Bitcoin

by Dominic Frisby

  Let’s imagine Bitcoin becomes an established asset class in itself – along with the likes of gold, commodities, bonds and stocks. I’ll give you some blue-sky targets.

  Global ecommerce was $1.2 trillion in 2013. If Bitcoin were to grow to 10% of that, you have a figure of $5,714 per bitcoin.197 That’s over a 1000% gain from current prices.

  Current global gold holdings are about $7 trillion. If Bitcoin holdings went to 5% of that, the price would be $17,000 per coin – a 3,400% gain.

  Current global money supply stands at $250 trillion. If Bitcoin made up just 1% of that, the price would be $119,000 per coin – a 24,000% gain from the current price of $500.

  Assuming widespread adoption of cryptocurrencies, the lesser-known altcoins, if they take off, will rise by a greater magnitude.

  When a bubble gets really big, it grows to the size of the US stock market. At the end of the 1970s bull market in gold, the value of global gold holdings exceeded the market cap of the entire US stock market. At the climax of the Japanese bull market of the 1980s, the Japanese stock market matched the US stock market for size. The value of global tech stocks in 2000 did the same.

  At present the total market cap of US stocks stands at around $22 trillion. The combined market value of Bitcoin and the altcoins stands at $7.5 billion. If Bitcoin becomes a bubble on the scale of gold in the 1970s, Japan in the 1980s or tech stocks in the 1990s, then gains of 300,000% might be ahead!

  I wouldn’t hold your breath.

  But even so, perhaps it makes sense to open an account with an exchange and risk a small amount of speculative capital on some coins – but only money that you can afford to lose, if there is such a thing. The other alternative is to find some start-ups and put some money to work there – or find a fund that does the same.

  But the compelling evidence of history is that you could also lose a lot more than your shirt. Cryptocurrencies could be widow-makers. Caveat emptor!

  The next great bull market

  In the 1970s, the bull market was gold. It rose from just $35 in 1971 to $850 per ounce in 1980. Gold mining companies increased by many times that.

  In the 1980s Japan was the place to be – its companies and its real estate.

  In the 1990s dot com stocks were the rage; in the 2000s commodities were.

  But what about the 2010s? What is the great bull market of this decade? US stocks, maybe? Biotech, perhaps, or London property?

  Well, no. So far it’s been Bitcoin. And I think the next phase will be one of its offshoots.

  We’ll call it block chain tech.

  Block chain tech is going to change everything – not just money and banking, but the law, accounting, social media, email, gambling, web hosting, cloud computing, stock markets even. It could be more earth-shattering than the World Wide Web.

  As we’ve seen with Ethereum, now that Bitcoin is up and running, developers are extending the technology of the block chain into all sorts of other applications.

  You have Bitmessage – a decentralized system of sending and receiving emails without Google or Hotmail or whoever your email service provider might be having access to your messages. Nobody can read them, except the people you send them to.

  You have Twister – like Twitter, but peer-to-peer and with no central body. It’s a much safer way to organize an Arab Spring or indulge in the kind of free speech that can get you into trouble.

  You can register ownership of financial assets and have contracts verified on a block chain. This has all sorts of implications for Wall Street, the City and the huge business models of share registrars and brokers. Car ownership and land ownership could be registered on a block chain (and in the UK this is not before time. Both the DVLA and the Land Registry badly need to pull their socks up, particularly the latter – 50% of land in the UK is still unregistered). This system of ownership and smart contracts has the potential to dramatically transform the legal system and slash costs.

  As we’ve suggested, insurance can be put on a block chain, prediction markets, and identity systems (username and password systems are on their way out), even services like Facebook, YouTube or Netflix.

  Why would you want YouTube, Facebook or Netflix running in a decentralized way with no central body in charge? It eliminates the problem of excessive personal information on Facebook, or your YouTube viewing habits being monitored and marketed to. And think about the copyright implications for the TV and movie industries. How on earth will copyright be enforced with decentralized viewing platforms? Existing business models will have to adapt or die.

  Even the American-controlled system of domain name registration, ICANN, for all its non-profit status and good intentions, is under threat from something genuinely independent – the decentralized Namecoin.

  The implications are enormous – not just to corporations, but to governments as well. If everything can be dis-intermediated and decentralized, what about the services governments provide – healthcare, welfare and education? The bureaucratic middleman megalith that makes them so inefficient and expensive could be circumvented altogether.

  It will even bring into question our system of representative democracy. The tech is there for people’s identity to be proven and for them to vote instantly on just about any issue that comes up – gay marriage, abortion law, planning permission, military intervention. Liquid democracy – where people actually vote on decisions as they get made – is surely a far truer democracy. Why then do you need a congressman or parliamentary representative?

  In the years ahead a huge battle for control is coming, as those who have been outdated try to cling on.

  The revolution will not be televised. It will be time-stamped on the block chain.

  It is all very exciting.

  For any conventional or mainstream investor, aside from buying altcoins, it is almost too early to buy in. There are no listed companies. There is no block chain tech ETF you can buy. There is no tracker fund (although it is coming – cryptocomposite.com is leading the way there). Almost all of these companies are private and mostly self-funded. Many of them may not ever list on stock markets, at least not in the current conventional way. But this is huge groundbreaking stuff – and investment products will soon become available, of that you can be sure. I’d say we’re about where the internet was in 1991. There’s still plenty of time to get on board. Perhaps we’re at the ‘technology trigger’ phase of the hype cycle for block chain tech. That phase when investments stratospherically rise to the ‘peak of inflated expectations’ is still ahead for block chain tech – even if it might not necessarily be for Bitcoin. Bitcoin may be just the beginning of something bigger.

  So, keep your eyes and ears peeled – block chain tech is the next great bull market. You heard it here first.

  11

  The People’s Money

  I would be surprised if ten years from now we’re not using electronic currency – now that we know a way to do it…

  Satoshi Nakamoto

  I have probably got a little too evangelical about Bitcoin and what it’s going to do to the world.

  Therein lies one of its many problems. Its champions often do not question it enough ­– they eulogize instead.

  There are a host of problems that Bitcoin will have to overcome.

  All new disruptive technologies will face detractors who try to limit their potential. The biggest detractors of all are those who the disruptive tech threatens to undermine. In this case, we’re talking about resistance from the two most powerful sectors of society – government and finance. Who knows what kinds of reactionary regulation could be round the corner if Bitcoin grows? To what extent will banks lobby governments to stop it somehow?

  The next big issue is that its user base is still too small. As the number of users grows, it will meet with increasing pressure from its detractors.

  Its price volatility might mean speculators like it, but, again, ordinary users will not. This volatility may settle over time. But there’s n
o guarantee of that. Until it does, mainstream adoption will be a problem.

  Its mobile platform support – or lack thereof – is also standing in the way of mainstream adoption. Apple had taken steps to make sure users cannot send bitcoins via wallets in its app store, though this policy seems to be reversing as this book goes to press. Google does not allow in-app payments. It’s not clear why either has done this, but it’s thought the reason is fear of falling foul of US government regulation.

  Another mainstream adoption problem is that Bitcoin’s ownership is too concentrated among early-adopters. Approximately 50 people are believed to own half of all bitcoins, and a handful of companies dominate bitcoin mining. Ironically, this has, in a way, made Bitcoin centralized. These coins need to be disseminated somehow. Higher prices should fix that problem.

  There are still too many bad actors and too many opportunities for cons, hacks and other crimes. Its widespread usership in black markets could undermine it – and certainly increase the likelihood of government opposition.

  Then there is the theoretical question of what it is – a medium of exchange, a store of wealth or a new asset class? People still think in terms of dollars and pounds rather than bitcoins. They price things in dollars. They don’t think about how many bitcoins they’re going to own. They think about how many dollars they’re eventually going to get for their bitcoins.

  Bitcoin is a breakthrough tech. Now that the floodgates have been opened, it could quickly be undermined by something that is better. Who uses Sony Walkmans or Amstrad home computers now?

  Time may cure many of these problems – particularly the issue of widespread adoption. We shall see.

  But let us end on a positive note.

  Truth in numbers – in each other we trust

  It is a wonderful thing that, after decades of ignorance, Bitcoin has got people talking about money systems once again – and, more importantly, questioning them.

  I’m a fervent believer that many of Western society’s problems lie in our flawed system of money – not least, this awful and widening gap between rich and poor. Changing our system of money wouldn’t solve everything overnight, of course not, but it would be the points on the railway – the railway switch – that re-route the unstoppable, runaway train that Western society has become. I’ve written a whole book about it – Life After the State –so it’s inevitable that Bitcoin and the cryptos are going to appeal to me.

  But Bitcoin is an incredibly multi-faceted creation that means many different things to different people. It has so many implications for the world. That’s what makes it controversial. That’s what gets it discussed. And that’s what gives it power.

  So, what exactly is Bitcoin?

  Bitcoin is a means to an end.

  It is a way to involve billions in the world economy.

  If you’re one of the unbanked, or ‘under banked’ – an adolescent, a citizen of a Third World country, or even a vagrant, Bitcoin enables you to participate in ecommerce avoiding the barriers the current banking system puts up.

  If you use the internet at all, you can make payment to and receive payment from anyone anywhere, even for a tiny amount. It will open up whole new markets. It saves on fees, increases speed of payment and, no matter where they live, enables people to appeal and gain access to a sophisticated, tech-savvy demographic with a substantial disposable income.

  It is a way to protect.

  If you live in a country with an over-leveraged, vulnerable banking sector (Cyprus, for example), with a poor record of inflation, capital controls or confiscation (Argentina, Zimbabwe, Romania are just three of many), or with crippling levels of taxation or regulation, now you can escape local banking and money systems.

  You might not like having to hand over your financial details to and then rely on the security practices of people you buy things from. You might not like organizations knowing about your spending habits, or being marketed things based on these habits. Bitcoin protects your financial information and your privacy.

  If you want to send money to friends and family back home, you can do so shielded from the costliness and clumsiness of current systems.

  And, yes, if you operate on the wrong side of the law, it is a safer way than fiat currencies to buy and sell illegal goods.

  It is a way to progress.

  If you’re an innovator or an entrepreneur, you can fund new ideas without having to rely on traditional systems or the endorsement of large, slow-moving financial institutions. If you’re a speculator, it’s a means to get rich (or poor) quickly. If you’re in business, here is a new efficient way to communicate, to prove ownership and write contracts. If you’re in technology, here is a fascinating new application – a watershed – that opens up a myriad of new possibilities.

  If you have an interest in economics, here is an opportunity to experience and study what is possibly a paradigm shift, taking place in real time in the real world around us – private and non-national currencies competing with government currencies, as economist Friedrich Hayek advocated in his seminal 1976 paper, The Denationalization of Money.

  It is a way to change to the world.

  If you’re an activist, here is an organic way to redistribute wealth through society and bypass existing corporate monopolies. If you’re a libertarian or an anarchist, here is a way to escape the clutches of government and its crony banks. If you’re a computer scientist or an entrepreneur, here is a new tech that has as much disruptive potential as the internet. And, if you’re a revolutionary, here is a way to overthrow the existing world order.

  All in all, Bitcoin is quite something.

  The block chain – a mere database in the eyes of some – is perhaps the most fantastically subversive technology ever invented.

  Appendix I:

  A Beginner’s Guide to Buying Bitcoins

  There are three ways to get hold of bitcoins.

  You can either buy them, earn them or mine them.

  I would suggest beginners ignore mining for the time being. Mining has become a specialized endeavour that takes a bit of experience and a lot of computer power. Earn them or buy them instead.

  The first thing you will need is a wallet. The simplest place to get one of these is blockchain.info. Click on ‘Wallet’ and you’ll have one as quickly as you can type in your email address and password.

  Once you have a wallet, you have an address – a place to receive your bitcoins.

  If you want to earn coins, simply mention that you accept bitcoins wherever you advertise your goods or services and add the option to pay with Bitcoin at your point of sale. So, if you have a website, have your web designer add a Bitcoin button and a payment function. If you have a shop, keep some means to accept bitcoins by the tills. If you send out invoices, put your wallet address on the invoice. It’ll take a few goes before you get comfortable with it – but it really is very simple, and it’s also fun practising something new. Often, the person you are trading with will know a bit more than you and they’ll actually help you get to grips with it.

  Now we come to actually buying bitcoins.

  The simplest way is to open an account with a recognized exchange, deposit some money and then use that money to buy some coins. What’s the best exchange? Coinbase, Bitstamp and Bittylicious are three names to think about, though that is not a recommendation. The best exchange for you will vary according to which country you are in, but make sure you go for one that is legitimate. You might have to do a bit of homework.

  Another method is to try localbitcoins.com. This site will put you in touch with local sellers and you can often buy bitcoins for cash. Make sure you choose a trader with a good reputation (each seller will have user reviews by their name). In many cases, you can actually meet up with the seller – which can work well as you’re bound to be able to learn something from them. But don’t do this with large volumes of cash, unless you have done proper due diligence.

  Another simple way to buy bitcoins with cash
is via one of the ATMs, which are gradually springing up in cities around the world.

  This is a fast-changing marketplace. Anything I write here will probably be out of date in a few months. To stay current, I would recommend the Bitcoin wiki page – https://en.bitcoin.it/wiki/Buying_Bitcoins_(the_newbie_version) – as Bitcoin users constantly update this. Have a read of it and you’ll discover a way to buy coins that suits you. But, however you do it, I would recommend only using small amounts of money at first while you are finding your feet.

  As for other useful Bitcoin sites, Coindesk.com – which dubs itself ‘the voice of digital currency’ – is the best way to stay abreast with Bitcoin news and current affairs. It also has a host of useful data and information (I get the daily email digest). Bitcointalk.org is the biggest forum – a good place to get opinions and stories (as well as all the usual misinformation you find on chat boards).

  Coinmarketcap.com is a useful site to introduce yourself to the altcoins. It gives you price information about the hundred biggest cryptocurrencies, as well links to their sites.

  For those with an interest in finance, I would also single out cryptocomposite.com. Its CC10 Index measures the performance of the top ten cryptocurrencies in real time. It’s almost certain to become the benchmark when tracker funds, ETFs and other financial vehicles eventually arrive to play the price of cryptocurrencies.

  As for vehicles to invest in block chain tech, they are coming – of that you can be sure – but they have not yet arrived. As this book goes to press, Ehereum is accepting investment – but you need bitcoins to invest. DigitalBTC is listing on the Australian Stock Exchange. This is the first Bitcoin company to trade on a major stock exchange. It will not be the last. Go to conferences, make as many contacts as you can, read your Coinbase and your Bitcointalk – keep your finger on the pulse.