Screen Shot 2017-10-03 at 9.52.26 AMDon’t understand cryptocurrency? Think ‘airmiles’.  You know, the premiums given out by various airlines, credit cards and other players as a reward for flying or shopping referred to as airmiles.  Almost every airline gives out some form of airmiles.  Airmiles are virtual.  There’s nothing physical thing you can point to called an airmile.  They exist in computer programs.  For each airline’s airmile program there exists a formula by which you earn and use airmiles.  You might have to spend a dollar on a participating credit card to earn an airmile, for example.  Or, you might have to accumulate 30,000 airmiles to use airmiles to fly from New York to Chicago at no additional cost.  You know the drill.  Cryptocurrencies are similar.  Each cryptocurrency has a specific function and value proposition.

How can something virtual have value?  How do airmiles equal a trip to Chicago worth $250?  Because that is its value proposition.  That’s how it was set up.  That’s what you get if you take the necessary actions.  That is the social contract that has been set up for each individual airmile program.

Cryptocurrencies are the same.  There is a cryptocurrency that is used for online gambling, one for online gaming, and even one for sports betting.  There’s one which is the currency of international money transfers, one for healthcare and one for real estate.  Before we’re done you will see thousands of different cryptocurrencies.  We’re just getting started.  Some will be valuable and worthwhile acquiring.  Some will not be worthwhile at all.  We, as a society, are just now learning how to use cryptocurrencies.  It is only now that they are even being considered a new asset class, a new form of wealth.  There are bound to be missteps and mistakes.

171010 Bitcoin, Plain and Simple

Bitcoin is a virtual currency.  That means it has no physical being.  It exists as an idea or as information.  Just as I would pay for a vacation flight with ‘Airmiles’ I accumulated on my credit card promotional program; there is nothing physical that represents an ‘Airmile.’  It’s just an idea.  But Airmiles can be used to purchase items from a catalog. You get Airmiles by spending money and taking trips when signed up for the program.

Satochi Nakamoto began Bitcoin in 2009.  No one has ever met Mr. Nakamoto.  Some people do not believe that is his real name.  But he wrote a detailed paper designing the whole system, then programmed it, gave it over to a group to continue his work and has disappeared.  But that’s the stuff of another blog.  Let’s stick to the topic; an explanation of Bitcoin.

Bitcoin is an idea, too.  You get Bitcoin by going to a Bitcoin exchange and trading another currency for it; U.S. dollars, for example.  USD->BTC

Bitcoin is a cryptocurrency.  That’s a new term.  Cryptocurrency is an encoded currency.  Currency, like money, is used to transfer value from one person to another.  A virtual currency is encoded so that it appears on a computer, but there is no real paper or metal manifestation of it.  It is only on a computer.  Just as I couldn’t pull an Airmile out of my pocket, I can’t find any Bitcoin there, either. All of the images you see on the Internet of shiny gold coins with the Bitcoin symbol are just art.  That is not what Bitcoin is.  It doesn’t look like anything because it does not have a physical existence.   Just as if someone gave you a big red heart saying, “This is my love,”  that is only a representation of their love but not love itself.

But just because it’s virtual and doesn’t have a presence in the real world, doesn’t mean it doesn’t exist.  Bitcoin is very real.  Today one Bitcoin is worth USD 4775.  It is its trustworthiness that makes Bitcoin compelling.  If someone puts a Bitcoin in your Bitcoin wallet, you can be sure it is real, and you just received its full worth.  That’s not true about most other currencies.  For example, if someone gave you a check made out to you from a bank for one thousand dollars, how would you know if it was good or not?

To explain why Bitcoin is trustworthy I have to describe how the network works.  I know technical descriptions are not everyone’s cup of tea.  I’m not going to do that here.  But, I will do that later on in this blog because it’s interesting and worth knowing about if you want to understand Bitcoin.  For now, let’s teach by way of example.  We now live in the age of the Internet.  Just about everything we do, in one way or another, involves the Internet. Satochi Nakamoto started by thinking about designing a genuinely trustworthy system to exchange value from one person to another.  The first assumption or guideline would be: everyone must know what everyone else knows.  No secrets.  On the Internet, that’s not complicated to do.  If you send everyone a complete copy of what you have, then everyone has the same thing.  If anyone doubts what they have is accurate, they can check with anyone else in the system.  In the case of Bitcoin, who is “everyone?” “Everyone” is anyone who owns any amount of Bitcoin.

As new owners appear in the Bitcoin network, they are called ‘nodes.’ A ‘node’ doesn’t connect to every other ‘node’ but a few.  These connections are called a ‘chain.’  You might have heard the term ‘blockchain’ or ‘blockchain technology’ when speaking of Bitcoin.  Bitcoin is base on blockchain technology.  That’s what I am describing here.  You would say ‘blocks’ are added to the chain when connecting node.  With each new transaction, the nodes connected to the sender of Bitcoin are checked,  and then the receiver, in turn, is connected to a new node.  Checking takes some time and why Bitcoin transactions are never instantaneous.

All of these are computer transactions.  Since this would be a decentralized system, that is to say; there would be no centralized headquarters or command responsibility, no single company or government would own the network, Satochi Nakamoto had to figure out a way for someone to get paid for doing the computing to manage the transaction.  He also had to figure out a way that anyone could be allowed to do this work, that it would be accurate and trustworthy.  He did all of that.  Again, some future blog post will explain the details of those parts of the network. The people who do the work are called ‘miners.’  Miner and mining are not entirely accurate terms.  He isn’t going to dig and find Bitcoin like digging and finding gold.  It is only similar to gold mining in that new Bitcoin appears after the miner does his work.   End Part I

171003 JPM’s John Normand: Bitcoin is like Airmiles

JP Morgan Chase’s John Normand has been writing about Bitcoin for many years.  He called Bitcoin “a retail novelty,” back in 2014 and essentially has the same opinion today. He acknowledges, though, the huge change in scale Bitcoin has achieved.   Trying to avoid calling Bitcoin a Ponzi, he likened it to “Airmiles,” as though Bitcoin’s added value is something like a bonus in the same way as Airmiles is an added value bestowed upon credit cards.  Wow.  That’s as basic a misunderstanding of the value of Bitcoin as you can get.

The underlying blockchain technology gives Bitcoin the trust and reliability that makes it part of an ever growing network of value.  In the future Blockchain technology will be used wherever a secure database is required.  Contracts, property deeds, vehicle registration information, stocks, and bonds are going to be using blockchain technology.