The most frequent investment question I seem to be getting these days is if Bitcoin is a good buy. So here is a little synopsis of Bitcoin including a good old fashioned conspiracy theory. (I’m not a fan of conspiracy theories – but a bitcoin discussion wouldn’t be right without one)
Bitcoin is the original and biggest in market capitalization of over 4000 active crypto currencies . It was revealed in October 2008 when a paper authored by Satoshi Nakamoto was posted to a cryptography mailing list. The paper detailed computer programming code for a peer-to-peer electronic cash system. Satoshi implemented the code in January of 2009 and the rest is history. The only things we don’t know at this point is where Bitcoin is going, or who Satoshi is.
Satoshi has not been heard from since 2010, so it’s thought his name is a pseudonym, but more about that later. His paper arrived on the heals of one of the worst bank disasters in history and embedded in the first bitcoin block was the text “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. Satoshi also wrote in his paper, “”The root problem with conventional currencies is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
Those who distrust of big and central banks and want an unregulated decentralized currency were the early buyers of Bitcoin. But that interest has expanded into mass speculation. There are very few transactions where cryptocurrency is used to buy stuff, but huge volumes of cryptocurrency trade hands every day, as people exchange conventional currency for crypto at a certain exchange rate, hoping that someone will buy it from them later at a higher exchange rate.
For the sake of trying to understand what a Bitcoin is, Ill replace a 1 Bitcoin with 1 new-age dollar bill. Imagine in 2009 Satoshi issued the first of 21 million possible of these new – age dollars. Every time a new-age dollar is used in a transaction; you have to get 3 strangers to witness the transaction. The one who signs first is rewarded with a newly issued dollar bill which is then in circulation. The more transactions there are the less of a reward the first witness’s get, so all 21 million wont be in circulation until the year 2140. But rather than a paper bill it’s a unique identifier in the cybersphere and rather than 3 strangers its people with computers scrambling to be the first to give your transaction a unique identifier. They are the Bitcoin miners. And just like anything else with limited supply and no way to regulate, the value of that new age dollar has no limits. As of this writing one is valued at $54,000 old school dollars. And to add a wrinkle, your access to your new-age dollar is protected by a password which cannot be retrieved or reset if you lose it or forget it. Currently about 20% of Bitcoin has been lost by their owners, narrowing the available supply.
My inspiration for this article is a story about Chamath Palihapitiya. He is very rich, and the quintessential Silicon Valley success story. Most recently becoming famous as a founder of several SPACs. In February of this year, he tweeted – “Loss Porn: In 2014 I bought an empty lot in Lake Tahoe for $1.6 million…in Bitcoin. Price adjusted for today, I paid 27.5M for it. “He sent a tweet a little while later – “I got the math wrong…it cost $128M”
Note to self – don’t pay for anything with Bitcoin! Next note to self – buy some Bitcoin! One more note – but what I am I buying?
Adding to Bitcoins unpracticality as a means of payment, the verification of a transaction which is what the mining does, can take 10 minutes while the miners’ computers, must try 100s of quintillion numbers before they find one unique enough for establish that transaction in the block chain. So, you’ll have to wait 10 minutes to get your cup of coffee while high powered machines, running on mostly coal and natural gas generated electricity to verify your coffee payment.
It makes sense that something with such limited supply and such popularity should get more and more valuable. But if you can’t really use Bitcoin to pay for something and you probably can’t use it as collateral, or borrow it, its value right now is rooted in peoples’ desire to make a quick buck. The U.S dollar which the whole world currently uses as a base currency has a value commensurate to the strength of the US Economy and the strength of the US military. Like it or not, we all enjoy that value. And it probably wont last forever, but will a decentralized currency take its place?
As an investment, like any other speculation, its as valuable as people are willing to pay for it. A tulip could be worth $60k if enough people want it. Last week Bitcoin was down over 20% in about a week and in 2018 it fell 75%. One article I read said it could get to $300k according to a crypto expert, but that would be followed by the mother of all crashes and a bitcoin winter that would last for years.
Blockchain is the mechanism on which Bitcoin works. Its described as a public ledger. Think of it as a family tree where every block(transaction) is a new person with an indistinguishable fingerprint, and all blocks are connected back to the first transaction between Satoshi and Hal Finney.
Bitcoin as a currency might not be practical now or ever, but the blockchain technology could potentially be a much more secure and more efficient way for transactional business to operate. For example, the settlement of stock market trades. Currently its archaic and drawn out. It still takes two days for the systems to be able to verify a transaction and exchange the assets between parties. If Bitcoin is any indicator of what could be, it might take minutes to settle trades. Across industries, databases could be more secure, and transactions more efficient and reliable.
Now for the conspiracy theory. Who is Satoshi? There are many theories. Some even say its Elon Musk which he categorically denied. One theory is it’s the previously mentioned late Hal Finney. The concept of cryptocurrency (the name references the fact that it is secured by cryptography) dates back well before Bitcoin. Crypto was being explored in at least the 80’s but what caught my eye is a paper published in 1996, which described a cryptocurrency system and was first published in an MIT mailing list. Its author…the National Security Agency. One of the sources used for that paper was an expert in cryptology as it relates to digital cash named Tatsuaki Okamoto (sounds like?). And to add to that coincidence the hash (the way the blocks in the blockchain connect) used by Bitcoin was also created by NSA. And if that’s not convincing enough the words Satoshi Nakamoto can very loosely be translated as “Central Intelligence”.
Now wouldn’t that be the best irony?!
I’ll end with a story about some Bitcoin personalities we do know. The Winklevoss twins, who are best known for their role in the Facebook story. One angle to that story is that Mark Zuckerberg stole the Facebook idea from the twins, the rowing jocks who were his classmates at Harvard. They fought Zuckerberg in court for their right to the Facebook empire, eventually settling for a measly $65 million. During that time, they made it to the finals in their rowing event at the 2008 Olympics but did not medal. In 2012, licking their wounds at a party on the island of Ibiza, they heard about Bitcoin and this is exactly what they needed to hear. They finally found the path to gold. With their Facebook settlement they started buying Bitcoin when it was low as $10. They printed their Bitcoin passwords, smashed the computers that had generated the passwords with a sledgehammer and then split up and flew around the country to random safe deposit boxes to deposit their jumbled codes. They have since become the first Bitcoin billionaires and formed a cryptocurrency exchange. They believe Bitcoin is the future.
Crypto currency is very quickly going mainstream. Coinbase, the crypto exchange is now a publicly traded company (shares only available in old school dollars). Companies like Tesla (TSLA) and Micro Strategy (MSTR), have padded their profit and balance sheets with Bitcoin. And some might say that cryptocurrency has become a leading indicator of investor sentiment. All the major banks are tipping their toes in, and a few countries are looking into creating their own cryptocurrency.
But everyone understands that Bitcoin and other cryptocurrencies, and blockchain technology are still trying to find their place in this mad mad mad mad world.
P.S. The cryptocurrency Ether hit a new high over over $3,000 Ether, and as the second biggest crypto-currency us enjoying more and more attention. I think though that many people are confusing Ethereum and Ether. Ethereum is a community run technology that can be used by anyone, for free to power a crypto currency or any transactional platform. Ether is a currency. I’m getting the impression that many people are buying Ether thinking they investing in the actual technology. Again the technology is free and is actually funded by a non-profit.