Bitcoin Status Update

The Financial District awoke this morning to Bitcoin trading at $8510, a level we haven’t seen in some time.  Bitcoin hodlers, in for the long haul, uniformly agree that there will come a time when Bitcoin, resuming it’s advance, does so with a vengeance.  Current prices somehow feel different from those we’ve seen in recent months. They might be the same prices but they certainly feel different on the =way up than they did on the way down.  Perhaps this is the rise they have foretold.  It makes sense, too.  For these Bitcoin holders, the biggest fear is the fear of missing out.  If there is a perceived price rise, these folk are more apt to jump back into the fray than most any other investor pool.

bitcoin price
One year Bitcoin price chart, from April 20, 2017. From a low of $1244 at the beginning of the year until the price topped out at $19,343 on December 16th, Bitcoin could not be stopped.  Since then Bitcoin has fallen to a low of $6914 on February 5th and again to a lower low of $6618 on April 6th.  

The last time Bitcoin rose more than $2200 from a new low was in February.  It managed to stay at that level for two weeks before resuming its fall.  Bitcoin has already recovered $3400 from its April 6th low and has done so in a solid, steady advance.  Hodlers looking at this progress now are more likely to feel a FOMO than a feeling it can’t go much higher.

Standards

 

traffic at night
A sea of red taillights on Sunset Blvd at night.

One of the finest examples of a stated and enforced standard is the specifications written for the automobile.  Every aspect of the automobile is specified so that every manufacturer is required to provide the same features and quality.  Every consumer can expect those same features and quality.  It is a tribute to our society for having created and enforced these standards. Most people do not appreciate what this body of work does or why it is so important.  The automobile industry is over 125 years old and it’s taken much of that time to sort out these standards.

 

Picture yourself driving down a busy highway at night.  Before you are several hundred cars going in the same direction.  What you see are rows and rows of red tail lights.  That’s is to say not just any tail light but the red color specified under Title 49: Transportation, PART 571—FEDERAL MOTOR VEHICLE SAFETY STANDARDS, Subpart B.  Looking down the highway you see each and every red tail light lens’ color matches every other precisely.  Wow.  When we glance down the road we can see in an instant that everyone is headed the same way.  If one of those 100 cars were coming at us, we would spot that in an instant.

Imagine what we would see if there were no standards; if every automobile’s owner decided for his or herself what he wanted for a tail light color.  Looking down the highway we would see something more like a Christmas tree then a column of red.  Is the car ahead of you slowing or stopping?  No one would know. Chaos would ensue.

New technologies take decades before manufacturers and consumers can agree on and set standards and rightly so. To set standards too quickly in the life cycle of a new technology means quashing inventiveness and creativity.  To wait too long before setting standards allows the biggest players in the space monopolistic control over the marketplace which drives up prices and further limits choice and ultimately hurts consumers.  Until standards are set and enforced that new space might behave like the wild West where anything goes.  The law is slow to catch up to the reality of the times, too.  Price gouging, failure to supply the promised value of a new product, and lack of truth in advertising are rampant. Misalignment of consumer expectations with manufacturer’s deliverables is common.  The resultant feeling is one of mistrust and disappointment.

With cryptocurrencies, we’re experiencing the early days of a new technology, characterized by much of the same.  There is a general feeling of mistrust and disappointment with software that doesn’t work as expressed or expected, and developers (the manufacturers, in this case) who are too quick to make promises and not experienced enough to understand why they should not cut corners or speed production in a trade-off with quality assurance and testing. Unfortunately, until standards are set and maintained, we can expect more of the same.  Furthermore, standards take a long time before they are written and ratified.  Until then, expect cryptocurrencies to feel like part of the wild, wild, West.

Electric Knives

 

electric knife
How are altcoins like the electric knife?

 

Electric knives weren’t as popular as the 1986 Christmas sensation Cabbage Patch Kids but there was a period of time in 1965 suburban America when they were one of the most desirable gifts to be given or received. Shortly after its introduction, the electric knife became a popular kitchen tool. However, there were many drawbacks. The knife required constant maintenance. It had to be taken completely apart and cleaned thoroughly after each use to prevent the spread of germs and the corrosion of rust.  Busy people soon found this more of an inconvenience than an advantage. When the blades weren’t set back in place exactly, they snapped or caused injury when the knives were turned on. After the novelty wore off, a majority of households returned to the old-fashioned knife for slicing food and reserved the electric knife for carving meat at the holiday table.  You can still find electric knives for sale in places like Bed Bath and Beyond but I can’t remember the last time I saw one in use.

The electric knife is a good example of an invention that came on the scene, was popular, and then, for all intents and purposes, disappeared for lack of use and a good raison d’etre.  Altcoins that have no good reason for being will suffer the same fate.

Bitcoin

bitcoin-2895295__340

Bitcoin is a cryptocurrency.  “Crypto” meaning encoded; “currency” meaning money.  It was invented by someone named Satoshi Nakamoto in 2009.  He was trying to solve the problems of digital currency such as using money online for shopping or banking.  His solution was so thoroughly thought out that one could say he gave birth to Bitcoin whole and fully formed.  In 2008 he published a white paper describing his invention, then formed a group of programmers who could create and follow his design. He then disappeared and no one knows who he is or where he is to this day.

Bitcoin is the result of something else Nakamoto created called a blockchain.  A blockchain is a distributed, decentralized network.  You all know what a centralized network is where every node in the network is directly attached to a central hub.  Our online banking systems work like that.  Every transaction goes through a central hub.  A decentralized network might have several hubs scattered throughout the network.  This would be what you would imagine our fire department looks like with stations scattered throughout the city.  A distributed, decentralized network is slightly different from these.  With a distributed, decentralized network there are no hubs.  Every intersection in the network between two or more users is considered a node.  Each node has several neighbors.  A blockchain is a distributed, decentralized network of nodes.  The Bitcoin blockchain has over 11,000 nodes at the moment.

In Nakamoto’s design for Bitcoin, each node would have a computer running the Bitcoin blockchain program.  The program would do several things.  It would each a ledger of every transaction made anywhere on the network at any time from the beginning of the network until the present.  It would communicate with its neighbors.  A typical node might have five or six neighbors.  Remember, this is all running on the Internet so a cyber-neighbor on the Internet does not mean it is a physical neighbor.  The nearest neighbor for a node in New York could be Chicago, London or South Australia.  The time for a signal to travel around the world is a small fraction of a second.

distributed network

When some at node A gives a Bitcoin to someone at node B that is called a transaction.  A transaction would be written as “A gives B one Bitcoin”.  The program at node A tells its neighbors this transaction.  Let’s say its nearest neighbor is node C.  The program at C receives the message “A gives B one Bitcoin” and records it as a new transaction and marks it as “Pending”. It then checks all previous transactions to see if A really has enough Bitcoin to give one Bitcoin to B.  If it finds the current amount of Bitcoin at A is sufficient to pay B one Bitcoin it sends a message back to A and B and says “Transaction confirmed” meaning that transaction can proceed.  Node A and B record the confirmation and write “Transaction pending.  1 confirmation”. C then goes on to tell all of its neighbors about this new transaction.  Node C tells D, E, F, G, and H.  They, in turn, check their ledgers to confirm that the transaction is authentic and allowable and send back confirmations if they do.  The process continues until Node A and B have 1000 confirmations.  At that point the transaction is considered authentic and allowed to proceed.  “Pending” status is changed to “Confirmed.” The 1000 confirmations make the network very, very difficult to cheat.  You would have to get 1000 strangers whom you do not know in advance to collude with you in order to cheat the system.

The transactions continue until there are a sufficient number of transactions to fill a block.  A block is about 1 kilobyte of data. When that happens the block is attached to the previous block to continue the chain. Now, Satoshi Nakamoto realized that he would have to get people to maintain all of these nodes, with a computer and a large disk drive at each one.  He created a very unique method for doing that.  These people would be called “miners.” A Bitcoin miner had 1) to be motivated to do the work, and 2) be chosen at random so that no one could take over the system for themselves.  His solution was this: he would pay them (in Bitcoin) for doing the work, and, he would create a very difficult mathematical problem for people to solve.  The problem was so difficult that even with a super-fast computer the miner would take about ten minutes to solve the problem.  And, the solution would be totally random so that even smart, fast computers did not have an advantage over anyone else doing the same thing.  The problem was to guess the password for the next blockchain.  This would be a random thirty-character password that took even the fastest computer about ten minutes to guess and looked something like this: 00RasOd2FsM5Gsdfd88up8pUs5QdWss:426SD38E1a.

The miner that guessed the password correctly was paid 12 bitcoin and had the privilege of creating the next block and communication that to the network.  Twelve (12) bitcoin today is worth over $100,000 so there are many people who want to do mining.   There are a total of 21,000,000 bitcoin in the system.  There will never be any more than that.  16,800,000 have already been distributed and there is enough bitcoin to pay miners for the next 100 years.  In the year 2108, the miners will have to charge fees to do the work.

Bitcoin is just one cryptocurrency.  Since it was created in 2008, there have been many more cryptocurrencies created.  To date, there are over 1500 cryptocurrencies recorded.  Not all will survive.  Each one was designed to do something different from the others.  There are currencies which are just for real estate.  There is one just for contracts.  There are several for online gaming, sports gambling, international finance and so one.  Their creators hope that they become popular and successful.  Some will.  Some won’t.  The most popular ones today are Bitcoin, Ethereum, Litecoin, and Ripple.  To see the Bitcoin network in action take a look at bitlisten.com. Since all transactions are public, at this URL the programmer created a bubble for each transaction and displays the size of the transaction in the bubble as they appear.

So what’s the big deal about Bitcoin?  Why all the fuss? How to get Bitcoin? How to keep Bitcoin safely? What are bitcoin wallets? These and many more questions are subjects for future discussion.  You can read more about Bitcoin at bitcoinARL.com.

 

(?) To Be or Not To Be

Bitcoiin.jpgAt the core of the crypto- controversy “scam or new asset class?”, is a personal belief from which all else flows.  If you think that Bitcoin is a Ponzi scheme, everything which is generated from that essential belief only serves to confirm a negative opinion of cryptocurrencies. No amount of ‘evidence’ is going to dissuade one of these thinkers from believing bad things will ultimately updo Bitcoin.  The only problem for them is how to prove that the value of bitcoin will go to zero, even though Bitcoin hovers around the $10,000 mark.  If they wanted to profit by the misfortune of others, they might even purchase a Bitcoin short position.

On the other hand, if you believe Bitcoin is only the beginning of a new asset class, that hundreds, if not thousands of other cryptocurrencies will follow, that many of them will be widely traded and prove to be a very lucrative investment for those who bought in early, your problem is two-fold.  First, you have to prove that the value of bitcoin will go as high as one million dollars per coin, even though bitcoin presently hovers around the $10,000 mark.  Second, to take advantage of this glorious insight you have to choose in which cryptocurrencies to invest.

Ultimately, a sufficient number of use cases will prove the value of cryptocurrencies, or not. Be on the lookout for those.  Uses cases are the best argument you can make about in which cryptocurrencies to invest or if to invest in Bitcoin at all.

J.P. Morgan’s Risky Behavior

725_Ly9jb2ludGVsZWdyYXBoLmNvbS9zdG9yYWdlL3VwbG9hZHMvdmlldy8zZDczMWVhYjBjZWFlZDUxZjhmZTZhMDVhZThmYTVhMy5qcGc=Today’s headline reads: J.P. Morgan Chase Bans Buying Cryptocurrency With Credit Cards.

“At this time, we are not processing cryptocurrency purchases using credit cards, due to the volatility and risk involved. We will review the issue as the market evolves.”

That’s about as disingenuous as Jamie Dimon’s “bitcoin is a fraud.”  Since when does the bank watch out for consumer risk and volatility?

“I’m sorry.  You were attempting to place a bet on a 15 to 1 shot in the 7th race.  J.P. Morgan will not facilitate that bet due to the long odds.  How about that favorite, Sugar Biscuit, going out at 3:1 in the eighth race?”

Overheard at an Atlantic City casino:

“Damn credit card won’t work. J.P. Morgan says they don’t fund buying an inside straight.”

Message from the online escort website:

“Due to the risky nature of unprotected sex, use of this credit card without a condom is prohibited.”

Message on a pack of cigarettes:

“Cigarettes are risky business.  J.P. Morgan credit cards should not be used in the purchase of cigarettes and other tobacco products.”

Bartender in an Irish pub to a customer:

“Your bank credit card won’t work here.  Sometin’ about binge drinking and risky behavior. Don’t know.”

 

 

 

Bitcoin: Bubble Made of Mylar Not Soap

Soap-Bubble.jpgBitcoin stands at $8697 and has hovered around $8550 for the last twelve hours.  This has been the softest the cryptocurrency market has been since last summer.  Prices are still higher than they were at Thanksgiving time last year, yet coming down from highs around $19,500 the market doesn’t feel optimistic.  Broadly speaking the market has been plagued with bad news of late.  Governments are cracking down on cryptocurrency ICO’s, exchanges with bad trading practices are in the news and Facebook has put a ban on all crypto ads. The billions pouring into cryptocurrencies in hopes of making a fast buck have exited.  The entire cryptocurrency marketplace has fallen in lockstep with Bitcoin.

Yet, I can’t help but think what the naysayers that appear daily on Bloomberg and other financial talk shows speaking of Bitcoin going to zero and the “biggest bubble in human history,” are going to say when Bitcoin emerges from this episode in fine fiddle and goes on to bigger things. It is easy to see who understands what Bitcoin offers and who is clueless.

Bitcoin’s a bubble made of mylar, not soap.

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