The future of Bitcoin


Updated: February 3, 2014

Ah, the hottest topic EVAR. Now, I'm discussing it. If you're even remotely savvy about technology, you must have heard about the digital currency, or digital crypto-currency, the Bitcoin. It's all the rage nowadays. If you don't know what I'm talking about, skip it.

Now, there's an even bigger question. Is it worth your money, or anyone's money? Is this the new commodity that will make you rich, fast? Is this something you should think about investing in, or just yet another fad of the digital era? Well, worry not, I will try to answer all these, without choking your brains with technobabble and political controversy. Just pure and totally accurate speculation by Dedoimedo.

Teaser

Note: Image, courtesy of bitcoin.org.

What is Bitcoin? Is it like e-gold?

This is the best question you could have asked. And some will tell you, this is the new digital gold. This is the new hot item, and since there are only 21 million instances thereof, the supply is limited, and you should hurry and grab some for yourself.

But wait a minute, Sonny Jim. Are you certain you can treat Bitcoin as gold or platinum or any of the other economical pillars? Sure, some people will say. After all, gold, silver and other metals are only worth as much as people want them to be, and money is just printed paper or cotton. We live in a world where everything is a matter of convenience and agreement, and this makes the Bitcoin as good a candidate as any. No, not quite.

Finite quantity of everything

Let me elaborate a little. First, most of the stuff we consume in real life has some practical implication or use. Oil, wheat, even hydrogen, of which there's so much around. But even if the actual application is relatively small-scale, there is still a finite quantity of said consumer good available on our planet. Most of the resources are capped by the number of available atoms and molecules, which makes them precious in their own right.

As a virtual, digital unit, Bitcoin does not rely on the rules of physics to exist, beyond the technological medium that contains it. But for all practical purposes, you can have more Bitcoin than ounces of gold and silver, simply by adding more zeros on the keyboard. While the protocol defines the Bitcoin consumption, it's a convention rather than any natural limitation. We cannot create new stable elements, we cannot synthesize fresh metals, but we can surely go as wild as we want about creating digital information. Sure, there's a physical limit to how much you can store on a hard disk, but that limit rests somewhere in the number of grains of sand in Earth's crust. Comparing Bitcoin to gold is probably wrong, then. So what does make sense?

Bitcoin 1

Note: Image, courtesy of bitcoin.org.

Stock market, then

How about calling Bitcoin a new stock, which represents the global will of the technology-minded population, hashed to uniqueness? That definitely makes more sense, and it sure explains the fluctuations and the speculations, as well as the different ways the commodity can be obtained.

If you treat Bitcoin as stock, then it become all perfectly logical. And in that same dimension of logic, the mining process becomes a reasonable way of obtaining additional stock. Bitcoin is not a company that works, but the people solving algorithmic problems sure are. In a decentralized way, the computing activity of the mining community translates into the production output of the so-called Bitcoin company.

Transactions, hoarding and all other non-productive elements of this kind of work complement the idea well, becoming the typical stock-related activities that push the price up and down, based on the supply and demand, as well as pure speculation, which is not unique to any one specific stock. So we're good in that sense.

Bitcoin has a problem

E-I-E-I-O. Yes, we need to discuss Bitcoin issues, too. Before you can decide whether to invest your money, you need to consider several crucial questions. Or rather, several more questions. So far, I have given you no reason to doubt Bitcoin, and really, it's all peachy so far. It's a good idea, overall, but like any good idea, it has its evil twin.

Price fluctuations are part of the wicked gamble. You invest today, and the value can go up and down by tens of percents in a matter of days. Not for the faint hearted. Then, let me ask you, who runs Bitcoin? Do you like the idea that no one is really in control of this thing? Or maybe someone is. Does that satisfy your economy model?

How about the fact that governments, banks, regulatory bodies, trade commissions, stock markets, and other finance institutions may decide to boycott, support or manipulate Bitcoin to suit their needs? Sure, the whole idea of Bitcoin is to make all these redundant to the future, digital economy backed by Bitcoin transactions, but for most people, these kinds of decisions can be critical. Even today, some countries forbid the exchange of Bitcoins to local tender. Others warn against the lack of consumer protection and regulations. Others yet emphasize the dangers of the peer-to-peer model, which goes against how all world economies are run, basically. No mamas and the papas to make sure it works fine. In other words, will you trust the sanity of the global Internet to regulate the Bitcoin stability and prices? After all, the Internet is one big troll, and it can change things for the lulz. No control there.

Bitcoin 2

Note: Image, courtesy of bitcoin.org.

The second law of Thermodynamics

But none of these really matter. They are sort of niggles to keep you aware, and make you feel like you're a responsible citizen who has spent a lot of time reading and learning, and now feels like shortcutting through life by making some easy money, even though this goes against the second law of Thermodynamics.

Economically speaking, there must be a pyramid of wealth, and most people will be at the bottom, and your chances of becoming a top lad is very slim to nil. You can try your luck, but on average, your success will not happen. Just like the gold rush, just like the oil rush, just like any rush, the few smart and keen will succeed, and the majority will not. True for any enterprise of any sort, ever. There's something else afoot, though.

Too geeky

The biggest issue, from the technological perspective, is that Bitcoin is nerd pr0n. It comes with a dozen beautiful phrases, which no one really understands. Block chain, oh, shiver me timbers. Then, digital wallet, crypto signature.

If you think this is daunting, how about you start mining? Buy an appliance for real money? Exchange Bitcoin for real money? Oh, speaking of that link, it's interesting how the author calls themselves a noob, but then he talks about ASIC and LED and 5 GH/s. Proves my point really.

Finding your way around Bitcoin is far, far from trivial. And we are ignoring all other implications of using the software and mining and trading in the currency. Just the pure and simple of process of getting what you want. It's definitely not the matter of plug and play, by any means. You cannot setup an account, punch in your bank account details and wait a few moments until a fraction of your balance is exchanged into Bitcoins. Does not work like that, although all sorts of exchange places have cropped round the Web.

Bitcoin 3

Note: Image, courtesy of bitcoin.org.

If you go to the official site, as much official as it can be, just the first section of informing yourself will make your head spin a little. I am telling you that as someone who is meant to be savvy. Wallet security, anonymity, transactions and confirmations, it's a whole new world of rules that do not apply to anything else you've known in your life. The closest would be a hybrid model between your local bookie and BitTorrent, and that's a messy thing.

Now, it's not fair calling Bitcoin complicated. It's a new thing. While credit companies had decades if not centuries to make their model simple and transparent to the user, and there's a whole army of people working behind the scenes, Bitcoin has been around for a very short time, so the whole alpha-beta feel is expected. Still, it does not change the complexity issues. And despite all that, it's still not the dealbreaker I want to talk to you about.

So what the problem is?

The real deal with Bitcoin is ... Bitcoin II. There is nothing that prevents any one person or group in this world from creating a new digital currency with its own set of rules, total resource share, and everything else. Call it Bitcoin TNG, Bitcoin Mk.2, whatever you want, it can be created tomorrow. You can't invent new gold, but sure you can create new stocks. Happens all the time. Much like social networks. In fact, EXACTLY like social networks. First there was MySpace. And then Facebook. And now Google Plus. No limits.

To give you the crudest of examples, Dogecoin. Based on the highly popular, many get, wow so detail meme, Doge, Dogecoin is an open-source peer-to-peer crypto-currency very much similar to Bitcoin. For a while, it traded like mad, even surpassing Bitcoin in the price surge, in terms of raw percentage and volume, until it was hax0red, and then things kinds of slowed down a little, but still stampeding forth well and true. Such is life, but a fitting part of the saga based on a meme.

Dogecoin

Note: Image courtesy of dogecoin.com.

Indeed, there have been many digital coins around, since the early 80s, with names likes Devcoin, Peercoin, Litecoin, and others. Which means that Bitcoin really has to prove to be technologically superior in every way not to be superseded or replaced or marginalized by one or more similar solutions. And that's the trickiest part.

Conclusion

What have we learned today? Not much. But definitely a lot. You see, if you ask me, whether to invest in a certain commodity of any kind, it's like going to a witch or a palm reader and asking for their opinion. Sure, I'm more handsome, and smarter by a mile, but still, it's a very unreasonable way of making financial decisions. Which proves that whoever created the Bitcoin is an absolute, total genius, and he or she or they deserve to become billionaires.

For the rest of the world, the matter of gambling. I'd say yes, most likely. This is a new commodity, so you could try your luck with a bit of real dough. Remember, someone will get your real money. Remember, you may get bogged down in technological mambo-jumbo, so unless you're willing to trust this whole new digital bubble of terms and phrases and names and new players, then sure. It's all about trust. Supposedly, you trust your bank until the economy goes pop, right. So this is the same thing, in foreign lingo.

In the end, it's not the matter of how, but who. Where should your money go? If you can't trust anyone, then mine away, that's the simplest way. And who knows, maybe you will be the one of the lucky gold rush pioneers that come back with a smile and a bunch of nuggets in your pockets. The chances are less then slim, but this is what this is all about. A game of thrill. A game of uncertainty. Buy a nice computer with a handsome graphics card, become a geek, and start spending electricity on solving riddles. That's all.

Now, if you like less risk, less profit, then you might want to look at the traditional stock market. But please don't cry when the big players sneeze and drown you in snot. The best economy lesson you will have ever had from anyone.

Cheers.

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