’t happened yet and that seems increasingly less likely but there is still a chance that bitcoin fails. There is also a decent chance that it succeeds and become the most extraordinary investment opportunity you’ll ever witness. A global democratic emergence always underestimated and yet so obvious a posteriori.

It’s not just about bitcoin and money it is about technology reshaping the world. Whether you like it or not when censorship resistant networks become easy to build and power can no longer be secured by the same people.

Bitcoin’s debate draws the line between those who fear and those who welcome freedom.

How does the blockchain work ?
Asymmetric cryptography is already everywhere and allows to encrypt, sign and authenticate. If you want to make a currency out of this in a decentralized ledger you’ll need a third-party to verify that you’re not trying to spend money you don’t have. This requires to timestamp all transactions to prevent double spending.

The revolutionary part of the blockchain is a clever way to overcome the need to have this trusted intermediary by creating a framework where actors have an economic incentive to participate in the proper functioning of the system. It’s called proof-of-work and it is the competition between miners to be first to solve a mathematical problem to earn a reward for adding a block of transactions to the blockchain. That reward is called bitcoin and it is what is exchanged in these transactions.

If it had no value it wouldn’t be mined and if it’s mined it is because it has value. Since it has value you can use it as a currency.

Why would it replace gold ?
Gold was king in ancient times and if it is still backed by history it has become a poor mean of exchange and store of value. Physical gold is impractical to use because it is physical and paper gold is not a market you can easily trust. Why would you bother to use a digital currency with the pain of having it properly backed by real gold when you can simply use a secure digital currency backed by abstract gold.

Some people are upset because currently the mining profitability has led to considerable energy consumption but it is worth noting that to maximize profits this energy often comes from places where it is cheap because unused. And it is apparently less than gold extraction which is much more damaging for the environment. Irony is that we already have very large quantities of gold sitting in safe underground storage costly to maintain.

What about price and volatility ?
Bitcoin can be worth exactly zero if it stops being exchanged and its value could be also several millions dollars if there is a widespread consensus that it is modern gold. It can also be anything in between and as people are speculating with very different opinion on what it will be tomorrow price can only stay very unstable until it becomes clear if it’s a failure or a massive adoption.

Until now there has been a structural trend of adoption which for something available in limited quantity makes the price rise exponentially. Adoption is natural because it enables more freedom and this is something that cannot be stopped. Open source software and P2P downloading have been fought but they will never be suppressed.

Bitcoin is not perfect and adoption might reverse but in that case it will most likely shift toward competitors.

What about altcoins ?
The typical journey is : you try bitcoin and make easily money, you cash out to verify that is possible and you are impressed by the total control you have on your money, you come back bigger because it feels sustainable and safer once you’ve done this before, you become impatient and try too boost your gains with alt coins, you win some money on stuff you don’t believe in and become to greedy, you lose some money on poor projects and become more selective, you understand that everything revolves around bitcoin and maintain a bitcoin portfolio with some smart diversification and you are confident that it’s not insane to allocate a part of your savings to cryptocurrencies.

Bitcoin is the digital gold. Some altcoins are decent alternatives or a relevant support for real use cases but most are like contemporary art and Madoff style investment.

Is it a ponzi or a bubble ?
It’s not a fraud. It’s open source and transparent. It doesn’t promises or guarantees you anything. It’s not owned or controlled by anybody. It is the first proposition and implementation of digital gold. It’s there and nobody is pushing you to use it. It’s not even greater fool investing because there is a growing number of people and companies working on improving it and on building a sustainable ecosystem around it.

It’s unfair and creates more inequalities and that is why many will want to “protect” you from bitcoin and cryptocurrencies. Particularly when they have poor knowledge of what it is really.

If you are convinced it is a bubbly because you feel the FOMO with people with no clue willing to invest you’re partially right. Too much excitement without the underlying adoption will create the conditions to have a good drop but don’t be wrong on the longer term trend behind that.

Why is it exceptionally cheap right now ?
Back in june 2017 when the price was around $5,000 the user base was a few dozens millions people and now the price is only about $10,000 with a user base of a few hundreds millions.

With the January 50% off current market cap is about $bn130 taking into account lost coins. It’s still afforable for a government or a big company to buy a significant stake of the available supply which means that in a very short period of time the price could be multiplied by a factor x.

2017 was a challenging year for bitcoin with a lack of consensus around the forks and issues with scalability and transaction fees. This is on the way to be solved and a lof of money could soon come back.

Many projects involving cryptocurrencies have been started by banks and fintech in 2017 and this is going to strongly support the growth of adoption in 2018.

To monitor the trend I would advise to follow daily volumes, how are doing exchanges, web traffic statistics, google trends, social activity, opening/closing of services offering access to cryptocurrencies. If the trend reverses it will be obvious and it won’t be worth fighting the crowd but everything let us think the opposite is much more likely.

Can bitcoin goes in hyper deflationary mode ?
Bitcoin adoption is a self fulfilling prophecy. If the crowd believes in it it starts to happen. And as the price rise is parabolic your potential gains are much higher than your potential losses which encourage everyone to put as much as they can. On the long term you start to develop a feeling that everything is losing value when you think with bitcoin as a standard. If you buy an art piece for 1 BTC today it’s likely to be worth a fraction of that at some point in the future. All unnecessary spending performed today might look very expensive tomorrow. There is a possibility that if for some reason there is a real concern on major fiat currencies that we will witness the fear spread quickly and have an extreme price rise on bitcoin. If that happens you’d better have some.