Prev. [Title for Previous Page]

Next [Title for Next Page]

March 22, 2014

VIEW SINGLE PAGE

Bitcoin 101

First, we have to get a handle on what the heck this Bitcoin thing is. The tech behind Bitcoin is so cool I personally get almost apoplectic when I think about it. It can be used not only for money, but for the transfer of anything that conveys ownership of property. However, this is the primary reason Bitcoin is failing. Techno-geeks tend to get wrapped up in the technology -- not the conceptual potential -- and end up talking about topics only a small group of people (other techno-geeks) can understand.

To help better explain what Bitcoin actually is, take a $20 dollar bill (or any other amount) out of your wallet and look at it. What is it worth? "Well, $20 dollars of course," is most likely the usual indignant reply. But what does $20 dollars mean? Where does it come from? We all know The Federal Reserve issues all currency for the United States. And then further elucidate on how it becomes $20 dollars. Believe it or not, U.S. currency was created out of thin air. The whole value of our currency is a faith-based system. We all accept the same belief that it has value. And such it is with Bitcoin. All it requires is the belief in it. And as of now, a lot of people believe Bitcoin is about as real as a unicorn.

Although technically the Fed can create money out of thin air, the central bank cannot simply print money as it wants. As with anything that has a higher supply than demand, the value will go down. As long as people have faith in a currency, a central bank can issue more of it. Since Bitcoin has no central bank, there will only ever be the capped supply of 21 million bitcoins. That finite amount creates an inherent scarcity within the Bitcoin system, which creates value.

Unlike gold, if Bitcoin does fail, it cannot be melted into a pretty piece of jewelry. So whether we are talking about gold or bitcoins, gold only has a higher "store of value" because more people believe it does, and not just because it can be made into something else.

In reality, Bitcoin is no different than gold -- a faith-based system with less followers. There is a floor to the value of gold because of that faith, but only from our perceived belief that mining has any value. And if faith-based systems (like religion) have shown us anything, it's that they have an amazing ability to survive regardless of the "reality" that tries to poke holes in its beliefs. However, because this little religion of Bitcoin has fewer followers and leaps-of-faith required to suspend logic, we can decide -- en masse -- not to believe in it. And then Bitcoin is just worth nothing.

"Didn't that Bitcoin exchange in Japan lose all of those peoples' money? See it is unsafe!" The transparency of Bitcoin is actually far superior to our current banking models. In fact, it is now becoming clear that instead of following basic Bitcoin security and transparency practices, Mt. Gox (the oldest Bitcoin exchange that recently shut down) was operating in an opaque centralized model more akin to existing banking systems. Following the banking model and not the Bitcoin model is what led to its demise.

This is where some people, who do not realize how our monetary system works, either get excited with me or want to shut me up for completely frying their synapses.

The difference between bitcoins and regular money

A notable difference between the U.S. monetary system and Bitcoin is that Bitcoin technically has no banking system. As such when people exchange the currency between each other there are no bank fees (or ones so extremely negligible as to have little to no fiduciary meaning). And that is where the first transformative aspect of the currency is. It's like cash -- when you exchange it with someone, there is no bank involved taking a cut. However, unlike cash, there is actually a simple record of the exchange -- how much and between which wallets. There is a very public and transparent record of every Bitcoin exchange ever done. The currency is inherently more transparent than cash.

Why is it so transformative?

It's transformative because of its two unique properties: no bank fees and no personally identifiable information being exchanged. And it is these two qualities that the U.S. banking system does not possess. To show you how transformative and powerful those two unique properties are, there are a whole range of possibilities. However, let me explain three business models and one unique group of people who will be profoundly affected by Bitcoin.

Publishing and content models

The internet was supposed to usher in a whole new era of publishing -- and it did. But what that publishing model became was neither what we deserved nor what we wanted. What