E An Objective Look At Bitcoin; What No One Is Giving

As global markets have been caught up in a whirlwind of activity over the past week, Bitcoin (BTC) unsurprisingly proved to be a popular topic of conversation in the midst of it all. During the mayhem, the digital currency saw its price drop as low as $6,000, shredding as much as 70% of its nearly $20,000 valuation from back in December. At the time of writing, its price stands around $9,680 according to emerging cryptocurrency data tracking platform OnChainFX.com.

But a major problem with the general conversation regarding Bitcoin and all that’s associated with it is the lack of agnosticism within the dialogue. Too frequently people choose to play the binary game by either determining the leading cryptocurrency to be the financial messiah and flawless in design or dead on arrival and bereft of even potentially bearing any value to society.

Berkshire Hathaway Vice Chairman Charlie Munger, for example, just yesterday said, “I never considered for one second having anything to do with [bitcoin]. I detested it the minute it had been raised. The more popular it got, the more I hated it…Bitcoin is noxious poison.” A bit extreme, no? Denying consideration is also a great way to not know much about what you’re discussing.

In another instance, Bert Ely of the Hill published a piece called “Bitcoin is a Ponzi scheme, and it will collapse like one”, yet it simply cannot be a Ponzi scheme.

On the flip side, Evander Smart’s CoinTelegraph articleHow Bitcoin Blockchain and Ripple May Help Kill U.S. Dollar” is shortsighted in many ways too. And flip to Twitter, where cybersecurity expert John McAfee is betting big on Bitcoin hitting $1 million and other users are romanticizing about the imminent demise of central banks.

The issue here is that both extremes are typically spoken about as blanket statements with such heavy conviction that it leaves little room to actually dissect the unique and very separate elements of the technological asset which deserve much deeper scrutiny on an individual basis.

It is for this reason that I hope to offer a more objective take on Bitcoin as it stands today. It is not an inherent evil nor the manifestation of financial perfection. It’s a fintech development that took the world by storm, offering the globe fresh perspective on everything from money to data storage to human ideals. Condensing Bitcoin into being either simply “good” or “bad” or destined for “failure” or “success” serves its brief, yet fascinating history little justice. So, let’s explore its strengths and societal contributions, as well as its shortcomings and undesirable traits. By doing so, we paint a much more detailed picture of what Bitcoin is, and where it might be headed in the future.

As a Protocol

Back in November, I wrote about the “dramatic Bitcoin family” that the original Bitcoin protocol (now referred to as Bitcoin Core) and all its forks had collectively constructed. The issues touched on in that piece, namely the lack of consensus within the Bitcoin development team and scalability concerns, have only reinforced themselves since then, highlighted by the vicious Bitcoin Core vs. Bitcoin Cash (BCH) battle that has emerged with ardent supporters on either side and the promise of the Lightning Network’s ability to fix Bitcoin Core’s limitations.

It’s therefore difficult to pinpoint the future trajectory for Bitcoin a protocol because nobody really knows, or agrees on, its true identity. Is Bitcoin Cash as what Satoshi Nakamoto had in mind? Or is Bitcoin Gold (BTG) more in line with the project’s objectives? What about Bitcoin Diamond (BCD) or the recently hyped Bitcoin Private (BTCP)? Each fork is nuanced in its own way, varying in block size, transaction capacity, mining algorithms, and privacy initiatives. As all of these are critical matters for the cryptocurrency aiming to achieve extensive adoption, it’s too soon to say how the dust will settle. Until it does, though, Bitcoin Core is the protocol globally recognized as Bitcoin.

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Gary Anderson 7 months ago Contributor's comment

This is the first bitcoin article I have ever read. It is proof the thing is pure speculation. That is very dangerous. If you can't afford to lose, don't play this. I think I lost brain cells trying to grasp the certainty of it when the author ends on an uncertain note. Bitcoin has more heads than Scientology. Like that many headed snake, Bitcoin is certainly massive speculation. And I still have no idea what it is. I know 21 million coins can't be a currency, that much I am certain of. Forbes says in many articles that it is an asset. Assets cannot replace central banks.

Nathan Feifel 7 months ago Author's comment

You're very right about Bitcoin being in its speculative stage right now. The coming years will be decisive for it. Notable questions include: how will the regulation conversation progress? Can mining become more energy sensitive? Can consumers' funds be stored more securely? We are still in the process of reaching definitive answers.

Based on the latter portion of your comment, I thought I would clarify the following. Even though there will only ever be 21 million Bitcoins minted, Bitcoin can be owned in fractional shares up to 8 decimal points, allowing for its ecosystem to accommodate for much wider adoption. In fact, the majority of Bitcoin-owners own far less than one Bitcoin. This was clearly understood from the outset and was considered carefully in the code.

Gary Anderson 7 months ago Contributor's comment

My question, author, is this: Since most currency is backed by a tangible collateral, what collateral backs bitcoin? If you take a loan out to buy a house, your house is the collateral for the loan. Money may be fiat but it is generally backed by some collateral. Money created is backed by collateral, whether base mony or broad money. I don't see the creation of bitcoin being backed by any real collateral at all. So how can it be money?

Nathan Feifel 7 months ago Author's comment

As stated in my article, Bitcoin is viewed as an asset/investment vehicle, piece of technology, etc. in addition to its role as a currency/money. I will respond in line with its role as a currency/money as it pertains to your question.

Bitcoin is a disruptive technology and is, by nature, doing things differently. It is so unconventional in comparison to the traditional financial system we're accustomed to that people have been predicting its demise year and year over. It's still here and essentially as strong as ever. While none of us know what the future holds, Bitcoin has been around for almost a decade now, and its demand has only increased. Standing the test of time, even if the reasons why are difficult to comprehend, must be respected.

There are a variety of reasons why Bitcoin could have intrinsic value as a currency. Here are some, in no particular order:

1. Decentralization; protects against frozen accounts, transactions, and manipulated records

2. Scarcity; finite amount of revolutionary tech project, protects against inflation

3. Increased privacy for payments

4. Borderless; better for global payments, FX

5. No physical backing; why do we even need physical cash in an ideal situation?

6. Can't be duplicated; protects against counterfeit money

7. Most recently in Arizona - ability to pay taxes with BTC

Again, Bitcoin certainly has its shortcomings too, but the case can certainly be made for it as a a currency.

Joe Black 7 months ago Member's comment

You make a good point. Everyone keeps judging bitcoin my traditional standards. But #bitcoin IS distruptive. New rules should come with the new game.

Beating Buffett 7 months ago Member's comment

Nathan Feifel, Arizona is now letting people pay their taxes with #bitcoin???

Nathan Feifel 7 months ago Author's comment

Yes, the state senate passed a bill to accept tax payments in BTC.

Now the bill is on to the house.

(fortune.com/2018/02/10/arizona-bitcoin-taxes/)

Per the following CoinDesk article, "This bill would, if approved, require Arizona's Department of Revenue to convert the cryptocurrencies into U.S. dollars within a day of receiving them as payment." (www.coindesk.com/arizona-lawmakers-advance-bill-protect-crypto-node-operators/)

BreakingBad News 7 months ago Member's comment

I suspect most people are hoarding their bitcoins right now in hopes they continue to increase, rather than looking for ways to spend it.

Nathan Feifel 7 months ago Author's comment

No question about it. The spending/payment use case is a lot less practical right now, not to mention lucrative. Also, there’s a lot of FOMO buying without real intent beyond making returns.

BreakingBad News 7 months ago Member's comment

FOMO? What is that?

Nathan Feifel 7 months ago Author's comment

It stands for “fear of missing out.” FOMO trading happens when someone observes others making a particular investment decision, and decides to make the same investment solely on the basis of fearing that they will miss out on future prosperity. In this context, many people are buying Bitcoin and other cryptocurrencies simply because they see many others doing so and profiting, so they don’t want to miss out on the action.

Gary Anderson 7 months ago Contributor's comment

With all due respect to you as a fellow contributor to Talkmarkets, that answer did not answer my question. It contained widely disseminated talking points. I also would like to know your association with Bitcoin. That includes with Bitcoin creators.

Nathan Feifel 7 months ago Author's comment

Bitcoin isn't backed by anything beyond its unique characteristics (some of which I listed above) and demand from the public. It might sound crazy, but it's the disruptive nature of the technology that is driving most of the banking world mad. I have no association with Bitcoin outside of researching and writing about the topic independently. I am fascinated by its history and enjoy following its activity. I am always completely objective about it.

Gary Anderson 7 months ago Contributor's comment

I want to add that money determines value. Gold is determined by money. The price of Bitcoin is determined by money. So, money is money and Bitcoin is more like gold, or maybe fools gold.

Kevin Richards 7 months ago Member's comment

Demand determines the value. Nothing else.

Michele Grant 7 months ago Member's comment

Gary Anderson, I agree with you on #bitcoin, but I would disagree slightly. Something has value if people deem it to have value. Sometimes an irrational craze surrounds some item. Just like people once spent a fortune on Ty beanie babies or garbage pail kids, or countless other worthless items, that same craze now surrounds bitcoin.

If people became crazed about fools gold, that would become valuable too.

Kirk Sheffield 7 months ago Member's comment

That reminds me about a story I once read about #3M. They invented this glue that was "worthless" since it only had a bit of sticking power. Then someone got the idea to make Post-It notes out of them - tiny slips of paper with "worthless" glue on the back. Companies and individuals spend a fortune on those ever year. $MMM

Gary Anderson 7 months ago Contributor's comment

You aren't comparing Bitcoin to Post-it Notes are you? Bitcoin is most likely a simple scam, a bubble like Beanie Babies. I don't know if the creators of Beanie Babies created the scam. They created scarcity by numbering them. I doubt if they knew what the result would be, but I think Bitcoin creators probably knew exactly what would happen if they would just label it currency. Lol. Maybe one Bitcoin would be worth more than another one based on the numbers? Like the first Bitcoin is a collector's item? And who says you can't use Beanie Babies as money? Somewhere, at least. But at least a Beanie Baby is a tangible product.

Kirk Sheffield 7 months ago Member's comment

I am not comparing #bitcoin to post-its per-se. I'm just pointing that things have value if people are willing to pay for it. What was originally dismissed as worthless, went on to be worth a fortune. Many thought bitcoins would be worthless, but those who bought early and kept them this long could also make a fortune.

On the otherhand, should there be a major hack, or a government crackdown, or proof of an intentional scam as you fear, bitcoin could instantly become worthless.

Harry Goldstein 7 months ago Member's comment

Was #bitcoin the first ever #cryptocurrency? How many #cryptocurrencies are there now? And what is the difference (if any) between digital currency and cryptocurrency?

Nathan Feifel 7 months ago Author's comment

Great questions.

Bitcoin was the first ever cryptocurrency. Cryptocurrencies use cryptography to facilitate and secure transactions, and use blockchain networks to operate in a decentralized fashion.

A cryptocurrency is a type of digital currency, yet not all digital currencies are cryptocurrencies. Think of digital currencies simply as "electronic money" that lacks physical form, but don't necessarily bear that qualities listed above.

At the time of this post, leading cryptocurrency data site coinmarketcap.com maintains that there are just under 1550 cryptocurrencies currently out there. This figure varies slightly by the day, but has been trending up over the past few years.

Harry Goldstein 7 months ago Member's comment

Thanks. I'm sure this is all second nature to you but it's harder to grasp for us older folk trying to make sense of it all. So if digital currencies are simply "electronics money" would $PYPL be considered a digital currency?

Nathan Feifel 7 months ago Author's comment

It's a good question!

It all goes according to the nuance of definitions. I believe that technically speaking, a digital currency must be bereft of any physical equivalent. So, the the figure of U.S. dollars you see digitally in your banking app, or PayPal account as you said, would not constitute a "digital currency." Rather, this would be referred to as ""Digital money."":www.investopedia.com/terms/d/digital-money.asp From what I understand, an example of a truly digital, non-cryptographic currency would be "Ven":https://en.wikipedia.org/wiki/Ven_(currency), which has centralized oversight and lacks a physical underpinning.

Michele Grant 7 months ago Member's comment

I would take issue with some of the issues in the "DecentralizeToday" article you linked to which states that "absolutely nothing about Bitcoin is a secret." but there is so much about bitcoin we don't know. We don't even know who really created it. Not with certainty.

Dan Jackson 7 months ago Member's comment

Bitcoins can't be a ponzi scheme. By definition, a ponzi scheme is always supposed to bring in new money to support those in at the earliest. But bitcoin mining was designed to run dry sometime in the next 20 years.

Nathan Feifel 7 months ago Author's comment

I agree that the referenced article is one-sided and perhaps slightly biased in certain respects.

That being said, I linked the article for the sole purpose of debunking the notion that Bitcoin is a Ponzi scheme, which I firmly believe, and which the article does a really nice job articulating. The author raises very legitimate points, uses fact-driven analysis and breaks down definitions to prove his point. He even highlights the logical backing of the other position on the issue, which is responsible and admirable.

While we certainly don’t know everything about Bitcoin, we certainly know a lot. Besides the anonymous creator aspect, which is causing all of these Bitcoin forks, is there another issue you find noteworthy in this regard?

Michele Grant 7 months ago Member's comment

I don't think bitcoin is a ponzi scheme necessarily. But I do think it would be the greatest scam of all if the inventor has some backdoor in or knowable way to hack the system. But even if it really was created for altruistic reasons, there are a number of reasons I am against bitcoin:

1. No regulation

2. Uncertain legal future (countries could deem it illegal at any point

3. Exchanges have already been hacked, costing investors billions

4. Exchanged could go under taking bitcoin owner's money with them (as already happened with Mt. Gox)

5. It helps to fund the drugs, the sex trade, child pornography, murder for hire, and all the worst that this planet has to offer - it empowers and emboldends not only cirminals, but every day people to do their worst.

6. No FDIC insurance or any other protection from a hacker or simply losing your "key."

7. It is way too volatile and speculative. I don't think the tulip analagy that is used so frequently is off the mark. But due to the technical nature, too many investors are getting caught up in the fad and jumping in, without understanding the risks.

Nathan Feifel 7 months ago Author's comment

These are very important and noteworthy points, many of which are standing directly in the way of larger adoption. Here are some comments of mine on them:

1. No regulation is a major issue as it delegitimizes Bitcoin, and is keeping so many people on the sidelines. (By the same token, it is probably what's keeping many in on it). While there are currently productive conversations happening in the Fed (techcrunch.com/.../virtual-currencies-oversight-hearing-sec-cftc-bitcoin/), things always move slowly there. I do think we will have a more clear picture by the end of 2018. South Korea has been a leader in crypto regulation until now (www.cnbc.com/.../...ulations-come-into-effect.html). I believe regulation would ultimately be a good thing, and I believe we will see more waves of it continuing to come.

2. This is very true, and any news even hinting at such a situation has created an instant bear market for cryptocurrencies in the recent past. With the right regulative measures, though, countries would likely feel more comfortable and be less likely to ban the market from operating. But no one really knows if China will ever change its mind, but it could. For what it's worth, though, governments can ban but never eliminate Bitcoin. People can move to more appealing places to use BTC and other cryptocurrencies if they felt like it was worth it.

3-4. This MUST improve if the industry wants to thrive. Major positive strides have been made since Mt. Gox, but there are still ways to go in building secure exchange and trading platforms in the space so people can feel comfortable.

5. From an association standpoint, this is a major argument against the whole crypto market, especially "privacy coins" (harder to track), and creates ethical dilemmas as well. The counterargument is obvious as well, though (i.e. should we ban cars because criminals use them in bank robberies, should we ban the internet because criminals communicate over it?). The point can be argued both ways with legitimacy. While this conversation is mainly about Bitcoin and not really about other cryptocurrencies, it's important to note that Bitcoin is actually dropping in popularity on the Dark Web and Monero (XMR)

is replacing it (www.bloomberg.com/.../criminal-underworld-is-dropping-bitcoin-for-another-currency).

6. This is where USD is way more appealing than BTC. FDIC insurance is such a valuable aspect of banking when matched up against personal accountability with securing your wealth. From a Bitcoin investment standpoint, however, it's a non factor. Non-deposit investments, like stocks, mutual funds, bonds, etc. are not FDIC ensured.

7. Is this not new with any breakthrough technology? There is no doubt a ton of speculation as well as "dumb money" (www.cnbc.com/.../...n-to-name-and-stock-soars.html) coming into the market, but does BTC emerging as a money making opportunity delegitimize it at its core? I would say strong parallels could be made to the internet in this regard. If you don't like volatility, though, it makes sense to stay away.

David P. Goldsmith 7 months ago Member's comment

These are good points Michele. Nathan Feifel, what's your take on it?

Cannabis Stock Buyer 7 months ago Member's comment

I read some "mystery investor" just bought up $400 million bitcoin!

www.talkmarkets.com/.../400-million-bet-on-bitcoin

Azi Feifel 7 months ago Member's comment

Very well stated. Thorough and useful review.

Nathan Feifel 7 months ago Author's comment

Thanks, Azi!