A guide to Bitcoin basics from someone who is not trying to sell you anything.
Ok, so I’ve been getting enough questions about it, “Should I invest in bitcoin?” etc., that I thought I should do a deeper dive.
I’m doing this for my own benefit as much as yours. It’s one thing to understand something. But when you explain it to others, that’s when it really drops in.
There’s a bit too it, so I’m going to roll this out over the next week or so. Keep an eye out for it.
This is what I’ll be sharing with you:
- This week, I’ll give you a basic over-view of Bitcoin and the Block-chain so we’re all up to speed and on the same page.
- Next week, I’ll make the bullish case for Bitcoin. Not that that’s necessarily my position, but I’ll try get away from my own biases by making the argument for why Bitcoin is a great investment.
- Finally, I’ll put on my sceptic’s hat and look at why I’m still wary about Bitcoin – this is closer to my actual position. But I’ll take it to extremes for entertainment’s sake.
- BONUS – just for a bonus, I’ll tell you what I think this says about market dynamics, and where I’m personally looking at making money in this whole story.
So it’s win-win. I get to develop my thinking around Bitcoin, and you get to see it through the eyes of a savvy investor with time on his hands… and most importantly, hear about it from someone not trying to sell you one way or the other.
There’s value in that right?
And just in case you’ve been living under a rock, this is what Bitcoin has been doing. Since launching in 2009 where each coin cost next to nothing, each Bitcoin is now worth $4,258.
If you were in the game for the whole ride that’s over a 4,000% gain in a matter of years.
This chart also doesn’t really do it justice, but it can be quite volatile day to day. Very volatile in fact. Keep that in mind, but I’ll come back to it.
Ok, so let’s go back to the beginning. If you’re struggling to get your head around it, you’re in good company.Seriously, when I started researching this piece, I was surprised at how difficult it was to get a handle on it.
There’s two reasons for that.
First, punch “Bitcoin” into Google and a massive tidal wave of bullshit starts bearing down on you. It’s easy to make professional looking content these days, and every millennial and their dog is trying to suck you into their sales funnel by giving you “the Basics of Bitcoin”.
And most of this, as you’d expect, is garbage. There’s a few familiar lines that get trotted out – disruptive technology, the end of centralised money… etc., but most people seem to have very little idea about what this things actually mean in theory, let alone in practice.
It’s not too hard to get a functional understanding of the technology, but as for implications… there’s a lot of hand-wavy hype, but not a lot of solid logic on offer.
That’s my impression.
And that doesn’t mean that Bitcoin isn’t awesome. You can’t judge a product by its sale-staff. It just means that if you’ve been feeling a bit baffled, there’s good reason for it.
The other reason is that is that humans are ‘metaphor thinkers’. That is, the most common way to understand something is to compare it to something similar that we already understand.
So imagine you’ve never encountered the concept of a Zebra. But you know what a horse is. It is very easy to give you a handle on what a Zebra is because I can tell you that it’s like a horse, just with black and white stripes.
There’s a lot of metaphors being bandied about for Bitcoin and the block-chain, but it’s hard to piece them all together.
Like, Bitcoin is like money. Block-chain is like a layer on top of the internet. Block-chain is a new way of building trust into the social fabric, like government, but without the guns.
All of these things are true, but put them together and the picture you get is more confusing that clarifying.
It’s like saying, this is a widget. It’s like a toaster, but it also clears conflicts in your social calendar. And it’s able to administer social football clubs.
(There’s a metaphor about metaphors. I’m so meta.)
Ok, point being, it’s not easy to get a handle on. Much harder than I thought it was going to be.
(And I’m still not entirely certain I’ve nailed it, so feel free to help me out here.)
Ok, so let’s get into it (remembering I’m aiming to give you a functional understanding, not a perfect understanding.)
The first thing we need to do is separate ‘block-chain’ from Bitcoin.
BLOCK-CHAIN
Block-chain is the technology that powers the whole show. Bitcoin is one expression of that technology but there are thousands. There’s a lot of dreaming yet to be done.
Block-chain is a decentralised trust network. It operates peer-to-peer, computer-to-computer, not through a centralised control system. If you’re across peer-to-peer content sharing platforms like Napster or BitTorrent, then you’re off to a good start.
So imagine I buy a house of you today. The title changes hands and the change of ownership is registered with the governing titles office. That body holds all the information and vouches for its integrity.
In a peer-to-peer model however, there is no central body. Rather, there is a “distributed ledger” that lives on the computers of everyone participating in the system, all at once.
What block-chain does, and why it’s such a revolution, is that it has come up with a way to ensure that this distributed ledger only records authorised transactions. That is, I just can’t open up the ledger that lives on my computer, give myself the title to the Sydney Harbour Bridge, and see that update spread across the system.
Trust does not come from the word of a central body. It comes from the integrity of the system itself.
There’s a lot more to say about how it does that, and it’s pretty amazing, but I don’t think we need to go there to get a handle on Bitcoin. If you understand that it is distributed, not centralised, and that it is a vehicle for trust, where people know that they can depend on information held in the block-chain, then we’re off and running.
BITCOIN
Bitcoin is a ‘crypto-currency’ a form of money that is cryptographically protected. It is powered by the block-chain. There are many “cryptos” out there these days, but Bitcoin was the first.
Unlike our digital money, which is a digital representation of hard currency, Bitcoin has no hard or real-world form. Other than that, it works like money. You can exchange it for goods and services.
There is an account – a ledger of who owns how many Bitcoins, and you guessed it, that ledger is distributed. There is no central body that keeps track of who has how many Bitcoins. Rather, that information lives on all computers at once.
There is a clearly defined limit to how many Bitcoins are in circulation. There were 16 million at inception in 2009. There will be 21 million when minting ceases in 2140.
(Contrast this with Australian dollars, where the quantity is largely a matter of government whim.)
Bitcoin transactions are not free – despite what some shiny teenager on the internet might tell you. There are Bitcoin ‘miners’ (not sure why they called them miners..?) who process transactions and update the “block”. Currently the miners are incentivised by being rewarded with new coins, but there is also effectively an auction market for transactions.
That is, miners get to decide which transactions to process first. You get to decide what transaction fee will be attached to your transaction. The miner effectively takes the highest bidder, and processes that transaction first.
Miners need these fees because maintaining the block is hard work. It requires large amounts of computing power running round the clock, and regular hardware upgrades. Computer power is increasing, but so is the complexity of the block.
So a Bitcoin transaction may cost you less in fees than a credit card transaction. However, it may also cost you more. It depends.
THERE YOU HAVE IT
Ok, that’s it. A little dry I know, but we need to get on the same page before I can share my thoughts about what makes it awesome, and what makes it dangerous.
Stay tuned. UP NEXT, I’ll get you all hyped and fluffed and thinking that maybe you should mortgage your house and throw it into Bitcoin. I’m calling that WHY BITCOIN IS AWESOME.
Next time.
What did I miss?
Karan Goda says
Sure it can keep going up, but hell you are late to the party 😉
steve says
No. Its 4000 now but when its 50k are still going to say late to party?
Karan Goda says
I invested when Btc was $800. Self proclaimed blockchain and bitcoin expert
Marty s says
Did you buy a Ferrari?
Karan Goda says
Looking to invest in NSW. If you know some good areas, let me know.
Marty s says
No. There’s no good areas. You can’t invest in NSW.
Karan Goda says
Which areas should I look into and specifically any suburbs that come to your mind?
Luke Moroney says
Look to SE QLD. Especially 20-35 km around Brisbane.
steve says
Coomera will pop, hundreds of acres around new Westfield getting ready to subdivide.
Dave says
Hi Karan
Riverstone NSW could be worth a look – we are waiting of re-zoning at the end of this year of our 1 acre lot. There is massive development happening and prices are still going up and the block sizes are coming down.
Marty s says
I just bought North of Brisbane
Marty s says
Not too late. You your self would expect at least 10x going forward, right?
Marty s says
I believe Bitcoin will continue to rise exponentially as fiat money transfers into crypto. I believe one Bitcoin will be at least $50000 by end of 2018. If you draw price on logarithmic scale in excel then draw line of best fit. You can see for yourself. I have 2 Bitcoin I aim to have 10.
steve says
Would you like to know how to mine them?
Marty s says
I will only join a mining pool if you use ethereum contracts. I won’t just send you Bitcoin. Even then mining requires huge equipment outlay and huge power bill. you need a huge data hub. My laptop won’t produce enough Bitcoin to make it viable. I can buy and hold. I’m fine thanks.
steve says
GPU mining pool shares, ETH, ETC, ZEC or XMR.
When you purchase a share you have full control over your GPU machine and which coins you would like to mine on a daily basis.
*You can also request shipment of your GPU’s if you want to run them
yourself. By doing this you forfeit all future commissions in our
pools. If you change your mind. 🙂
Marty s says
Do I sign a contract before sending you a bitcoin?
Joe says
Hmmmm looking up is being hopeful ….what goes up can also go down .These decentralised cryptos can easily be outlawed by Govts ….then what ??
Marty s says
Yes so don’t put in more than you are willing to completely lose. Or approximately 2% of all your investment.
Marty s says
As an entity on it’s own, Bitcoin can’t be stopped except by turning off the internet.
miner says
the technique of flat file structure maintain under distributed file system along with deep data dive refer as Mining , hence they called miner.
Phil says
I feel I’m dressed in a toga with a grey beard down to my nipples and someones given 3 rocks , 2 pebbles and some shells with the instruction ” see that bloke over there? He’ll give you a loaf of bread for 1 shell and a packet of gravel, and the the bloke with the fish will swap a nice shiny pebble and a rock for a bright shiny fish. Come back next Monday and lay this big flat rock across the 2 vertical ones and ……..”.
Marat Khal says
I ,personaly, can not accept something virtuaI, like cripto currency. I put a lot more value into something that i can physically touch or change, like real estate.
I guess if people can make profit from criptos , by all means.
Karan Goda says
Stocks have made Buffett one of the richest men in the world, guess you don’t like stocks either huh?
Bill D says
looking forward to your insight in this bs. one of my sons is into this, hard to have a sensible conversation with him if I have no understanding of what it is about. The most basic question I have is can you turn this into cash? Smells like a digital Ponzi scheme to me.
steve says
https://goo.gl/JTfiVQ&wibj
Marty s says
Jon,
I know you like graphs so here is one for you. The graph is on a logarithmic scale. This can be used to predict generally the future price of Bitcoin. Is this too optimistic?
Even the huge volatility of events like China banning bitcoin mining have not really dented the uptrend.
We have seen graphs like this before with the improvement in price performance of computing on a logarithmic scale. Given that Bitcoin is computer based I believe there is definitely a link there.
Also when all humans have adopted bitcoin there is no reason for this to stop as automated systems can use bitcoin without human intervention. I’m drawing the parallel to where transistors peaked in their capability and silicon chips were adopted which smoothly continued the price performance curve.
It would be good if you discuss this. I’m not trying to convince people I just believe this is the more meaningful way to look at the graph.
Cheers
Marty S
https://uploads.disquscdn.com/images/2f6c5a359b32cc0542a8254f9f1849bcdb2636ca1e3ee3143b1621b991181b38.png
KiwiAl says
Hi Marty S,
Fascinating graph! (I guess you meant the Horizontal Red line is $10,000?)
Anyway, how’s this for a theory? It’s an exponential graph. Could it be related to Demand versus Supply? If there is a fixed number of Bitcoins, and, due to Marketing their Demand goes up, and since Supply is fixed, Price must go up, so Demand goes up, and the cycle repeats.. To me, what the graph represents is the collective “breaking points” of the global gambling population, in other words, the level at which they give in to temptation, and decide to get involved. The higher the price goes, the more temptation there is, and the more people who “break” each day.
It’s certainly going to be interesting to see what happens.
From my highly skeptical point of view, every “new thing” is merely another technique, method or attempt to get as many people as possible to transfer their money into the hands of the “new thing” promoters. There are so many great examples.
Take the iPhone. Is it really a much better phone? In my experience, no. As a phone, it’s not even as good as many others. In my experience, in an area crowded with conflicting Wi-Fi signals, it performs very poorly in comparison. But it has been marketed better. It has become not so much a phone as a status symbol. And people are willing to pay much more for status symbols than they are for practical, reliable, less expensive things that only have “everyman” status.
Maybe it’s the same with Bitcoin.
steve says
https://goo.gl/LrWaQq&awabe
Contract Notes says
I thought this was a speculative bubble 3 years ago, and after hitting close to $1k and falling right back it went higher again years later.
As the great John Maynard Keynes said:
“The market can stay irrational longer than you can stay solvent.”
steve says
https://goo.gl/GKycgp&vyxet
LuckyPhil says
I read an article today on money morning about “bitcoin forking” which trows some more more research into the mix … also Peter Schiff is not a fan of cryptos because they are not backed by anything …
steve says
https://goo.gl/ivsjSE&afavy