Salt, Wampum, Benjamins - Is Bitcoin Next?

Tyler Durden's picture

Authored by Michael Lebowitz via 720Global.com,

Currency was first developed about 4000 years ago. Its genius was in the ability to supplant barter thus greatly improving trade and providing a better means for storing value. As illustrated in our title, currency has taken on many different physical forms through the years. Given the recent advances in technology, is it any surprise the latest form of currency resides in the ether-sphere? In this article we explore the basics of cryptocurrencies and the important innovation they support, blockchain. We also offer an idea about whether or not Bitcoin, or another cryptocurrency, can become a true currency worthy of investment.

A Primer on Cryptocurrency and Blockchain

Cryptocurrency is an independent, digital currency that uses cryptology to maintain privacy of transactions and control the creation of the respective currency. While not recognized as legal tender, cryptocurrencies are becoming more popular for legal and illegal transactions alike. Bitcoin (BTC), developed in 2009, is the most popular of the cryptocurrencies. It accounts for over half the value of the more than 750 cryptocurrencies outstanding. In this article we refer to cryptocurrencies generally as BTC, but keep in mind there are differences among the many offerings. Also consider that, while BTC may appear to be the currency of choice, Netscape and AOL shareholders can tell you that early market leadership does not always translate into future market dominance.

Before explaining how BTC is created, acquired, stored, used and valued, it is vital to understand blockchain technology, the innovation that spawned BTC. As we researched this topic, we read a lot of convoluted descriptions of what blockchain is and the puzzling algorithms that support it. In the following paragraphs, we provide a basic description of blockchain. If you are interested in learning more, we recommend the following two links as they are relatively easy to understand.

The Ultimate 3500-word guide in plain English to understand Blockchain – Mohit Mamoria

A blockchain explanation your parents could understand – Jamie Skella

Blockchain is an open database or book of records that can store any kind of data. A blockchain database, unlike all other databases, is stored real time and is accessible for anyone to view its complete history of data.

The term block refers to a grouping of transactions, while chain refers to the linkages of the blocks. When a BTC transaction is completed BTC “miners” work to solve the cryptology algorithm that will enable them to link it to the chain of historical transactions. As a reward for being the first to solve the calculation, the miner receives “newly minted” BTC. As the chain grows, the effort needed to solve and verify the algorithms increase in complexity and demand greater computing power. As an aside consider the following statement by Bitcoin Watch (courtesy Goldman Sachs): “BTC worldwide computational output is currently over 350 exaflops – 350,000 petaflops – or more than 1400 times the combined capacity of the top 500 supercomputers in the world.” Needless to say, a tremendous amount of computing resources and energy are being used by BTC miners, and it is still in its infancy. Could these resources be better employed in other industries, and if so, how much productivity growth is BTC leeching from the economy?

The takeaway is that blockchain is an open, real-time database that provides anonymity to its users. It is not controlled or regulated (yet) by any government. BTC miners, driven by the incentive to earn BTC, and fees at times, verify and authenticate the database. Blockchain technology is incredibly powerful and will likely revolutionize data management regardless of whether cryptocurrencies thrive or disappear.

BTC

Bitcoin Mining (Creation): New Bitcoins are created as payment to BTC miners that solve the aforementioned calculations that verify transaction data and link it to the blockchain. This ingenious reward system incentivizes miners to compete to perform these calculations, enabling the blockchain to exist. Currently there are approximately 16 million bitcoins outstanding out of a proposed limit of 21 million. As the blockchain grows, the calculations required to mine BTC and add to the chain become more complex, making each bitcoin harder and more costly to earn than the prior one.

Obtaining and Storing Bitcoin: Other than mining Bitcoin, the only other way to obtain them is via transactions and exchanges. One can earn bitcoin by selling a product or service to someone willing to pay in BTC, or one can purchase them with traditional currency through a BTC exchange. BTC can be exchanged for cash or goods and services in a similar fashion. There are reportedly over 100 BTC exchanges, and BTC ATMs are gaining in popularity. BTC’s are stored in a so-called “wallet”. Wallets may reside on a mobile phone or a desktop computer. The decision to use one versus the other largely comes down to a trade-off between security and ease of use.

Transacting with Bitcoin: Each wallet has a unique key which serves as a personal identifier. When one wishes to transact, the buyer and seller swap their personal keys and the transaction information is posted for miners to verify and post to the blockchain. The identity of the buyer and seller is never revealed. This is one reason that black market, money laundering and tax avoidance transactions are popular on BTC exchanges. While not 100% accurate, you can think of a BTC transaction process as similar to a debit card transaction, but instead of banks verifying, approving and transferring cash to fund the transaction, miners fill that role.

Valuing Bitcoin: Valuing BTC is just like valuing any other currency. One can compare BTC to U.S. dollars or to any other currency. One can also compare the value of BTC to its purchasing power or what one may buy given a set amount of BTC. Currently, BTC is rising rapidly versus all major currencies thus its purchasing power is following suit. As marginal interest in BTC versus sovereign nation currencies increases, the rise in value could continue.

In trying to provide a succinct summary of BTC, we left out many details which you may find pertinent and/or interesting. As blockchain technology represents an important innovation and will certainly find many other uses besides cryptocurrencies, we would encourage you to apply further rigor and read beyond the scope of this article.

BTC – Currency or Investment Fad?

Since BTC started trading in July of 2010, it has risen over 51,000 percent! This meteoric rise in the price of a bitcoin, as graphed below, has certainly attracted many traders and speculators to the cryptocurrency space. While price gains are certainly drawing short term players, others are buying it for its promise as an alternative currency. It is this aspect of BTC that we believe is most relevant.

Data Courtesy: Bloomberg

BTC is a pure fiat currency, meaning it is backed by nothing tangible other than the value users ascribe. Currencies, whether fiat or hard money (backed by something tangible of value) derive value from their utility and scarcity. As the Weimar Republic and many other nations throughout history have learned, economic disasters occur when governments ignore the value proposition and recklessly print money.

The U.S. dollar, also a fiat currency, is backed by the full faith and credit of the United States as well as a small amount of gold. While some may not ascribe too much value to “faith and credit”, almost 250 years of economic progress, military might, and the most powerful tax base in the world strongly argue otherwise. The dollar is globally accepted for almost any kind of transaction, and, despite recent actions of the Federal Reserve, dollars remain relatively scarce. Put another way, even billionaire Bill Gates would stop to pick up a dollar bill laying on the ground. Visit a third world nation and notice how many vendors not only accept U.S. dollars but encourage their use over the domestic currency.

The question investors, not short term speculators, are tasked with answering is, “Will enough people value BTC to make it a respected and often used currency?” In our opinion, the most crucial information needed to answer that question is understanding how governments will respond to the rise of BTC. Gaining a sense for what is at stake for existing currencies and the economies that employ those currencies offers keen insight into the future of BTC and its ability to become more than an afterthought in global trade.

The preamble to the U.S. Constitution states the purpose of the Federal government is to: “form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity.” In other words the government’s role is to protect the freedoms and liberties of its citizens. If the government has no ability to fund itself and is unable to provide defense and law enforcement it cannot uphold the Constitution. More precisely - the sovereignty of any nation, regardless of its form of government, rests upon the strength and integrity of its currency.

All transactions, and their participants, that occur with BTC are anonymous. Accordingly taxes cannot be efficiently assessed, black market transactions are made easier, and fraud can easily escape the eye of law enforcement.

If BTC continues to gain in popularity there is little doubt in our opinion the government will seek control or at a minimum the personal data from the transactions. In fact the SEC has recently opined on the matter claiming that “tokens” such as BTC can be deemed securities and may need to be formally registered. This is just a first step but given the potential threat, we envision government will impose a way to remove the secrecy BTC offers, allowing taxation and legal supervision to occur.

We strongly believe the government will not allow BTC to become a full-fledged currency, at least in its current form, but we think they are enamored with the technology. It is possible that a deeply regulated and controlled version of BTC or a new government cryptocurrency could at some point usurp the dollar as we know it today.

Before summarizing this article we leave you with a few pros and cons of BTC:

Pros

  • BTC is unregulated, allowing users to avoid taxes or any other kind of governmental, banking, and law enforcement scrutiny.
  • BTC is in limited supply which should help it to retain its value over time. We caveat that with the fact that there are many competitors, each with their own rules about creation.
  • BTC creation is not subject to the whims of central bankers that appear constantly looking to devalue their respective currencies via inflation.
  • Transacting in BTC is easy. As more sellers of goods and services accept BTC its flexibility improves.
  • Typically storing BTC is less expensive than most other national currencies as well as precious metals. Additionally, transaction fees and other banking costs are largely avoided.

Cons

  • Bitcoin is unregulated. Regulations to enforce market structure and prevent fraud are not available.
  • There are over 750 cryptocurrencies and the number is growing rapidly. Which one will emerge as the dominant currency beyond the first mover stage? Conversely, which ones will fail and leave holders with nothing?
  • BTC security is not fool proof. Wallets have been hacked on both desktop computers and mobile phones. Due to the anonymous nature of the exchanges, remediation of such actions is difficult.
  • Price volatility makes accepting BTC a risky proposition. Accordingly transaction fees are becoming popular by many merchants.
  • The energy costs and computing power associated with mining BTC is massive and will increase as the complexity of the blockchain and the number of users grow. Seemingly these resources could be put to better use.

Summary

The U.S., E.U., Japan, China and Great Brittan have devalued their currencies significantly over the past ten years. The recent success of cryptocurrencies is a meaningful sign that central banker actions have not gone unnoticed by the users of traditional currencies. While we applaud the concept of a currency that is scarce and avoids the whims of bureaucrats, we do not own, nor do we have plans to own cryptocurrencies in the future. The current market is one of significant volatility and heavy speculation. Additionally, the bigger concern is that global governments have the means to make or break cryptocurrencies. Until these powers more fully reveal their intentions on BTC, the risks are too speculative to warrant involvement.

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FreeShitter's picture

There are no cons to bitcoin, just keep your coins off the exchanges and offline. Once segwit gets possibly activated in Nov, bitcoin transactions will be much faster. Im not even a bitcoin super-lifer, but as long as I can do my part do decentralize my $$$ from uncle scam then I will.

Looney's picture

Which crypto-currency is better?

<<<   BitTulip

<<<   BitSeashell

Looney  ;-)

FreeShitter's picture

You will get tired sooner or later...

tmosley's picture

>BTC is a pure fiat currency, meaning it is backed by nothing tangible other than the value users ascribe.

He was doing so well, then he went full retard and made his total lack of understanding what fiat is known.

But the oldbugs will love him for it. So I guess there is that. Maybe they can have a loser convention and sooth the savage butthurt with a big circlejerk.

Stackers's picture

"The U.S. dollar, also a fiat currency, is backed by the full faith and credit of the United States as well as a small amount of gold"

Complete horse shit. There is no "full faith", whatever the fuck that is, or credit backing Federal Reserve Notes. This misconception is continually perpetrated and needs to stop being repeated.

mtl4's picture

Fiat (or "let it become" in latin is really a misnomer now.  People are arguing over what backs money as having value (this is fiat, that isn't) but really this is irrelevant because it's the perception that gives money it's value. National currencies are backed by militaries/taxation, bitcoin backed by blockchain/platform, while phyical things like PM's, art, cars or real estate and all physical and thus alot easier to understand.  Stff is only worth what others will give you for it.  The reality here is that government confidence is going down the tubes fast (due to an absolutely massive gov't bubble) and this is why you are seeing people search for alternatives like physical items or cryptos.

dcohn's picture

It certainly will go along with the illusion.

I assume you will fill those trucks will all the plastic and waste the US creates each day.

Buckaroo Banzai's picture

"Fiat money" is defined as money you have to take because somebody who can credibly threaten incarceration or force, tells you to take it. Then at some point that person is going to make you give him some of it, or just flat out siphon it out of circulation. That's why he needs to make sure it circulates in the first place.

Calling BitCoin "fiat" reveals that the author is a fucking retard.

fredquimby's picture

I seriously can't believe he wrote that. What a total fucking idiot.

That the tylers even printed that dross shows why I'm here less and less.

P.S All the CONS he says about bitcoin are actually it's PRO's no?

 

38BWD22's picture

 

 

Just to toss another angle for you to consider is that 1% (+/-) in BTC is OK in my book for anyone who is willing and able to take a risk.

I am at under 1% BTC.

And about 11% Au.

~  ~  ~

ounce.me now showing Au:BTC price ratio at 0.299, the lowest ever.

Hey, BTC for now could be over-valued!  That's why I have an upcoming order planned with jmbullion.com.............

Dizzy Malscience's picture

 

I vote for two lips.

..she liked me

Winston Churchill's picture

As i siad to a client, a retired judge,its backed by 10 carrier groups and nothing else.

ultraticum's picture

"The preamble to the U.S. Constitution states the purpose of the Federal government is to: “form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity.” In other words the government’s role is to protect the freedoms and liberties of its citizens. If the government has no ability to fund itself and is unable to provide defense and law enforcement it cannot uphold the Constitution. More precisely - the sovereignty of any nation, regardless of its form of government, rests upon the strength and integrity of its currency."

The first and 2nd sentences are true . . . but the government long ago abandoned constitutional money (backed by gold/silver).  If the author thinks the US government is doing ANYTHING at all to protect my freedoms, aside from totally destroying my freedoms with its shitty fiat currency and taxes thereon to pay the infinately compounding interest to the private cartel (known to this establishment author as the Fed), please reply. 

stitch-rock's picture

...and the gold part lolz

Panafrican Funktron Robot's picture

"Complete horse shit."  Indeed.  Coming up on $20 trln in debt, G-10 is about $47 trln in debt.  Japan has a 246% debt to GDP ratio; wonder why their adoption of Bitcoin is so rapidly increasing?  At least there is computing and electrical power backing the value of it. 

Raffie's picture

Just wait till the TulipEMP goes off. That'll show us whats what. The world wide 'ruse' will be exposed.

While we wait, this is a great time to buy more cryptos. BTC/ETH/LTC.

 

Raffie's picture

In all seriousness, We can not prove %100 cryptos will be around in the next 10+ years. There is global adoption for blockchains in news all over the place and that can not be refuted.

Then again, if you hate cryptos you can not prove %100 they are fake and a scam. You can only guess this and that, but to base your ideas on something that is not even related is just shows desperation. Whats next? You all will say 'If a tree falls on a planet in another galaxy, does it make a noise? So there for cryptos are %100 a ruse.'
*the word ruse is just not used today, so trying to bring it back*

If cryptos are fake, they will die on their own and not from the handful of people in the comment section. So why not sit back and just let it all collapse on it's own so you can rush in gloating that people lost their money instead of just jawboning making to comment section look bad?

booboo's picture

If these articles would be honest and depict crypto currency as ones and zero's and not a shiney gold coin with a "B" on it I would have more respect for the article, visual images play such an important role is duping people.

 

fredquimby's picture

'tis one of my indicators of how full of shit the bitcoin article is going to be.

ctiger2's picture

https://www.armstrongeconomics.com/world-news/taxes/governments-to-contr...

This hunt for taxes has led down the path of arguments for eliminating currency. While people think Bitcoin is an answer, they do not understand government’s hunt for taxes no less the lack of a true rule of law. The government need only pass a law that anyone who fails to report what they have in Bitcoin is criminal and they get to confiscate all your assets.

Like this isn't gonna happen...

Suleyman's picture

Just say no. Problem solved.

Grave's picture

bitcoin is backed by science, cryptography and math, the language of the universe

debtfiat such as us dollar is backed only by threats of violence and massmurder on large scale

tmosley's picture

That isn't what backing is. Please don't say such silly things.

Bitcoin isn't backed by anything, and it doesn't NEED to be backed by anything. Backing is for cheap slips of paper that are supposed to be worth an arbitrary amount.

Grave's picture

there is only one thing of value in the universe, and thats knowledge, and the essence of the knowledge is science, and its language is math

with knowledge you can make anything, yes including gold. when you understand the laws of nature, laws of universe behind the how and why, you can create anything.

so let me rephrase that:
bitcoin is backed by energy, the fundamental unit of scarcity and value in the universe.

the only relevant unit of value in the universe
and it is secured by the language of universe, math

malek's picture

At least in theory.

Also in theory, theory and practice are practically identical. In practice however, they are not.

Grave's picture

learn the difference between "theory" and scientific theory

malek's picture

learn the difference between true scientific theory and hogwash

your quote: "bitcoin is backed by energy"

Orly, so if I'm for whatever reason not able to use my valid bitcoin anymore, how do I extract the energy it is "backed" with? (for my personal peruse of that energy)

tmosley's picture

Where do I trade my bitcoin for energy at a fixed rate?

Is it the same place I trade dollars for aircraft carriers?

KansasCrude's picture

Bitcoin and the Cryto's were researched and funded by the NSA in the mid late 90's.  They are the corral for the sheep and the set up is wildly successful as the greed factor is triggering the critical short circuiting of most folks brains.....Are you one of the Sheep?  Seriously no code that can't be cracked and a wormhole in all of them just for the NSA.  BAAAAAA Sheep will be shorn and controlled.

HOW TO MAKE A MINT: THE CRYPTOGRAPHY OF ANONYMOUS ELECTRONIC CASH

 

Laurie Law, Susan Sabett, Jerry Solinas

National Security Agency Office of Information Security Research and Technology

Cryptology Division

18 June 1996

http://groups.csail.mit.edu/mac/classes/6.805/articles/money/nsamint/nsamint.htm

WeekendAtBernankes's picture

How does that make it any different that the conventional banking system? Both have their respective merits.

Grave's picture

also just because something isnt tangible or is new does not negate it's usefulness.
"not backed" - it is backed by what is now one of the largest network systems in the world. there is a lot of very real infrastructure behind btc now.
if you mean "not backed" in the sense that it's purely digital, well, the same is true of most things of value - love, culture, tradition, etc.
again just because something is not tangible does not mean it's not useful.
money is nothing but a social construct

tmosley's picture

Money isn't backed with anything. Money is valuable by its nature.

yogibear's picture

Next step for the left is to label President Washington as a slave owner and a racist. To take his photo off the dollar bill.

Rinse and repeat for the rest of nation's founders.

The left will remove the statues and constitution.

Install the globalist government.

Winston Churchill's picture

"He who controls the past,controls the future".

We were all warned by Orwell, a recovering Marxist, long ago.

O/T my right eye vision was 20/20 at the doctors today.Looks like I'm going to need it.

Exponere Mendaces's picture

Hey, its a vintage oldfag getting up from his recliner to tell us all his boundless wisdom.

Or, its a retiree that has nothing else to do - ranting about some retarded shit

I think we know which one fits better.

 

lil dirtball's picture

> Im not even a bitcoin super-lifer

Mbbe not ... but you're still fulla shit.

FreeShitter's picture

The only shit I see is between them ears and cowboy hat. Its the best performing "asset" since 09 motherfucker, fact.

Raffie's picture

link the proof plz so we too many read and believe.

FreeShitter's picture

He has no proof just spewing bullshit since he missed out.

garypaul's picture

THIS IS GOOD:

So I looked up wampum on wikipedia. It turns out that wampum beads were originally used to record chains of events (such as treaties) before it became used as money (after contact with Europeans).

Holy shit, isn't that just a "proof of work" system? So bitcoin is based on concept used in wampum? More wickedly funny that I thought!

 

dumbhandle's picture

The con is that Bitcoin is serial number one. Next generation coins blow it away in every area except market cap.  That advantage will not last long.  Peruse coinmarketcap.com to see what coins are catching upon market cap and how fast bitcoin will likely fall behind. If you buy bitcoin you are the greater fool.

FreeShitter's picture

There are no cons to bitcoin, just keep your coins off the exchanges and offline. Once segwit gets possibly activated in Nov, bitcoin transactions will be much faster. Im not even a bitcoin super-lifer, but as long as I can do my part do decentralize my $$$ from uncle scam then I will.

Raffie's picture

The dreaded EMP thing is a BIG con to Btc *LOL*.................. also people using Btc need to have a higher IQ then most who don't understand it.

So 2 cons.