On Tulips and Hockey Sticks


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Bitcoin price chart through June 12, 2017. Until today December 15, 2017, Bitcoin continued its meteoric rise to $17,700. 

The comparisons of Bitcoin to the tulip mania of 17th century Holland  or  Bitcoin’s price to a classic Economics 101 hockey stick are wearing thin.


The classic hockey stick chart

If what we are looking at is truly a bubble then if we are at that point where institutional investors are coming into the market in droves, we should see them being accompanied by media attention, unbridled bitcoin enthusiasm, and greed.  After that, a period of delusion, fear, and despair.  The Naysayers would love that to be the case.

Chart of the classic market bubble showing valuation against time.  As time passes valuations rises to euphoric heights followed by a crash.

But what we are looking at is something more akin to a chart of Facebook membership enrollment which goes up and levels off rather than a rise and fall.  Of course, Facebook didn’t have an eight year warmup period like Bitcoin but once it started to catch on with users, Facebook doubled and tripled in almost every year for the next nine years.

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If Bitcoin is the new currency to replace US dollars then what we’re witnessing is people accumulating Bitcoin as they would cash.

How much cash do you have on hand? If you’re like me you have enough cash in your wallet for a few days and enough cash in the bank for about a month’s worth of expenses.  More than that isn’t necessary since the supply of cash is replenished with a salary check or a dividend [ayment.  If everyone is in the process of accumulating a month’s worth of spendable cryptocurrencies, then the market cap of cryptocurrencies used as cash should go to a trillion dollars.  That’s the amount of money that American’s keep in checking accounts, on average.

At present, the Bitcoin investments can be characterized as speculative. Investors aren’t using Bitcoin yet.  They simply want to own some in the hopes that the price rises.  This will quickly change as folks find ways to spend Bitcoin as they would dollars.


Bitcoin: Not Ready for Prime Time


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Not one in a hundred bitcoin users knows these are barcodes or what they do.

The bitcoin community is delusional. All of the features the bitcoin enthusiasts claim make bitcoin great do not yet exist.  Yet these bitcoin cowboys act as though they do and that defies explanation. Based on the blockchain technology, bitcoin is supposed to be the next generation of finance.  It is supposed to be secure, anonymous, and fast.  But having now purchased, traded, exchanged, spent, and gifted bitcoin, the reality is — bitcoin promises all of those features but delivers none.


The most well-known, well-used bitcoin exchange is Coinbase. It now boasts more customers than Charles Schwab with 100,000 new customers signing up daily.  It is extremely slow.  I went to bed last night, rather than wait beyond the 30 minutes Coinbase asked me to wait to see the confirmation of my transaction.  The program upon which the exchange is written is barebones.  The protocols customers have to follow to execute transactions are so poorly designed, so unstable and so unreliable that if it was a student computer science project it would get failing grades.  One customer in a hundred understands what the QR code does.  The Internet service provider, Spectrum, which I use to connect to the Internet goes down daily and is so unreliable that you would think I live in a third-world country not the Financial District in Manhattan.  That’s not bitcoin’s fault but it doesn’t help speeds or reliability.

I break out in a cold sweat whenever I have to copy and paste one of those nasty thirty-character addresses that may or may not be correct.  How would you know the difference? The only advice I get is “This had better be a BTC address or your crypto may be lost forever.” Or, what is going through my mind at that moment is the story about the scam which involves a dormant program which resides on your computer, waiting for you to make a bitcoin transaction.  At the moment the transaction is sent, the pirate program substitutes their address for yours so you never know what hit you. Bitcoin transactions might be instantaneous but you have to be so cautious and move so carefully that it rather feels like an awful lot of work.

The transit might be instantaneous but the mining, confirmations and blockchain building takes forever.  Transactions at the speed of light? An hour or more is not uncommon.

I’m sorry to say the whole Bitcoin environment will have to evolve into something that is much, much safer, faster and foolproof before it can ever go Mainstream.  Think of automobiles.  When you take the keys and go for a spin you barely have to give the act of driving or the car itself a second thought.  Bitcoin has to evolve into something just as safe and reliable.  Otherwise, there are going to be accidents, thefts, mislaid property, and unintended consequences.  And, we will never realize the promise of a blockchain based currency.

171130 Selling Certainty

Screen Shot 2017-11-30 at 7.55.21 PMBlockchain technology, the basis for Bitcoin and other cryptocurrencies, has been broadly acclaimed for what it does: create trustworthy, distributed, decentralized networks.  Until now we have relied on centralized clearinghouses to manage and process ‘the books’ for most of our important infrastructural ledgers such as credit, banking, stocks and bonds, real estate, insurance and investments of all kinds.  Those systems have their own inherent problems, something that blockchain overcomes nicely.  Moreover, blockchains have been shown to be inherently trustworthy.  So where we were once forced to keep secret our usernames and passwords and garner our administrative privileges carefully, we may freely distribute our wallet addresses so that others can make payments to us, all without fees or fear of theft.

What does it mean for you? Let’s explain it in more personal terms.  Let’s say you meet a stranger on the street who offers you a $200 personal check for the hat on your head.  Would you take it?  The hat cost you $50 and you have no love for this hat but losing it to a fraudulent check would be a bummer. You’re not comfortable with that arrangement and say no.  Now, let’s do that again.  The stranger says “I don’t have that much cash but I’ll give you the equivalent in bitcoin.  Bitcoin is $10000 at the moment so I’ll give you $200 as .005 bitcoin, ok?” Bitcoin is based on a blockchain.  You take out the Coinbase app on your smartphone, a bitcoin exchange, show his bitcoin wallet camera your address and the transfer is made instantly.  Very comfortable with that payment, you say “Thank you.”

For too long our society has been burdened with the need for more and more security.  We have locks on everything public.  We have passwords, administrative levels, and private keys for everything, both actual and virtual.   We all carry around a heavy set of keys, passcards and ID badges in our wallets.  If we begin switching over to blockchain for all of the things that need to be safe, secure, private and accessible, we will no longer need all of those levels of security.

You will begin seeing blockchain applied to real estate, contracts, building passes, insurance, as well as currency.  Blockchain will be applied to more and more things that you would have thought did not need ledger journal entries.  Every time blockchain is applied reduces the need and therefore the costs of security.  That’s a good thing.

171109 Blockchain

HandshakeBitcoin is difficult for most people to understand.  It’s based on trust, cryptography, finance, and computing. All of these are complex subjects. But, Bitcoin is an important phenomenon taking place and there’s good reason to be able to appreciate what’s happening.  Let’s look at some of the features of this new currency that make it so special.

The Bitcoin network, called a blockchain, give Bitcoin it’s strength. Blockchain technology works so well that thousands of blockchains have been proposed and are in various stages of actualization.  These are being created by banks, insurance companies, healthcare providers, and Fortune 500 companies to help secure data and provide trusted information to large networks. A blockchain network is described as a distributed network.

We are familiar with centralized networks where everything is sent in and out of the network through a centralized node.  We also are familiar with decentralized networks where many different nodes are scattered across the network.  A distributed network is a little different.  But that difference is very important.

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In a distributed network every node is connected to all of its neighbors.  There are no great distances between nodes.  A new node may be added to the network by attaching itself to an existing node.  Before we talk about how block change works, let’s look at the problem it solves.

If you were in charge of some very sensitive, valuable information but you had to keep it on a computer how would you keep the data safe, preventing damage and free from unauthorized tampering, and secure, free from vandalism and theft? Remember, this is someone else’s data and they need access to it whenever they want. How do you keep the data safe and secure but still allow the rightful owners access?

First, to prevent loss there should be copies. How many? The more the merrier, actually. If everyone who had data in your care also had an exact copy of all of that data, wouldn’t that be great?  If someone were to steal your computer, the data would be with all of the other players. In fact, if someone stole half of all the computers in the network, there would still be multiple copies of the records.

Ever hear the phrase “garbage in, garbage out”? This is another motto that applies to blockchain in spades. To ensure every new record is a good record, before adding it to the chain of all the blocks of old records, it is verified by comparing it to the existing records. Remember, of the 21,000,000 Bitcoin that can ever be created, 16,600,000 is already out there.  They are being kept in Bitcoin wallets, and the amount and address of each wallet are the data in the blockchain. So before a new record is added which says X number of Bitcoin from address A is being transferred to the owner of address B, that new record is checked to see that there is, in fact, X Bitcoin and then the differences recorded after the transaction. Before a Bitcoin transaction is built into a new block and added to the chain, hundreds of checks of this type are verified. That’s why Bitcoin transactions are not instant.  They usually take about 10 minutes. But, having made those thousands of checks, the new block of transactions can safely be added to the blockchain.

With this system, two total strangers can exchange Bitcoin in full confidence that there is real Bitcoin, it hasn’t been lost or stolen and is the property of one to give to the other.  The transaction is anonymous, that is a person’s name is not attached to the address.  There are also no fees required to make this transaction.  The work of keeping the distributed ledger up to date and accurate is done by miners who are rewarded for their work by getting paid in Bitcoin.  There is a payment process which keeps the function of mining random and allows anyone to join.  The reward is randomly given to one of the miners.  It is a large reward and there is enough Bitcoin in reserve to pay miners for the next 120 years.  At that point, the system changes to a fee-based system.  By having a system that gives all comers an equal opportunity to be a miner, it prevents certain interests from monopolizing the mining function.








171030 The Inevitability of Bitcoin

distributed networkBitcoin is a cryptocurrency.  If the term is new to you, a cryptocurrency is a digital currency; virtual money.  It was the byproduct of another invention, blockchain.  Blockchain was invented by Satochi Nakamoto, an unknown inventor.  In 2009 he made the following announcement:

Announcing the first release of Bitcoin, a new electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s completely decentralized with no server or central authority.  

Double-spending was the biggest problem for any electronic cash system.  If someone pays you online, how do you and your bank know that the payee didn’t already use all his money somewhere else?  You rely on your bank and the payee’s bank to ensure that the money hasn’t been double-spent.  It involves a lot of secrecy, electronic handshaking, passcodes, keys, locks, and accounting.  In the end, those systems aren’t very good.  There are often long delays, there is often theft, there is fraud and misdirected funds.  Blockchain is the technology that creates a decentralized network.  There is no central clearinghouse for the exchange of Bitcoin.  Bitcoin is the currency that is being exchanged.  We can go on and describe how it Bitcoin works in greater detail but suffice it to say over the past eight years Bitcoin has gained a huge following and spawned many other cryptocurrencies.

Before getting into all that, it’s important to ask “why?”  Why Bitcoin? Why now?

Bitcoin is inevitable.  At the beginning of the United States of America, when we had to create our own currency, we based our currency on gold. It was possible to trade paper and coin for gold.  Gold became impractical to use as everyday currency.  It was not easy to carry, divide or weigh.  For the next 250 years, paper and coin was the currency of choice.  Today most of our financial transactions are done with debit or credit cards.  Checks are quickly falling out of favor.  In fact, only 11% of people prefer cash as a method of payment.

Furthermore, more and more of our transactions are done online.  For those, we must use a digital form of payment.  In the very near future, a new payment requirement will become necessary — computer to computer payments.  Your computer will interact with the computer of a good or service without your direct involvement.  Those payments might be very, very small and/or very, very fast.  For example, you will go to a website where you pay to read what is there by the word.  A word might cost $0.0001324.  Your Lyft, Uber or Apple driverless car service gets directions and the payment from your smartphone.  You pay for groceries simply by bagging them and carrying them out of the store.  There are no cashiers.  Much of this will be micropayments and they will happen quickly, too quickly for us to be actively involved.  Nor would we want to be.  For this type of transaction, it will be necessary to have a cryptocurrency, one that can be divided into 1/100,000,000th of a coin if necessary.  Also, the cryptocurrency will have to be decentralized.  There is no time to send a message back to a central clearinghouse, wait for a response, and then send messages off to a couple of exchanges and two or more banks in order to keep up with the necessary bookkeeping.

Bitcoin does all of this with ease.  Until you have actually received or spent a bitcoin it is hard to imagine just how easy bitcoin is to use.  To keep bitcoin you use a bitcoin wallet.  Bitcoin is placed in the wallet by means of a public and private key.  To receive bitcoin, you would give the payee your bitcoin wallet public address.  Your address is part of the bitcoin blockchain.  Every single owner of bitcoin has a complete record of every bitcoin transaction, kept in the blockchain.  New transactions are not permitted until all of the modes in the bitcoin network surrounding the new transaction agree that it is a legitimate new transaction.  For a more detailed description of the blockchain technology and why it works, other entries cover that in great detail.

One of the first questions about bitcoin is “Isn’t bitcoin used by drug dealers and money launderers?”  Yes, it is.  That’s because it is totally anonymous, secure and fast.  But that is also why it is used by families sending money home to Venezuela and the Philippines.  That is why people suggested to the independence-seeking Catalonians who are now looking for a new currency to use Bitcoin.  The best part about Bitcoin — there are no fees.  There is no central government or governing body.  There is no clearinghouse or regulations, at least for now.  It would be very surprising if a country allowed bitcoin without imposing some sort of regulations or governance.  In fact, China has already barred some forms of cryptocurrency and announced they will be issuing regulations on Bitcoin soon.  Russia has already outlawed Bitcoin but then restated their intent to regulate it.  Russia will, however, be issuing CryptoRubles, a state-owned cryptocurrency.

There are 16,600,000 bitcoins in existence.  Some more will be issued as time goes on but the total will never exceed 21,00,000 bitcoins.  That makes them exceedingly rare when they have to be shared by the world’s 7.5 billion people.  On January 1, 2017, bitcoin was valued at a little over $600.  At the moment, bitcoin is $6150.  Estimates range from $6000 to $25,000 for the value of bitcoin by the end of 2018.  Estimates range from $0 to $1,000,000 for the value of bitcoin at some point in the future.

Technology requires that there be a cryptocurrency.  Paper and coin, which replaced gold nuggets, isn’t flexible enough to work with computerized systems.  When we use debit or credit cards over the internet we are practically using a digital currency.  The only difference is that the banks, the exchanges, and the clearinghouses that handle the digital transactions are all involved.  The only role the cards are playing is acting like the account numbers for the banks to keep in their ledgers.  Each of those players must keep the information secret, and take responsibility for its being genuine.  There are long delays; often days are set aside while transactions are proven, settled and cleared.  Technology in the near future will require fast, reliable, secure, anonymous transactions.  Blockchain technology promises to deliver all of that.  In fact, blockchain is so well liked and reliable that most of the Fortune 500 companies are already using blockchain to secure all sorts of networks from financial to legal to real estate.  Why not currencies, too?

If you want to get a sense of how popular bitcoin is already, check out bitlisten.com. There the programmer has made a bubble for each bitcoin transaction with the size of the bubble equal to the amount of bitcoin.  The tone played gets lower with the size of the transaction as well.  You’ll be surprised.  There are hundreds of transactions per minute. Bitcoin is inevitable and it’s here to stay.

171011 What’s Bitcoin’s Killer App?

Every new, disruptive technology that takes the fast track to wide distribution, acceptance, and use does so by finding its ‘killer app.’ The killer app gives that new technology a function that cannot be done any other way.  Bitcoin hasn’t found its ‘killer app’ yet but we might be very close.  When it does, Bitcoin will be desired by just about everyone who uses money over the Internet.  That is an enormous number of people.

The killer app for Apple II computers, back in the day, was the program that invented spreadsheets: Visicalc.  Visicalc was the forerunner of Excel.  Visicalc transformed the Apple II computer from plaything to office workhorse.  There was no other way to crunch numbers as fast or as extensively as with an Apple II and VisiCalc.

The killer app for Apple Macintosh computers was Pagemaker, a graphic design program.  Imagine a time when the standard office report was printed on a dot matrix printer on paper that was tractor fed with tear-off sprocket holes.  Along comes Apple Macintosh, with Pagemaker and the new LaserWriter printers and suddenly, dreary spreadsheets became fabulous looking documents with fonts and illustrations, drop shadows and clever graphics.  Everyone had to have a Mac.

There might be several reasons Bitcoin’s killer app hasn’t materialized yet.  People have to become familiar with Bitcoin first.  You can’t very well sell someone on a unique, game-changing use for Bitcoin before they even know what it is.  With every new technology, there is built-in inertia.  You hear: “Isn’t it the currency of thieves and money launderers?”  People do not understand Bitcoin well enough to appreciate its trustworthiness, the unique feature of Bitcoin that makes it so valuable.  When they do, when most questions regarding its safety go away, then killer apps will abound.

For example, let’s imagine an app that sends and receives Bitcoin.  If you’re thinking of a Bitcoin Wallet app, you’ve got the right idea.  These are popular for holding Bitcoin and most Bitcoin owners have a wallet of some sort or other.  One day, those same people are going to realize that the money they are sending to their trading partners abroad is being reduced by huge bank fees and exchange rates.  One day, it will occur to them that the same value could have been sent as Bitcoin without any fees.  If the amounts sent monthly average $100k, then that person stands to gain $30K per year using Bitcoin.  Killer app?


171002 Here’s the Problem

Let’s say you own a website that sells bicycles.  Someone seeing your page decides that’s the perfect bicycle for me and decides to order one.  At your website, a variety of methods for customers to pay for their orders is provided.  All of the usual methods such as credit/debit card, PayPal or check are there.  If the customer chooses to pay by check, instructions include the proviso that the order does not ship until the check has cleared. The reason for that is obvious.  How will you know the check is any good unless you try to cash it.

The card companies have vetted the customers well enough that they are willing to risk the few bad apples that will thwart careful scrutiny.  If a card is stolen, it has not yet been reported.  Or, if the customer doesn’t have enough credit and they are unable to stop the transaction, the banks have enough information to successfully pursue payment. In that case, they do not have to assign a waiting period.  But, with all of these procedures and devices for ensuring payment, there is still a huge fraud rate in the credit/debit card industry.  The recent proliferation of cards with chips has improved the situation somewhat.  There is also the enormous expense to the merchant by the banks for this money handling.  Rates vary from 2.35% to 6%.  There are also fees to the customers, though those might be hidden.  After all, the merchant fees paid to banks must come from somewhere.

Bitcoin does away with all of that. If your site accepted Bitcoin, the customer would read you address into his Bitcoin Wallet and send you Bitcoin.  The Bitcoin would arrive instantly.  The transaction would be complete. It’s that simple.  Done.  Over. Finished.  No fees. No waiting period. No risk of non-payment. No lack of credit. No bounced checks. That’s the beauty of Bitcoin.

170915 Why Bitcoin?

bitcoin-2582593__480“Why Bitcoin?” is one of the first questions that comes up when I mention Bitcoin.  It’s interesting to note that WordPress.com, the host of this blog, now includes space for authors to be paid in Bitcoin.  My Bitcoin address is “14VNkTPR7N9kxjPkYc1Gvf3R9TNbME615W” just in case you are interested in sending me some Bitcoin.  It’s just that easy to set up, send and receive Bitcoin.

If I wanted to set up the ability to receive payments by MasterCard or Visa it would require a bank, a merchant account, an ability to read card numbers, username, date of expiry, a three-digit security code, and a signature. There might even be a waiting period before any transactions go through, despite all of this security.

Bitcoin requires none of that.  Bitcoin that is sent to an address is received by the address.  That is the end of the transaction.   There are no banking fees,  there are no exchange rates or credit card charges.  There is a small fee attached to each transaction that pays for the processing.  Every bit of the Bitcoin sent as a payment is received by the recipient.  This is true for any sender and any receiver anywhere in the world.

Imagine your brother, someone you trust more than anyone else in the world, owed you a large sum of money.  To pay you he hands you an envelope full of cash.  You might not even bother to count it. He’s your brother after all.  In this trusted relationship, counting isn’t necessary.  You put the envelope in your pocket.  End of story.  The reason that this transaction was so simple was that it is a trusted relationship.  The reason Bitcoin transactions are so simple is that they, too, are trusted relationships.

Why Bitcoin? Because it’s so much easier, faster, smarter and cheaper than any other form of payment.bitcoin