Bitcoin, The Big Picture

Bitcoin, The Big Picture

Bitcoin, The Big Picture

$BTCUSD finished at $4410.98 Wednesday.

  • The price of Bitcoin rose Wednesday, following a brief dip below the $4,000 mark, in an apparent run at another record high.
  • On 1 August Bitcoin Cash ,Peer-to-Peer Electronic Cash successfully launched.

The Big Picture

A simple cryptocurrency transaction looks like this, as follows:

  1. John wants to send Bill 10 Bitcoin.
  2.  John has 100 bitcoins that he has gotten from 500 people who, in turn, got from 10,000 people, and on and on back to the very 1st Bitcoin transaction.
  3.  John puts together a “transaction” and sends it out onto the block chain.
  4. A “block” is a list of transactions.
  5.  Miners confirm that the transactions in a block are legit.
  6. Bill decides how much validation he needs.
  7. The Bitcoins get transferred

Every step above is complicated, but for a reason.

Pros & Cons:

The Pros:

A) a standardized and neutral confirmation policy backed by software that has no human agendas.

The Big Q: What does this mean?

The Big A: Imagine I want to send Bill dollars to buy his house. John needs to trust all of the middlemen between Bill and me: local bank, central bank, lawyers, governments, Bill’s bank, etc to approve of this transaction if I do it in dollars.

This is OK but at each step someone can be untrustworthy.

They are all humans, even the government (humans subtly influence the price of the dollar and also share details of the transaction with unfriendly parties (the IRS)).

Also, each step in the above has a transaction cost. So inflation is built into the system.

If this were a Bitcoin transaction, enough miners need to approve that this transaction is valid. So even if a few miners are not trustworthy, the bulk of them will be and we can trust that the transaction between Bill and John is legit.

The process is complex.

Suffice to say, it works on Bitcoin and any other “legit” cryptocurrency.

This is the reason for cryptocurrency: avoid governments, borders, middlemen, extra transaction costs.

As well as have high security and avoid forgery (there is another reason for cryptocurrency, which is to do more complicated transactions that we can call “contracts” without lawyers, etc. This reason is sometimes the basis for legit ICOs.

Now: Imagine the History of Money.

Money is used as a store of value or as a way to transact without having to use a barter system.

Store of Value

First it was the land you owned and the resources you developed on that land (wheat, grains, etc).

Then it was metals. Gold, silver, etc. You traveled with it by fashioning it into jewelry. Too much gold = harder to travel.

Paper Currency

Backed 1st by gold but then…faith in God (“in God we trust”) or government.

Electronic currency. Easily transportable. But there are transaction fees all over the system and Zero privacy.

And the next generation is Cryptocurrency.

Easily transportable, little to Zero transaction fees, no human intervention between payor and payee, high anonymity, and even functionality.

Money evolves, like anything else, and the natural evolution of money is always as a store of value that is easier to move, more secure, and more private.

Transactions

Transactions have the same history, and the same issues.

The Big Q: How can you transact across a far geographic area with less fees, less costs, less chance for human error, higher security and privacy?

A natural evolution leads go crypto-currency.

THE BIGGEST TREND:

Theism => Humanism => Data-ism

Think about every industry in human history

WAR

Theism: A country planning on going to war would make sacrifices to their gods. Would pray. And would surrender to the fact that who’s ever God was stronger would win.

Humanism: More people, more bullets, more human intelligence, equals the winner in a war.

Data-ism: This is the war being fought every day right now. We saw snapshot of it with the election but it’s only a snapshot in a 10 year movie.

The war is on every single day worldwide in every country. It is loaded with data and hacking and piracy.

MEDICINE

Theism: Shamans and priests would pray for health or do rituals to enhance health.

Humanism: The doctor knocks your knee, puts hand on head, take 2 aspiring and call me in the morning

Data-ism: Bloodwork, DNA work, robotic surgeries, fMRIs, Catscans. Statistical matching with massive database of similar scans to do diagnosis. All medicine is starting to be outsourced to data.

CURRENCY

Theism: “In God We Trust”
Humanism: Let’s throw a President on there. Let’s get the signature of the Secretary of Treasury up there. “Don’t worry, we’re good for it.” While we print a few trillion without telling anyone.

Data-ism: The natural evolution: Cryptocurrency.

Does this mean Bitcoin is The Winner and to Buy Bitcoin?

No.

It just means the natural evolution of currency is arriving and nothing will stop it.

The basic philosophy is the following

  1. Decentralized. So no one government entity can quietly mint money for their own purposes and have access to your transactions, accounts, etc.
  2. Security. So nobody can forge or steal your money.
  3. Privacy. Your transactions can’t be seen and reported to other entitles.
  4. Functionality. This is the more technical parts of the blockchain in Cryptocurrencies but suffice to say some of the “intrinsic value” of a coin is the functionality and computational power used to “mine” that functionality.

There will not to be just 1 Winner.

Just like there is not one paper (fiat) currency or metal currency.

The difference is: those currencies have geographic borders.

Cryptocurrencies have “use” borders.

ZCash might be used by people requiring higher anonymity.

Filecoin might be used by people requiring decentralized storage.

Dash might be used be people requiring faster transactions.

The borders are created when more problems are solved.

Which is a true innovation for currency, as opposed to borders and supply being created by geographic boundaries, central banks with secret control, or a gold mine down the block?

THE BAD

With Bitcoin, a list of transactions is sent out to the network in the form of a “block”. Miners, who are slowly paid in more Bitcoin up to a maximum of 21,000,000, validate a transaction.

If a transaction does not make it into a block on Bitcoin it waits a certain period of time to get into the next block.

This means it might take more time, a problem.

Another problem is that everyone can “see” the transaction on what is called the blockchain. They cannot see who it was but they can see the size and other details, a problem.

Sometimes software can provide a solution. But a software layer involves humans and human error and human “Evil”.

Hence there are scammers and Ponzi scheme and theft, like with paper currencies.

The Good News; these are problems that can be eliminated.

Just like Internet software since Y 1991 solved the problems of speed, security, transactions, privacy, more functionality, etc,. So, think of cryptocurrencies as the “Internet of Money”.

These problems are being solved.

Either with new currencies some of which may be scam currencies, others may be legit. Time and research will tell …or with “forks” in currencies, like what is happening today with Bitcoin and Bitcoin Cash.

What is Bitcoin Cash (BCH), and what should I do?

Bitcoin Cash tries to solve the problem of how can I buy a cup of coffee with bitcoin without using the software layer of Bitcoin.

Remember, if a transaction doesn’t make it onto a block that is then sent out into the network to be validated, it has to wait.

Bitcoin Cash is simply the same as Bitcoin, except it increases the size of a block from 1MB to 8MB.

Hence, faster transactions.

The reason that many exchanges are nervous about this “hard fork” is:

  1. it’s never happened before. So there could be the possibility that smart developers can find a flaw in the process and steal money.
  2. A “fork” is similar to a human election. We had a choice between Hillary Clinton and Donald Trump and forked to Donald Trump.

Bitcoin is designed to limit human involvement as much as possible because all humans have different agendas.

For instance: Perhaps China is greatly in favor of Bitcoin Cash because they currently have a huge edge on mining and they will be able to amass a large amount of Bitcoin Cash before others can.

So the fallout of Bitcoin Cash, while probably correct philosophically and from a software point of view, is still unclear from a human point of view.

Same for the development of any new cryptocurrency, although all new currencies need scrutiny on the software side as well.

But this fork is a bit more intense because Bitcoin is so big and it’s the first time this has happened.

This leads immediately to some logical conclusions, they are as follows:

What to do right now about Bitcoin Cash:

  1. Remove your bitcoin wallet from exchanges and store it in cold storage. If you google “cold storage” you can see step by step how to do that.
  2. If Bitcoin crashes 20% over the next few days because of this fork, its an opportunity. The philosophy of Bitcoin remains the same, it is still the biggest, and volatility only creates opportunity.
  3. If Bitcoin Cash goes up too much, people may sell or sell short, only because they do not know how  to value it.

Cryptocurrencies are going to be volatile for awhile. So in addition to the basic opportunity there is many additional trading opportunities due to the volatility.

No back to basics

The Big Q: Why does volatility create opportunity?

The Big A: Because it’s rare that intrinsic value changes very quickly from day to day.

Example: We know everything there is to know about McDonalds (NYSE:MCD) and 1000’s of analysts research the company.

The intrinsic value of McDonald’s will almost certainly never go down 20% in 1 day. But if the stock went down 20% in a day, then MCD becomes a value buy because the volatility exceeded the normal change in value.

If one can identify the Cryptocurrencies that are legitimate and not scams, then a lot of can be money playing in volatile situations in Cryptocurrencies.

In conclusion:

  1. Cryptocurrency philosophy is valid and not going anywhere and is a natural evolution in:
    a. the history of money from bartering to coins to paper money to data money
    b. the history of every industry from theism to humanism to data-ism.
  2. Volatility is huge as people determine what coins are real and what are not.

These are the basics, and these basics are wrapped around the circumstances of the event happening today: The Bitcoin fork.

There are many people who are being scammed by all sorts of schemes and layers of schemes that are trying to dupe people into buying or trading cryptocurrencies that can be potentially worse than giant Madoff schemes.

The evolution of money, and the evolution of every industry, strongly imply that Cryptocurrencies, probably in many forms, will be in our future. And will dominate the money supply at some point.

How people get from “here” to “there” is a path will be paved with many lucrative opportunities.

The solution is do your homework: research, diversification, building a network of intelligence people who understand all the relevant issues, and then making smart decisions.

As always, it is your money and therefore your responsibility.

Stay tuned.

 

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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