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Bitcoin and The Blockchain - Banks Must Embrace Or “Die”

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Bitcoin and The Blockchain - Banks Must Embrace Or “Die”

Editors Note:

GoldCore believe that blockchain technology will revolutionise the world of finance, payments and money and may have an impact on the world on a scale of that of the internet.  Hence, the need to keep an eye on this very important evolving technology that has ramifications for us all.

If you thought the internet was disruptive, well you ain't seen nothing yet ... the blockchain cometh!

Charlie Morris is the editor of Atlas Pulse - a newsletter focusing on gold, bitcoin, blockchain and disruptive technology.. He has written an excellent article looking at bitcoin, the blockchain and the ramifications for banks and our financial system.


Symbols for Gold, Bitcoin and Silver - Atlas Pulse

by Charlie Morris

Bitcoin’s had one hell of a year.

The price of a single bitcoin recently touched $500, which is three times higher than it was in August this year. That’s one hell of a move in a short space of time and I’m going to try and put that into context.

In November 2013, there were just over 12 million bitcoins in circulation and the price touched $1,200, meaning the network was briefly worth $14.4bn. This new form of electronic money had high hopes and some felt it would genuinely catch on as it had the potential to challenge the existing system in global payments.

Bitcoin clearly got ahead of itself and the excitement about the future of money took a turn for the worse.

There were scandals such as the loss of bitcoins at the MT Gox exchange (a bitcoin trading platform), the closure of the Silk Road website (drugs and other bad things) and the banning of bitcoin wallets by Apple (users could no longer transact on their phones).

The lowest ebb came in January this year when the network value briefly dropped below $ bn, a 77% contraction. Many high profile commentators wrote off bitcoin and predicted a future value below $1.

Today the bitcoin network appears to be alive and well. It recently saw total daily transaction volumes rise above $300m. This growth in usage from $50m per day in the summer has caused the price to surge. At $500 per bitcoin, the network value recently touched $7.4bn.

This resurgence is all the more surprising because there have been so many barriers in its path. Regulators have put bitcoin businesses under heavy scrutiny and most banks have refused to deal with them, despite being legitimate and innovative enterprises. In fact, George Osborne showed public support for bitcoin and wants Britain to be a hub for these disruptive technologies.

Before we go into further detail, let’s take a step back and remind ourselves what bitcoin actually is.

In simple terms, bitcoin is electronic cash. It was created on the Internet by ‘miners’ and can be transacted with anyone else who has a bitcoin ‘wallet’. It can’t be copied, cut or pasted, nor can they be minted to infinity.

As I said, there are 14.8 million bitcoins in circulation, and each day approximately 4,000 new coins are created. In exchange for validating all of the transactions carried out by the community, the miners receive the new coins plus some transaction fees. Yesterday’s payout to the miners was roughly $2m. Yes, you read that correctly.

Given the vast rewards, this process is highly competitive and if you want to mine bitcoins, you’ll need a super computer bigger than GCHQ’s and Nasa’s combined; I’m not exaggerating.

The miners work hard for their money and their primary task is to validate a ‘block’ of transactions every ten minutes (or by my calculations, every 9 minutes and 41 seconds on average). In financial terms, they carry out the ‘settlement’ for bitcoin and perform record keeping functions.

There are roughly 153 blocks created each and every day. They stack up on top of each other and, since bitcoin’s birth on 3rd January 2009, this process has occurred over 382,000 times. Hence the phrase ‘blockchain’ as the transaction data is stored as a ‘chain of blocks’.

The true genius of bitcoin is that it has been built using a database that was designed to transact, whereas a traditional database was designed to store information.

Financial transactions use traditional databases that were invented decades ago. In order for them to transact, they dive inside the computer, find the data they are looking for, change it and then climb back out. That system has worked well, but now the world has something better.

With a blockchain, instead of finding and changing the data, the system continuously adds new layers whilst the past records remain unchanged. This has improved speed, security, transparency and record keeping whilst simultaneously slashing costs.

Crucially, the bitcoin ecosystem is operated by the ‘invisible hand’. There are no employees or maintenance staff behind it. Ask a bank how many people sit in their IT department and the answer will be in the tens of thousands. Bitcoin has survived for nearly seven years with no employees whatsoever, just an open-source community of coders who implement periodic improvements.

Crucially, the bitcoin network is ‘de-centralised’. A bank may backup its database several times, but for bitcoin, there are 5,625 copies (at the last count), known as ‘nodes’. In order to shut down bitcoin, you would need to destroy every single one. That would mean a coordinated effort from 90 different countries including Zimbabwe, Russia and Iran. Good luck with that; the bitcoin network is here to stay.

What can you do with bitcoin?

You can spend it in a growing list of places although, I readily admit, it is far from mainstream. As I said on my recent podcast, I managed to buy a glass of wine in Chamonix and a cup of coffee in Shoreditch, but little else.

That has hardly changed the face of money, but entrepreneurs have created credit cards that transact using bitcoin. That means it is potentially acceptable whenever you see the Visa or Mastercard symbol.

Wall Street has seen this blockchain technology and has taken it into the fold. The banks that intend to survive know that if they don’t take the lead, they’ll die. Those that fail to take an interest will get left behind and so there’s much at stake.

The recent surge in price from $160 in August to $500 was an explosive move. The FT has attributed this to a Russian pyramid scheme called MMM, that has taken off in China. I’m sure this explains much of the recent exuberance, but underlying that, is a self-sustaining network that enjoys underlying growth.

Speculative flurries will come and go but what I am interested in is the trend. If the real usage of bitcoin grows, the price can only rise. We should think of bitcoin like a technology stock where the value is directly related to the size of the network.

This article is from the free daily email Capital & Conflict as published by Money Week. Charlie Morris is the editor of Atlas Pulse; a newsletter focusing on gold, disruptive technology and blockchains.

 

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DAILY PRICES

Today’s Gold Prices: USD 1070.50, EUR 1005.95 and GBP 702.74 per ounce.
Yesterday’s Gold Prices: USD 1080.80, EUR 1013.60 and GBP 710.50 per ounce.
(LBMA AM)


Gold in USD - 10 Year

Gold closed yesterday at $1069.50, down $13.70 for the day.  Silver was down $0.06 closing at $14.21. Platinum lost $12 to $851.

Gold is steady but set a fresh near six-year low overnight  - the lowest since Feb 2010 - at $1,064.95/oz, after falling 1.2% yesterday. It was gold’s biggest one-day drop in more than a week, and its 21st down day in 24. Gold’s 14-day relative strength index (RSI) remains in oversold territory (below 30) for a tenth session, at 22.5.

Silver is 0.1% higher, platinum's a touch lower, and palladium is down 0.4%.

Global silver supplies in 2015 are in deficit for the third straight year as mine production sees its smallest rise in more than a decade, scrap returns drop and miners reduce their hedge positions, a Thomson Reuters GFMS analyst said on Tuesday.

Total silver supply is forecast to fall to 1.01 billion ounces in 2015 - down 3.3 percent from 2014 - with physical demand falling to a lesser degree, down 2.5 percent to 1.06 billion ounces, said Erica Rannestad, senior analyst on the GFMS team presenting the report at a Silver Institute dinner in New York. This brings GFMS' 2015 silver supply/demand forecast to an annual physical deficit of 42.7 million ounces.

Gunfire and explosions shook the Paris suburb of St Denis early on Wednesday as French police surrounded a building where a Belgian Islamist militant suspected of masterminding last week's attacks in the French capital was believed to be holed up. Two assailants were killed, including a woman who detonated a suicide bomb, a source close to the case said, adding that the police operation was continuing to flush out two other suspects. The target of the raid, which filled the streets of St Denis with heavily armed police and soldiers, was Islamic State militant Abdelhamid Abaaoud, who was initially thought to have orchestrated the Paris attacks from Syria, police and justice sources said. (Reuters)

Air strikes carried out by French jets and other forces have killed at least 33 Islamic State militants in the group's Raqqa stronghold in Syria over the past three days, the Syrian Observatory for Human Rights monitoring group said on Wednesday. Citing activists, the Observatory also said that Islamic State members and dozens of the families of senior members had started leaving Raqqa city to relocate to Mosul in Iraq because of security concerns. Mosul is also controlled by Islamic State. (Reuters)

IMPORTANT NEWS

Paris Raids Target Terrorist Ringleader, Leaving at Least 2 Dead – Bloomberg
Security jitters drive European investors back to safe havens – Reuters
Gold eases as dollar gains offset safe-haven bids – Reuters
Einhorn’s Greenlight takes new long positions, exits some shorts – Reuters
Gold settles under $1,070 for the first time since 2010 – MarketWatch

IMPORTANT ANALYSIS

Can the Australian Government Confiscate Your Gold? – Dailyreckoning.com
Why Gold’s Physical Sales Are Going Strong – Yahoo Finance
UK Property Market At “Tipping Point”? – MoneyWeek
Bitcoin: digital gold or fool’s gold? – mineweb.com
Stockman CNBC Interview: Last Spasm Of The Bull, Meltdown Ahead – David Stockman

Read more News & Commentary on GoldCore.com

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Wed, 11/18/2015 - 21:28 | 6811650 herkomilchen
herkomilchen's picture

Well, you might want to go inform all my neighborhood stores that gold is universally accepted as true money.  Because they didn't get the memo and don't accept gold as payment.

If you mean the counterparty from which one _receives_ money, rather than the counterparty to which one _gives_ money, then yes, unlike debt money, sound money needs no guarantee of its soundness by anyone.  Bitcoin is no different than gold in this respect.

Wed, 11/18/2015 - 23:17 | 6811988 nmewn
nmewn's picture

They're not exactly throwing out the welcome signs for BitShit either, however, the "other" electronic currency called EBT is doing gangbusters.

Quite the paradox in freedumb, no? ;-)

Thu, 11/19/2015 - 00:00 | 6812049 herkomilchen
herkomilchen's picture

Correct.  Nor do they accept Japanese Yen or Euros.  So what.  Legal tender laws and market forces both incentivize toward standardization around a single, legally approved money because all else equal that is more efficient.

However, as the unsoundness of the dollar becomes more blatantly costly to tolerate (hyperinflation, NIRP, cash bans), and as cheaper, better black market alternatives to state-backed goods and services proliferate, the incentive to also use sound money as well as official government paper money will mount.  The more people that take up sound money, the more attractive it will be for others to as well due to network effects.

I suspect gold/silver may be the crowd favorite for displacing paper cash transactions and bitcoin may be the crowd favorite for displacing credit card type transactions.

Wed, 11/18/2015 - 13:59 | 6809702 Quinvarius
Quinvarius's picture

LOL...WUT?  The blockchain is terrible technology.  It only exists as a security measure because bitcoin is electronic.  The record it keeps is enormus and growing.  That technology would never work in an actively used currency.  It is interesting.  It would grind to a halt in months.  https://blockchain.info/charts/blocks-size  

 

Thu, 11/19/2015 - 08:45 | 6812652 herkomilchen
herkomilchen's picture

Sure, Bitcoin's scalability and privacy could be a lot better for a global financial transaction system.  But remember, Bitcoin was released as an experimental alpha-grade, v0.1 science project in the crypto geek community to test a theory.  It's insane that it's working as a global currency at all.

Your criticism is like saying the iPhone 1.0 was terrible technology because it was slow with painful gaps in its capabilities.  Well, you'd be technically correct about that.

But you're missing the forest for the trees.  You're missing the sea change in core technology the iPhone 1.0 represented and forgetting that subsequent generations address whatever are the biggest limitations.  If you put the current iPhone 6 side by side with the iPhone 1, you'll understand this concept and realize without an iPhone 1, 2. 3, 4, and 5 there would not be an iPhone 6.  Perfectly evolved technology doesn't just spring into existence out of nowhere.

Bitcoin isn't even at v1.0 yet.  Sheesh.

Wed, 11/18/2015 - 14:42 | 6809875 crazytechnician
crazytechnician's picture

" It would grind to a halt in months."

Odd thing to say considering it has been running flawlessly for the past 6 years.

Wed, 11/18/2015 - 15:22 | 6810057 Bunghole
Bunghole's picture

So Mt. Gox was flawless?

Wed, 11/18/2015 - 15:46 | 6810161 crazytechnician
crazytechnician's picture

Mt. Gox was an exchange operated by a fraudster , nothing to do with bitcoin itself.

Wed, 11/18/2015 - 14:56 | 6809927 Quinvarius
Quinvarius's picture

But not in an actively used currency.  All of its 6 years is about the same as one hour of Visa transactions.   Imagine how cumbersome that blockchain would become after a month of use ina real currency.

Wed, 11/18/2015 - 16:35 | 6810413 fallout11
fallout11's picture

But...but...but.....Bitcoin (and the blockchain, and digital currencies in general) use encryption!
And TPTB say that encryption is evil, and is allowing the terrorists to win! 
So, it seems logical, that they will declare war on it soon (actually, has already begun...see other articles and comments here on ZH).
Goodbye bitcoin. 

Wed, 11/18/2015 - 16:48 | 6810504 coinhead
coinhead's picture

Wold governments including the US will declare war on Bitcoin and teh world governments will lose that war.

Wed, 11/18/2015 - 23:24 | 6811960 palmereldritch
palmereldritch's picture

...because they created Bitcoin?

Edit: Thought you said 'World Government'

Wed, 11/18/2015 - 15:01 | 6809957 crazytechnician
crazytechnician's picture

Yeah , I suppose 160,000 transactions per day and growing linearly is absolute proof it's totally useless.

Gee , Imagine how many '60's warehouse sized mainfame computers your smartphone could hold ? It's actually more than existed on the entire planet . Your storage capacity argument is not even weak , storage capacity grows by atleast thousandfold every 10 years , way faster than a blockchain operating at VISA / MasterCard speeds will in a decade or two.

Thu, 11/19/2015 - 02:49 | 6812281 Global Observer
Global Observer's picture

Yeah , I suppose 160,000 transactions per day and growing linearly is absolute proof it's totally useless.

That doesn't demonstrate its usefulness on a wider scale as a payment instrument, given that the number of daily financial transactions in one city, in the regular currency of payment, would exceed that volume. 

 

In addition, the entire blockchain network can be hijacked by any party with more than 50% computing power. If Bitcoin becomes a serious challenge as a payment instrument to any conventional monopoly currency like the US$, you can bet it will be hijacked. It would be surprising if significant computational power has not already been deployed by the US alphabet agencies in the Bitcoin network. If these computers already have a mechanism to hijack the network, which can be done simply by trusting the claims only by each other and not those outside the group, it will throw the entire bitcoin network into disarray, the moment a decision to hijack is taken.

 

Bitcoin or any other blockchain based currency is an extremely useful currency where no alternatives exist and no one with the capability to challenge it is interested in challenging it. But it being a decentralised system, with no large players interested in esnuring the integrity of the blockchain itself, is exactly why it will not be safe from those with the means and motive to hijack it.

 

If the blockchain is ever adopted by the mainstream financial institutions, it will be when the integrity of the blockchain is guarranteed by the estblishment of centralised institutions who become the keepers of the trusted blockchains, not by a naive belief that the majority computing power will always remain outside any vested interests and hence safe from any misuse.

Wed, 11/18/2015 - 13:41 | 6809640 KnuckleDragger-X
KnuckleDragger-X's picture

Bitcoin is great in theory, but that blockchain creates a unique "fingerprint" that can be blocked by the government whenever they decide to take over the 'net "for our safety".....

Thu, 11/19/2015 - 08:29 | 6812617 herkomilchen
herkomilchen's picture

Hold on,  have to go check my Hollywood movie torrent downloads.....ok back.  What were you saying about governments shutting down digital services because of their unique fingerprint?

Wed, 11/18/2015 - 20:34 | 6811493 logicalman
logicalman's picture

If the banksters 'embrace' something, I want no part of it.

Call me funny.

 

Wed, 11/18/2015 - 14:37 | 6809860 Captain Debtcrash
Captain Debtcrash's picture

While I hate Jamie Dimon, and I own some bitcoin, I can't help but agree with his bitcoin reality check shown here. 

Wed, 11/18/2015 - 15:08 | 6809992 MalteseFalcon
MalteseFalcon's picture

Bitcoin click bait.

Wed, 11/18/2015 - 22:45 | 6811889 Alea Iactaest
Alea Iactaest's picture

I'm shouting into the wind here, but anyone embracing BitCoin should be familiar with "51% attack". Beyond that, who are the majority holders that could make the 51%? (Hint: They probably aren't your friends.) Then you have to ignore the fact that BitCoin may be lots of things, but anonymous isn't one of them.

Don't forget to study up on FACTA as well as the IRS ruling on using BitCoin in transactions and the required tax reporting.

BitCoin will do its job getting people used to the idea of digital currency. Then it will be disappeared.

What was Ben Franklin's quote about trading freedom for security? Seems apropos...

Wed, 11/18/2015 - 23:08 | 6811954 palmereldritch
palmereldritch's picture

I, for one, welcome our new cashless overlords

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