Boring old Bitcoin (and why you should buy some)

What do you know about Bitcoin? If you’re a bit confused by the coverage by the mainstream media, you’re not alone. Bitcoin only makes the news when there’s a new story: an all-time high, a high-profile scandal, someone new claiming to be the cryptocurrency’s creator.

All this detracts from a far more interesting story that’s just ticking away in the background. Following the news, you’d think that Bitcoin was volatile, illicit, risky, unstable, corrupt, or if you follow the really dumb media, dead. (It’s been declared dead a total of 126 times at time of writing.)

In fact, the reality, is – in dumb news terms – really boring. This is the number of Bitcoin transactions per day since its creation in 2009:

chart of bitcoin transactions

 

What is Bitcoin?

Bitcoin is a way of transferring value from one person to another. To demonstrate, here’s a video of me paying my friend, Steve, 0.001 Bitcoin.

What just happened?

1. Using a Bitcoin wallet on my mobile, I set up a transaction

2. The transaction was sent to the Bitcoin network

3. The transaction was verified

4. My balance was debited, Steve’s was credited

The most important difference between this and traditional transactions is that there was no financial institution acting as a trusted third party. The nodes on the network checked that this was a valid transaction (ie that I had 0.001 Bitcoin to spend) and the transaction was then added to the Bitcoin Blockchain (the shared public ledger of all Bitcoin transactions) for all to see.

This is a massive oversimplification, of course, but the point is that it works. And more and more people are using it.

Steady adoption of a superior system over a period of time doesn’t make great news. Wild fluctuations in the value of Bitcoin against the dollar still dominate the headlines, but as I will explain, this actually has as much to do with the dollar – and all the other fiat currencies Bitcoin is very steadily replacing – as it does with boring old Bitcoin.

‘Proper’ Money

I remember the very first time I owned one of these. I was confused. Why was the Queen promising to pay me ten pounds?

Of course, this is remnant of a time when a pound note could be exchanged for a pound of silver. UK sterling and the US dollar have at various times in their history been pegged to the value of precious metals. Between the end of WWII and 1971 the World’s currencies ran on the Bretton Woods system, which gave more flexibility than direct convertibility but essentially set the values against gold.

In 1971 Richard Nixon opted the US out of Bretton Woods, effectively making the dollar a fiat currency.

Fiat derives from the Latin fiare and translates to something like ‘Let it become’. Essentially, the currency is worth whatever those in power deem it to be worth. There is a long history of fiat currencies and the common theme is that they always fail, spiralling into hyper-inflation and losing their value.

The Roman denarius is a good example. Successive emperors gradually ‘cut’ the coins (originally made from pure silver) with non-precious metals in order to fund wars until by the time of the downfall of the empire the coin was just copper with a silver wash .

Other examples include the Papiermark of Weimar republic, which people ended up burning by the barrowload to stay warm and, most recently, the Zimbabwean dollar.

Fiat currencies fail because it’s just too tempting to print money.

But that couldn’t happen here, right?

This is a chart of the US money supply.

In contrast, here is a chart of the supply of Bitcoin.

Boring, huh?

There can only ever be 21 million Bitcoin. In fact, there will be fewer because some have been irretrievably lost. It is scarce. Scarcity is a fundamental property of money, and it’s the one that fiat currencies struggle to maintain.

Bitcoin has enormous potential and there will be many exciting stories in the future, but at this point in time, the most compelling aspect of Bitcoin for most of us is as a store of value. Good ol’ Bitcoin is providing a safe haven in these uncertain, post-trust times.

I am not saying that Bitcoin is not risky; I’m saying ‘proper’ money is riskier. We’ve already had warning signs: bail-outs, bail-ins, negative interest rates etc.

Here is my advice: hedge your bets. There are really only two likely, stable outcomes for the value of one Bitcoin :

0

or

Some measure of the global economy divided by 21 million

How much would you be prepared to lose on a weekend in Vegas? Take that figure, double it, buy that amount in Bitcoin, then sit back and watch the future gradually unfold.

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