# Thoughts on a “Korea Krash”

If you are reading this on January 16, 2018, then you are aware that Bitcoin (and the exchange rate of most other coins) fell by 20% today. Whenever I encounter a panic sell-off, the first thing that I do is try to ascertain if the fear that sparked the drop is rational.

But what is rational fear? How can you tell if this is the beginning of the end, or simply a transient dip? In my book, rational fears are fundamental facts like these:

• A new technical flaw is discovered in the math or mining
• A very major hack or theft has undermined confidence
• The potential for applications that are fast, fluid and ubiquitous
has dropped, based on new information*

Conspicuously missing from this list is “government bans” or any regulation that is unenforceable, because it fails to account for the design of what it attempts to regulate. Taxes, accounting guidelines, reporting regulations are all fine! These can be enforced. But banning something that cannot be banned is not a valid reason for instilling fear in those who have a stake in a new product, process, or technology.

Ellery’s Rule of Acquisition #1:

Drops triggered by false fears present buying opportunities

At times like this, you must make a choice: If you can’t afford to stay in the market and risk a bigger drop, then cash out and live with it. But if you believe in crypto and the potential for a digital future that dis-intermediates your earning, spending and savings, then this drop in dollar value presents opportunity.

This downturn will pass, because the cryptocurrency fundamentals have not changed or been undermined by recent events. There is no new technical flaw or hack. The potential for cash transactions and future applications get rosier every day (let’s assume that Bitcoin will finally add Lightning Network and that miners will stop fighting with developers)*

The current 20% drop is not a big deal. It takes us back to an exchange rate that we saw just one month ago in early December. It was triggered by saber rattling in South Korea. But, let’s face it: Governments have as much influence over trading or spending cryptocurrency as they do over the mating of squirrels in your backyard. Do you think fewer squirrels would mate, if the government banned them from mating?

If you can answer that question—and if you can afford to stay in the game—then relax. 1 BTC has the same value today as it had yesterday and the day before. It is worth exactly one bitcoin. The current dip in exchange rate with other currencies was sparked by fear; and that fear is misguided or irrational.

[click below for perspective]…

* Bitcoin has a serious limitation in transaction throughput and transaction cost. The problem is serious and it frustrates users, developers, miners and vendors. But it is not new, and the consensus about its likelihood of being corrected has not suddenly changed. These limitations are unrelated to today’s large drop in exchange value.

Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. He is keynote speaker at the Cryptocurrency Expo in India this month. Click Here to inquire about a presentation or consulting engagement.

# Proof-of-Work Alternatives: Massive electric consumption by cryptocurrency mining

Some blogs and news outlets eschew long titles. Publishers want readers to scan a list of topics that fit on one-line each. But, a better title for this article would be:

“Massive electric consumption by cryptocurrency mining:
An unfortunate environmental nightmare will soon pass!
… Proof-of-Work alternatives are on the horizon”

A considerable amount of electricity is used in the process of mining Bitcoin and other cryptocurrencies. Miners are effectively distributed bookkeepers, and this use of resources is part of a system called “proof-of-work”. It keeps the books fair, honest, and without an ability for the miners to collude (In other words, they cannot ‘cook the books’).

What makes the process unique and exciting is that this “distributed consensus” does not require a trusted authority, like a bank. In fact, the whole point of the blockchain revolution is that users trust a mechanism rather than a bank, government or even each other.

But, for any network that hopes to become part of the financial fabric, it must be ubiquitous and in constant motion. Proof-of-work just doesn’t make the grade, because it doesn’t scale. The need for miners to prove that they did something complex sucks up too much power. If Bitcoin or any proof-of-work currency were to be adopted for even a small fraction of commercial and personal transactions, it would overwhelm the world’s energy services.

One reader suggests the problem will be solved by the recent boom in shale fracking and renewable, non-polluting energy. He points out that crypto mining may even drive a market for distributed, clean electric production.

Unfortunately, clean and cheap power makes the problem worse. Even if electric capacity were to rise dramatically and experience a great cost reduction, cryptocurrency networks would automatically demand all the extra electricity. It is a no-win game, because mining incentives escalate with an increase in supply or drop in cost.

Will large-scale, blockchain-based networks fail, because of enormous electric demand? Fortunately, the future is not so bad, after all. Although networks, like Bitcoin, currently use proof-of-work to ensure honesty and fairness, it is only one of many possible measurement and enforcement mechanisms. Eventually, developers and miners will swap in another proof mechanism to keep the network humming—and without creating an environmental catastrophe.

Will Change in Proof Come in Time?

The political process for changing the fairness mechanism (“forking the code”) is complex and fraught with infighting, but the problem will eventually be addressed, and it will be solved before electric demand becomes a critical issue. Despite a messy voting process, the miners have too much at stake to ignore this problem much longer.

Various proof alternatives are already being used in altcoins. Since Bitcoin is perfectly free to steal these techniques (none can be protected by patent or trade secrecy), we can think of these other coins as beta-tests for Bitcoin. How so? As the first and biggest elephant in the room, Bitcoin will likely reign supreme, as long as it doesn’t wait too long before grabbing the best technology and tucking it into its quiver.

Proof-of-Work Alternatives

• One method, already used by some altcoins, is called “proof-of-stake”. It’s a bit like getting voting rights based on how much land you own. This method does not demand lots of electricity—but some analysts feel that is not as fair, because it cedes network control to the wealthiest members.
• Another method, called BFT Replication was developed by Marko Vukolić, at the IBM Blockchain Group in Zurich Switzerland. It might be exactly what we need.
• Yet another method was proposed by C.V. Alkan, an amateur analyst with a passion to solve this problem. He calls it Distributed Objective Consensus.

These aren’t the only alternatives to proof-of-work. Ultimately, one or more of these fairness enforcement mechanisms will make its way into Bitcoin and other currencies and blockchain services. In my opinion, the electrical crisis is a genuine threat, but it is one with a solution that will be implemented soon—perhaps even this year.

Related:

Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. He is keynote speaker at the Cryptocurrency Expo in India this month. Click Here to inquire about a presentation or consulting engagement.

# Is Cryptocurrency Good for Government?

Today, editors at Quora asked me to answer a seemingly simple question:

## “Is cryptocurrency good for government?”

This is a terrific question, and one that I write about frequently. The question gives me a chance to summarize the key facets of widely mistaken fears.

In the first phase of cryptocurrency adoption (we are in the midst of this now), there is an abundance of skepticism: Misunderstanding, mistrust, historical comparisons that aren’t comparable, government bans & regulatory proposals—and a lot of questions about intrinsic value, lack of a redemption guaranty, risky open source platforms, tax treatment, etc, etc.

Out of the gate, few individuals and governments paid attention to Bitcoin. That was when it traded under $100. It was complicated to understand, and it seemed to be nothing more than gaming money coveted by nerds and geeks. But with each wave of adoption, or the crash of a major exchange, or the shutdown of Silk Road, public interest has piqued. And, of course, the price of Bitcoin has shot up from nothing to almost$20,000 in the past few years.

It’s natural that governments watch developments closely, and sometimes weigh in with guidance, licensing or regulations. But consider the underlying concerns: Why should governments care about this activity? Is cryptocurrency good for government?

Very often, we hear of government restrictions or “bans” on trading bitcoin. The justification typically hinges on a belief that cryptocurrency leads to bad things:

2. Facilitates criminal activity (because of anonymity)
3. Causes citizens to lose faith in their own government
4. Interferes with a nation’s ability to control its own monetary policy
5. Reduces liquidity of (government-backed) national currency
6. Causes a deflationary economy. People will delay spending and stop investing

The first three concerns are patently false and the last three concerns raise an interesting question: Might it benefit a government to surrender control over its own monetary policy? We’ll explore this, below…

Let’s look at each of these fears. I won’t try to analyze or defend each statement below. You can find the justifications throughout this blog.

1. Gradually, governments are coming to recognize that the first three concerns are false. If cryptocurrency gains widespread traction as a payment instrument—or even as cash itself—governments are not weakened in their ability to tax, spend, or enforce tax collection. This myth arises from a lack of education, experience and familiarity.

2. We have seen some spectacular news stories involving very serious criminal activity that accepts bitcoin. In each case, the bad guys were caught—and they were caught because they foolishly accepted bitcoin.

In fact, cash is a far better tool of crime than cryptocurrency. Pre-paid debit cards are even worse.

Bitcoin is not anonymous. It is what cryptographers call pseudo-anonymous. I call it “a fool’s anonymity”! Although Bitcoin allows users to create anonymous wallets, anyone selling drugs or committing a notorious deed can be tracked. A million armchair analysts (anyone who uses and follows Bitcoin), can follow the money trail—through VPNs and mixers—all the way until something is spent in the real world. At some point, someone buys a tennis ball or gets braces for their kid, or buys a book at Amazon. That’s when it all unwinds.

3. Far from cryptocurrency undermining trust in government, it does just the opposite. It demonstrates to citizens that the government shares an obligation to balance its books, just like every individual, corporation, NGO, city or state.

In effect, governments must raise the dollars that they intend to spend. In an emergency, they can borrow, of course, but only if they can find creditors that truly believe in their ability to repay the debt.

This trust yields phenomenal results:

• Creditors no longer wonder if a nation will attempt to turn on the printing press (like Argentina, Venezuela, Sudan, Zimbabwe, Greece or Germany between the wars).
• Citizens no longer fear that their transient elected officials will constantly raise the debt ceiling (This is a euphemism for “hoisting debt on future generations”, and destroying credibility with debtors at the same time).
• Redistribution of wealth through wacky tax laws is still possible, but it is more likely to require the consent of taxpayers, because suddenly, governments can’t hide expenses behind the opaque barrier of a printing press, nor can they use inflation as a mechanism of social policy. Instead, they must create clear, 2-entry line items for each social welfare expense: Who gets the money? —and Where does it come from?

4, 5 and 6: Now, we arrive at the least understood concerns…

#4 and #5 are true. But as we discuss in #3, loss of control over monetary policy is a very different thing than losing control over fiscal policy.

It took decades to discover that decoupling a country from its delivery service and telephone companies resulted in a remarkable boost to industries, services and productivity. Likewise, decoupling a nation from its currency is a really, really good thing. No one can play games, trust is restored. Our kids aren’t born into debt of the nations that purchase our government bonds.

#6 is perhaps the most difficult to accept. Some economists still insist that a small amount of inflation is critical to getting people to spend and invest. But a growing number of experts are discovering that this just isn’t so. Deflation is often associated with unemployment, war, recession and a loss of liquidity and investment. In fact, deflation can be triggered by these things, but when it is the result of a trusted and capped-but-divisible money supply, it doesn’t lead to any of these things.

The concern about people not spending is a linguistic trick. Another way to say the same thing is that a capped money supply encourages people to save for big expenses and for retirement. Since when is that a bad thing?

I have been answering questions about Bitcoin and cryptocurrency since Satoshi was at the helm. Talk to me. Ask about it! Then, think for yourself. Stay engaged.

Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. He is keynote speaker at the Cryptocurrency Expo in India this month. Click Here to inquire about a presentation or consulting engagement.

# Say it Again: “Bad News is Good News”

By now, every interested news-junkie is aware that Bitcoin plummeted from $15,000 to$13,000 (USD exchange rate) on January 11, 2018. This morning, every news outlet and armchair analyst attributes the drop to the Korean government signaling that it will ban Bitcoin trading among its citizens.

With Donald Trump and Kim Jong Un butting heads over nuclear missile tests and the upcoming Winter Olympics, you would think that South Korea has other priorities than banning Bitcoin.

As with all news—except accidents—the Korean plans were known by a few insiders (in this case, government bureaucrats), and so the influence on value was bigger than the drop that occurred after the news story. In the days before this “event”, it was probably responsible for a drop of about $4500 in exchange value. Listen up Wild Ducks! We have heard this before. On Sept 11, China announced the exact same thing. I wrote about it in the most popular article of my 7 years as Blogger: Bad News is Good News for Bitcoin Investors. As an investor, am I worried? Not on your sweet bippy. I am ecstatic! There are some things that governments cannot ban: the mating of feral cats; water from seeping into cellars; communications networks that are distributed and permissionless. Ineffective and unenforceable regulation always spells opportunity. When I hear of such “bans” (or learn about Jamie Dimon claiming that Bitcoin is a ‘pyramid scheme’ before having all the facts), I become confused and excited Investors often fail to recognize the way in which toothless government edicts work. I am confused that anyone would act on such flawed information. I am excited that they do. Why?—Because each time Bitcoin makes a quick dive due to crazy or irrelevant news, it makes an even bigger upward jump within days. In this case, the reverse correction has already begun. I created the chart, below, for my presentation at the Cryptocurrency Expo in Dubai during the last days of October. During this 3 day conference, Bitcoin jumped from$6000 to 6500 because these days followed a hard fork that scared analysts. Within 5 weeks of the conference, Bitcoin touched $20,000, depending on the exchange from which you get quotes. But here’s an odd thing (not so odd, to me): With sudden market accessibility in the past 30 days, why is Bitcoin falling? [continued below]… In the past month (Dec 10 2017~Jan 10 2018), Bitcoin and Bitcoin futures are finally becoming accessible to traditional brokers using familiar investment instruments. As a result of market accessibility, everyone and his brother is getting into Bitcoin. Since it is still difficult to take a negative position, you might expect this fresh interest to drive up value. This expectation is reinforced by my own anecdotal observation: Based on the large number of old acquaintances asking me to help them buy Bitcoin, it certainly feels like the sentiment is bullish. But no! Existing stakeholders are dumping their positions! It’s not just because of yesterday’s news. Rather, it’s because anyone who has seen Bitcoin triple in just 3 months, feels that their personal stake experienced a “lucky” gain. They want to turn that paper gain into a profit before it tanks. But then, there are the cognoscenti. That’s us…We are the individuals who have a feel for the natural, intrinsic value of Bitcoin. We understand that value does not require a redemption guarantee from Caesar. We have a reasonable vision of currency, inflation, economics, history, the role of government—and especially, of distributed trust. Just as important, we understand why an altcoin is unlikely to replace Bitcoin—even if it solves some of Bitcoin’s frustrating technical and governance issues. Governments tend to react to perceived threats before understanding opportunities, motives and that which is fait accompli. There is a role for government in all of this, but it is not to ban what cannot be banned. That is simply good news for us stakeholders. Related Reading: Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. He is keynote speaker at the Cryptocurrency Expo in India this month. Click Here to inquire about a presentation or consulting engagement. # What if you send Bitcoin to a non-existent address? I get this question a lot. Today, I answered it at Quora.com. But, here at A Wild Duck, I have more bandwidth to elaborate. Question: What if I make a typo when sending Bitcoin. The recipient address may be invalid or it may belong to another individual. —But there is a third possibility. Couldn’t it be a valid address, but without any wallet that can receive it? I bet the blockchain catches these errors—Right? Will I always get my money back? The short answer:Don’t worry, it cannot happen. That won’t happen either. Sure, it’s possible. That’s wrong, and You’re screwed! But let’s look at this a bit closer. A little knowledge goes a long way! Incidentally, this answer gets into some gritty, esoteric details. It may lead you to believe that cryptocurrency is complicated, risky or not worthwhile. But, it only seems this way. With any new technology, standards and practices gradually flow into gadgets, apps and services. Early televisions required an expert operator. The next generation of owners dealt with vertical hold, contrast and antennae bolted onto the chimney. If your older than 55, you schlepped to a pharmacy with Dad to test a dozen or more vacuum tubes, just to find out if the circuitry was getting weak. No one does these things anymore. TVs are flat and with a perfect picture. They are almost as easy to use as a toaster. (Except for the five remotes needed to choose a source and set up the sound! These ridiculous gadgets are only now being replaced with voice control and other smart technologies). Back to square one: Can you send money to an invalid Bitcoin address due to a typing error? If you do, will you get it back? It is not likely that you would do so in a hundred lifetimes. But if you succeed at creating what appears to be a valid address, you are screwed. Only a hundred million trillionths of valid addresses will ever have a wallet behind it. The blockchain does not record the creation of wallets. No one can know if there is anyone with the address and the keys to the apparently valid wallet address that you sent money into. Addresses transfer things from one place to another. You enter a street address into your GPS expecting to be transported to a location. But, with everything else, an address moves value or sensitive information. So, let’s start with an absolute, inviolate rule: Never type an “address” into any system! Instead, cut & paste the address from the source or—at least—from the message that delivered it. After all, you don’t want a note to your lover ending up on the mobile phone of your boss. But you didn’t ask about best practices—you asked about checksums… 1. Invalid Address (No wallet could exist for what you typed) Bitcoin addresses include a 32 bit checksum, which makes the possibility of typing a valid address by mistake about 1 in 4.3 billion. So don’t worry, a mistyped address will be caught by your own wallet or service, before anyone even peeks at the blockchain. But what if—somehow—you manage to enter an address that seems valid (it passes the checksum test), but there is not yet a wallet created with that address? 2. Address Appears Valid (But there is no wallet, or they belong to the wrong person) You might think that the transaction gets staged, but eventually fails, because the wallet address is unlikely to have ever been created. But there is a problem with that theory: Wallets can be created off-line and remain dormant for years. The block chain does not know which wallet addresses exist. It only knows which appear to be valid addresses. For this reason, sending bitcoin to an address that is entered in proper form, but does not belong to anyone will result in permanent loss. Technically, the money exists, but no one has the private keys to spend it. Any effort to recover the loss would better be spent on a good therapist and searching for a job in the sunset years of your life. It would be nice if you could create a wallet that matched the receiving address. Sadly, this is impossible, because wallets are created through a random one-way process. This ends an answer to a straightforward question. But, now, let’s have some fun… Let’s figure out what are the chances that someone actually does have a wallet that matches a valid address that you typed by accident. (After all, you already beat odds of 1-in-4.3 billion by typing an address that satisfied the checksum!) A Bitcoin wallet address is a string of 34 characters (letters and numbers).* From the full set of 10 digits and of 52 upper/lower case western characters, four are excluded to reduce the chance of entry error (O, 0, I, L). This means that the number of possible wallet addresses is 5834 = 1060 * The human brain has between 100 and 1000 trillion synapses. Yet, 1060 is: • More than the synapses in all brains of every animal that ever lived • More than every atom in our planet, solar system and galaxy • More than—Well, you get the point! Even if everyone on earth creates a new Bitcoin wallet every single minute and all wallets are valid for life, the chances of accidentally typing the valid address of another user is very nearly zero. * Interesting caveats and notes: 1. Bitcoin addresses are currently generated via an algorithm called RIPE-MD160. This further limits the number of possible wallet addresses to 2160 = 1.4*1048). But this reduction is caught when sending, because the checksum uses the same algorithm to validate against a properly formed address. 2. Checksums aren’t just for catching a typing error. In addition to 34-character addresses, Bitcoin supports 33 characters and even some 26 character addresses. The checksum ensures that shorter addresses are not actually longer addresses that with leading zeros (transcribed as blanks) or that have dropped a digit. Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. He is keynote speaker at the Cryptocurrency Expo in India this month. Click Here to inquire about a presentation or consulting engagement # Revenue Neutral model reduces altcoin investment risk Titles are chosen by editors and not journalists or experts. I fought my editor over the above title. Yes, I address the teaser—and I explain a solid altcoin investment model. But, that comes after the break. The first part of this article should be titled “Why would anyone quote cost or value in Bitcoin?”. The subjects are highly related, so bear with me… Today, a reader asked this question: Some financial sites discuss value in terms of Bitcoin, rather than dollars or Euros. Why would I calculate the value of a new car, my rent or an investment in this way? It’s hard to understand how much money I need! Answer: Your right! It’s difficult to estimate the value of a car or your rent in terms of Bitcoin. You are paid in dollars or Euros—and your landlord quotes rent in the same currency. On the other hand, it’s natural to gauge the value of something by comparing it to a commodity that you earn and spend at a steady or predictable rate. Therefore, your assumption that it makes more sense to determine value on a dollar-basis is absolutely correct. No one determines the value of a new car by comparing the cost with a government’s national debt—or the number of donuts you would need to sell (unless you are a donut maker). But, this assumption is transitory. It is based on a historical paradigm that is gradually changing. We are entering a bold new era. A big debate is shaping up over How gradual is the change? But make no mistake: This change is occurring in our lifetimes… That change will eventually lead you to estimate, earn, spend and value things in Bitcoin or a similar cryptocurrency. One day soon, fluctuations in the value of the US dollar or Euro will cause you to wonder “What is happening with the dollar?” rather than shake your confidence in Bitcoin. Bitcoin (or something similar) will integrate into your mindset as the exchange medium, rather than fiat currency of a nation state. Naturally, a series of dominos must fall, before you realize that Bitcoin is the money. I predicted this four years ago, and the process is already occurring. It is retarded by two unfortunate events, but these are both temporary setbacks: • Today, more people are hoarding and speculating rather than accepting or spending Bitcoin for goods and services. This delays the day that it can act as a useful, functional currency. • Miners, users, vendors and developers are chasing different goals. This makes it very hard to agree on necessary changes that will address several critical technical problems (i.e. transaction cost, speed, electrical demand, replay issues, etc). Both of these problems have solutions, and we have already seen the solutions at work in altcoins. Think of forks and altcoins as beta tests…Bitcoin will fold in the best of these technical improvements and will very likely continue to inch toward becoming the world’s de facto currency. Revenue Neutral Investing To answer the question in the title, let’s look at this from a completely different angle. The individual who asked the original question went on to ask this: Cryptocurrency sites compare and track the cost of altcoins in terms of Bitcoin rather than dollars. What’s with that?! Do they assume that we will all be selling Bitcoin to buy the new altcoin? It actually makes sense to value altcoins in terms of Bitcoin—even today. How so?… This growing trend provides very useful information. This method of quotation helps the reader to determine the relative change in value between the two currencies and compare it to fundamentals that they learn from news and research. The information can then be used to hedge an investment or even craft a revenue-neutral investment strategy. Allow me to explain… I am long on Bitcoin. This is not likely to change. So I keep a significant fraction of my wealth in this form. But, I also understand that the use and market for cryptocurrencies is young and very immature. A very few other forks and altcoins are the real deal. They have solved some major technical flaws with Bitcoin and they have the potential to become a credible, functional currency. This isn’t the place to explain my favorite coins, but the strategy is relevant. Since I already have a substantial position in Bitcoin, I wish to avoid further exposure in the market. Therefore, I invest long and short at the same time (for example, using puts and calls)* on certain coins that are likely to perform better than other coins. This reduces risk, by leaving me without a loss, if the entire market rises or falls. The only way I might lose is if I get it exactly wrong! That is, if the coins that I believe are scams do better than the ones that I feel are well-designed and with a solid adoption trend. (Remember: The risk reduction strategy is to invest on the difference between an overvalued dog and an under-performing beauty). To avoid the downside scenario (i.e. getting it exactly wrong), focus on fundamentals and not the cost of a unit, short term trends, emotional zeal, or other technical issues. Don’t follow the crowd! Bet on value and bet against hype. (TIP: The take-away, here, is to do both at once!) Investors who consider only asset cost and trends are in a craps shoot. The smart money determines which coins are likely to be a better functional instrument than other coins and then sticks with a dollar cost averaging plan for months at a time. Want to learn more? Want to know which coins I admire? Reach out. Let’s talk. I don’t bite. * A regulated financial exchange for puts and calls does not exist for altcoins. But, with a little research, you can create an nearly equivalent futures contract or options instrument. You may need to be a bit creative. Ellery Davies co-chairs CRYPSA, publishes A Wild Duck, hosts the Bitcoin Event and kicked off the Cryptocurrency Expo in Dubai. Click Here to inquire about a live presentation or consulting engagement. # How does the Blockchain ‘know’ you have printed a paper wallet? Let’s say that you no longer trust your currency exchange to host your Bitcoin wallet and you don’t trust a Trezor or Nano hardware wallet. You don’t trust your memory and you don’t trust your kids. And you certainly know better than to keep your wealth in your PC or phone. That would be downright crazy—right? What can you do?! A growing number of people are printing paper wallets. It is the ultimate form of security. Some individuals even delete their cloud wallet, leaving everything to a string of hex characters or a QR code printed onto a slip of paper. (NB. You had better be certain that you and a few trusted individuals know how to find that piece of paper!) But here’s an interesting mystery. If you print the paper wallet off-line and delete your other wallets, then how can the blockchain ‘know’ that you have changed wallets? The short answer: It doesn’t and you haven’t! Let’s explore a bit deeper… • The deed to your house is stored and maintained by a registry. It is housed in a court house or other government building. • With a bearer bond, a certificate in your posession is the actual item of value. But, in both cases, the fact that you made a photocopy of your deed or corporate bond is not of any consequence to others. It is the same with a Bitcoin wallet. (In this case, the ownership record is netiher in a government warehouse nor in your posession. It is crowd-sourced). Printing out a paper wallet does not change your wallet ID. The paper wallet is simply another method of storing and retrieving the proof that you own a part of a mathematical solution set—That is, you know the solution to a problem. Your paper wallet is just a copy of the keys to your wealth. You may choose to destroy the other keys, that’s your business. No one knows or verifies that you still have access to your stored secret or how you stored it. It’s up to you to maintain access to the keys. The blockchain only records a transfer of ownership from one wallet to another at the time of a payment transaction. Got it? I hope you like the metaphors. I am fairly proud of myself for this explanation. Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. Last month, he kicked off the Cryptocurrency Expo in Dubai. Click Here to inquire about a live presentation or consulting engagement. # Why would anyone attribute value to Bitcoin? Oh, Cheez…We’re back to this question, again! As a Bitcoin columnist, I get this question a lot. Today, an answer was requested at Quora.com, where I am a leading contributor on cryptocurrencies: “Clearly, some people value Bitcoin. But How can this be? There is nothing there to give it value!” Many individuals, like the one who asked this question, suspect that Bitcoin was pulled out of thin air—and that it is not backed by gold, a government, or an authoritative redemption guaranty. After all, it is just open source code. What stops me from creating an ElleryCoin using the same code?! Let’s start with the short answer: • Indeed, it was pulled out thin air • It isn’t backed by an asset, government or promise • You could easily clone Bitcoin (the entire mining ecosystem) and distribute it yourself. It would be exactly like Bitcoin. Yet, Bitcoin is clearly valued by everyone, and your new coin is unlikely to generate interest or adoption. A More Complete Answer: What is value? Bitcoin has more intrinsic value than a government printed paper bill. The value arises from a combiation of fundamental properties: • It has a capped supply • It is widely recognized, liquid, and resistant to legislation • It has attained the robust supply-demand of a growing, 2-sided network. • It is open and transparent. This elevates user trust • Unlike cash and credit, Bitcoin requires no back-end settlement. That’s because it is not a payment instrument. Rather, it is money itself. • Finally, it’s value is likely to be durable, because it is not printed by a country that spends beyond its means and racks up debt. In fact, it can never be inflated. Downside and Risks But wait! What about the long transaction delay and high cost? There are sharp disagreements anong miners, users and developers concerning block size, transaction malleability, and replay issues. Aren’t these a deal killers? And what about wild volatility in the exchange rate? Doesn’t this retard adoption as a functional currency? These are transient issues associated with a new technology. Bitcoin is weathering growth pains that arise from a new and distributed governance technology (democracy can be messy!). But, all of these issues have sound solutions. We have witnessed and tested the solutions with various forked coins. Think of these imrpoved altcoins as beta tests. Even if current problems delay the day when you can spend bitcoin at every retail establishment—it is already sucking liquidity from national currencies and becoming the world’s de facto reserve currency. Many individuals find all of this hard to accept. That is because we have been conditioned to think that ‘value’ arises from assets with ‘intrinsic’ value, the promise of redemption, or by edict. This is not true. In all things (including gold, a Picasso painting, or your labor), value arises from simple supply and demand. Some individuals claim that all other factors are secondary. But, even this statement is false. All other factors are irrelevant. They may be related, but they are not the source of value. I recognize that this answer may seem smug or definitive. So, allow me to suggest related questions with answers that are a bit more interesting, because they are subtle. Unlike the question of value, these two questions are open to analysis and opinion: (1) “Will people continue to value bitcoin in the future?” — And (2) “When will Bitcoin stop swinging wildly in value?” (measured by its exchange rate with other currencies). This is fun! Let’s explore… Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. Last month, he kicked off the Cryptocurrency Expo in Dubai. Click Here to inquire about a live presentation or consulting engagement. # Is Bitcoin a store of value? Bitcoin has many characteristics of a currency. It is portable, fungible, divisible, resistant to forgery, and it clearly has value. Today, that value came close to$20,000 per coin. Whether it has ‘intrinsic value’ is somewhat of a moot question, because the US dollar hasn’t exhibited this trait since 1972. Today, economists don’t even recognize the intrinsic value of gold—beyond a robust, international, supply-demand network.

Lately, Bitcoin is failing as a viable currency, at least for everyday consumer transactions. The settlement of each transaction is bogged down with long delays and a very high cost. The situation has become critical because of squabbling between miners, users and developers over how to offer speed transactions or lower the cost of settlement. Bitcoin forks and altcoins such as Dash and Bitcoin Cash demonstrate that these technical issues have solutions. Since Bitcoin is adaptable, I believe that these issues are temporary.

But an interesting question is not whether Bitcoin will eventually become a consumer currency. It is whether Bitcoin can distinguish itself as a store of value, rather than just an instrument for payment or debt settlement. After all, a Visa credit card, a traveler’s check and an Amazon gift card can all be used in retail payments, but none of them have value unless backed by someone or something. US Dollars on the other hand are perceived as inherently valuable. They carry the clout and gravitas of institutions and populations, without users questioning from where value arises. (This is changing, but bear with me)…

What about Bitcoin? Does owning some bitcoin represent a store of value? Yes: It absolutely does!

Bitcoin is a rapidly maturing two-sided network. Despite a meteoric rise in exchange value and wild fluctuations during the ride, it is the epitome of a stored value commodity. Regardless of government regulation, adoption as a consumer payment instrument, or the cost and speed of transactions, it has demonstrated stored value ever since May 22 2010, when Laszlo, a Bitcoin code developer, persuaded a restaurant to accept 10,000 BTC for 2 pizzas.

The “currency” accepted by the pizza parlor wasn’t a gift card. It was not backed by a government, a prior deposit, dollars, gold, the promise of redemption, or by threat of force or blackmail. When a large community of individuals value, exchange, and can easily authenticate something that has none of those underpinnings, that thing clearly has stored value.

In this case, value arises from its scarcity and a robust supply-demand-network. Because its value is not tied to a government or to other commodities, its exchange rate with other things will be bumpy, at first. But as it is recognized, traded and adopted as a stored value token, the wild spikes will smooth out.

A tipping point will precipitate rapid adoption when…

• when some vendors begin to quote prices in Bitcoin (rather than national currency)
• when some of these vendors retain a fraction of their bitcoin-revenue for future purchases, payments or debt settlements—rather than converting revenue to fiat/national currency with each sale

Bitcoin is clearly a store of value, and it is beginning to displace gold and the US dollar as the recognized reserve currency (it is gradually becoming the new gold standard). But before Bitcoin can serve as a widely adopted everyday currency (i.e. as a payment instrument—with or without the stored value of a currency unto itself), it must first incorporate technical improvements that speed transactions and lower cost.

This is taking longer than many enthusiasts would have liked. But, that’s OK with anyone who keeps their eye on the big picture. Democracy is sometimes very sloppy.

Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. Last month, he kicked off the Cryptocurrency Expo in Dubai. Click Here to inquire about a live presentation or consulting engagement.

# Revisiting Bitcoin Fair Value Calculation

In an April 2014 article, I demonstrated how one might approach a fair Bitcoin valuation.

• Original Methodology: What fraction will Bitcoin capture
of the float needed to support daily global commerce?

My methodology was based on the demand that Bitcoin would generate if it displaced a small fraction of cash and credit used for retail and commercial payments around the world. At the time, Bitcoin had a value of USD $450. I estimated that if it captured 5% of global payments, it would have a fair value of about$10,000/BTC (I didn’t complete the calculation—I left that up to the reader. That’s because I was concerned that publishing such a prediction would cause me to lose credibility as an economist and blogger). For what it is worth, I also predicted that a rise to $10,000 would take 5~8 years. As you might imagine, my friends and family urged me to unload my BTC investment. The April 2014 price of$450/BTC seemed very high to most armchair analysts. After all, thirteen months earlier, it had been just $45. Yet, now, just 2½ years later, Bitcoin has reached$18,000 per coin. Last week, on Dec 7, 2017, it climbed 40% in just 40 hours, and 120% in less than 2 months. Naturally, this leaves everyone asking if Bitcoin’s rapid rise in value represents an investment “bubble”.

…And so it is time to update the calculation of a fair value for Bitcoin. I can’t do better than point to a terrific prediction model described by Divyanth Jayaraj. His answer to a question at Quora presents a sound basis for valuation—much better than my original valuation method. How so?…

• Reserve Methodology: What fraction of int’l business will be
settled with the transfer of Bitcoin instead of Gold or Dollars?

Jayaraj

Bitcoin is rapidly demonstrating viability as a reserve rather than a daily transaction currency. Few people believe that Bitcoin will replace national currencies throughout the world, but it very well may replace gold for government and interbank settlement, and for large intercontinental purchases of commodities, such as oil, grain or airplanes.

Sure! When developers and miners get a handle on transaction cost and delays, it may also become a de facto instrument for retail payments and debt settlement even among consumers. But, even if Bitcoin never achieves this status, Divyanth’s excellent analysis is still valid.

I won’t steal the author’s thunder. Click the link and learn what is very likely to be a fair future value for Bitcoin. Prepare to digest a very large number. I didn’t think of this valuation methodology, but I agree that it represents a realistic peek into the future.

For a few other methods of determining Bitcoin’s inherent value, check out the links at the bottom of my original article. But that was then and this is now. Give extra weight to this newer analysis. The methodology is more accurate given what we know now.

Ellery Davies co-chairs CRYPSA, publishes A Wild Duck and hosts the Bitcoin Event. He was keynote at Cryptocurrency Expo in Dubai. Click Here to inquire about a presentation or consulting engagement.

# Bitcoin: up 120% in less than 2 months

At the end of October, I delivered a keynote speech at the Cryptocurrency Expo in Dubai. That was just 5 weeks ago. When I left for the conference, Bitcoin was trading at $6,300/BTC. But in the next few weeks, it reached$10,000. Last week, I liquidated part of my investment at just under $13,000/BTC. Now, Bitcoin is about to cross$16,000. (I began writing this 10 minutes ago… But it has risen another $1600.00 since then. Now, it is$17,000).

Dear Reader: I believe in Bitcoin. Yet, there is a “But” in the last paragraph below…

I believe in Bitcoin. Its rise is not fueled solely by investor hysteria. Rather, it is a product of delayed appreciation for a radical, transformative network technology.

In the mid 1970s, the microprocessor was spreading to every consumer gadget. It started a trend toward tools that added power and enjoyment to all facets of life. And they were quickly becoming faster, lower-power, lower-cost and more ubiquitous. If you understood the potential of the computer chip before mainstream investors, you couldn’t really invest directly in the microprocessor. After all, it is a platform improvement. But you could come very close—You might have invested in Intel, Fairchild or Texas Instruments.

Jump forward 20 years: In the mid-1990s, the Internet was spreading to every class of citizen and to all corners of the earth. But just as with a computer chip, you could own a web site, but you couldn’t own a piece of the internet’s market potential. You can’t invest in an idea, unless you are the inventor and you hold a patent.

But, 5, 6 and 7 years ago, many individuals saw the future. They understood that Bitcoin is transformative. They recognized that—contrary to popular misconception—Bitcoin is backed by something more tangible than dollars, Euros and Renminbi. More importantly, it exhibits the potential to become the global reserve currency. And it continues to do so, even as internal bickering threatens its utility as a consumer payment instrument. That’s because it diverts liquidity away from gold and national FIAT. Ultimately, it forces governments to be transparent and accountable to its citizens. This is further reinforced by rampant inflation in countries around the world and a growing list of trading partners who seek alternatives to the US dollar.

But, just like real estate, the supply of Bitcoin is capped. No one can produce more. It’s the math, stupid! Even if you only realized this one year ago, you still would have reaped a 2000% return on your investment as of this morning. (I am cherry-picking here, but Bitcoin had just crossed $630 on October 20 2016). Let’s be clear: This is not a dot-com bubble or a 17th century Dutch tulip bulb mania. It is far more comparable to the 19th century California gold rush. The only frenzy is to acquire a functional instrument that is still trading for far below par value—but with the strange caveat that hoarding retards liquidity and the ‘functional’ adoption that we need to sustain long-term value. The Bottom Line In the grand scheme of things, Bitcoin is still undervalued—even at$17,000/BTC. It will fall and it will rise, but it will certainly be valued higher years from now.

…But, I must admit that this sudden and urgent race into outer space is a bit unsettling. From an investor perspective, it is not rational to leave when I recognize that the exuberance is rational. Yet, here we are at $17,000. I am taking some bitcoin off the table—A bit of bitcoin. I have taken some Bitcoin off the table. # Will Futures Market Affect Bitcoin Value or Viability? The Chicago Mercantile Exchange (CBT) is likely to begin listing options contracts for Bitcoin futures. And the CBOE is very likely to follow suit. What impact will this have on the value of Bitcoin holdings around the world? And what impact on it’s use as a money transmission mechanism? This Financial Times article* explains that an internationally accessible options market will create the first opportunity for betting against Bitcoin, other than unloading coins which were previously purchased. Some individuals feel that this could precipitate a crash in the Bitcoin exchange rate. I disagree. Buying “puts” or Selling “calls” against a commodity risks upward spikes, because individuals writing an uncovered option must make good on the contract buy buying it, even if the price has recently run up. This pushes the commodity even higher into the stratosphere—until the buyer unloads to realize his gains. This magnifies short term volatility (sometimes massively), but has no effect for long users or term buy-and-hold investors. Contrary to conventional wisdom, it also has no effect on the utilitarian value of Bitcoin as an instrument of debit, payment and settlement. Volatility has no real effect on payment users or long term investors. But adding sanctioned financial markets—even risky ones, like CBT options—adds demand to capped commodity. Like real estate, no one can make more Bitcoin. There will never be more than 21 million units. So, in this respect, the new market will push ever more early investors into millionaire territory. * Disclosure: I had no role in this article, and I do not know the author. But The Financial Times was a sponsor for my keynote presentation to the Cryptocurrency Expo in Dubai 3 weeks ago (End of October 2017). # Big insight from tiny fraction of bitcoin owners Quick—Take a guess: How many individuals own at least 1 BTC? I was asked this question today at Quora, a popular Q&A blog covering a variety of technical and economic disciplines. Under my alias “Ellery”, I am the most viewed author on Bitcoin and the blockchain. While this question may sound like a factoid for a trivia game, the answer has far reaching impact on your pocketbook and your future. It goes to the heart of a debate between warring factions: In the 2nd half of this answer, I address a more pressing question: Is Bitcoin a pyramid scheme? Or are we still early on the adoption curve? But, let’s start with the question at hand… There is no certain answer to the number of people who own Bitcoin or how many own more than 1 BTC. We know that tens of millions of wallets have been created, but this certainly doesn’t help. Although the value of every single wallet is publicly disclosed on the blockchain (most have a zero balance), there is no way to determine who owns each wallet. Some may be controlled by organizations or custodians on behalf of many individuals, while others may be just one of many wallets with a single owner. Most of my Bitcoin is in a wallet or a vault hosted by Coinbase, the San Francisco exchange. When I log into my account to view my wallet ID, I see that I have dozens of wallets—all valid. The large number of wallets is not related to my wealth. Rather, it a byproduct of my many small transactions. Coinbase creates a new wallet each time that I buy, sell, or purchase something with BTC. There are good reasons for this practice, but it certainly muddies the correlation between wallets and number of owners. There are 16.6 million coins in circulation today (a bit less, since some have been irretrievably lost). That puts a cap answering the question. There cannot be more than this many people with a full BTC—currently worth about USD$5900.

But, we know that the number of individuals with a full coin is considerably less. After all, many people in my own circles own dozens of coins, and Satoshi is very likely to hold 1 million BTC. Coinbase and Bitstamp are just two of very many custodial exchanges (i.e. they offer a cloud wallet or vault service to their clients). They host many hundreds of wallets with more than 50 coins. In almost each case, the client has provided single-user taxpayer information to these services, and so it is very unlikely that a significant fraction of these wallets belong to more than a single person or family.

And, let’s not forget that a far greater fraction of exchanges fly under the covers. That is, they don’t collect taxpayer information or report the wallets that they administer to any authority—nor to analysts or journalists like me.

So, while no one can accurately estimate the number of individuals who own 1 or more BTC, the answer is very likely under 2.5 million, worldwide. 1

The number of people who have heard of Bitcoin is growing rapidly. In the United States, fewer than one in twenty people were aware of Bitcoin just 2½ years ago (at the beginning of 2015). By September 2017, almost one in four USA adults has a reasonable idea what it is—and many of them have an opinion about its future. 2

There will never be more than 21 million bitcoin. This is a mathematical upper limit. Compare this with the current US population of 323 million. So even if all Bitcoin owners are in America (they are not!) and if no one owns more than 1 BTC, fewer than 1 in 19 Americans could own a full Bitcoin today and fewer than 1 in 15 after all bitcoin are mined.

If we consider the global population of 7.6 billion, fewer than 1 in 458 people could own a full Bitcoin today. Since most early adopters have more than 1 BTC, the actual fraction is probably much smaller than 1 in 25,000 individuals.

In the introduction, above, I said that the question about how many people own more than 1 BTC leads to a more profound question. In fact, this innocent trivia question, leads to insight about adoption and the economics of investing in a deflationary instrument as it spreads beyond speculators, into commerce and all sorts of institutions.

Moral of the story…

The original question asks for a simple number. It doesn’t ask for editorial perspective. But it’s tough to resist. With fewer than 1 in 25 thousand people owning a bitcoin, a reasonable question is:

Will adoption increase, even if interest is limited to only one sector?

For example, what if Bitcoin falters in all but one of these venues?… Bleeding edge geeks, collectors, investors, p2p payments, interbank transfer, debt settlement, or treatment in some regions as a full-fledged currency.

Answer: Even if Bitcoin continues to show strength in just one of these areas, it will eventually be used or accumulated by millions of new users—even if they don’t realize it!

Do you see where I am going with this? Even if you believe that Bitcoin will…

• never be treated as a store of value (this is nonsense of course),
• only be used on one continent (nonsense, again),
• never erode payment & settlement services such as Visa or PayPal (it already has),
• that governments can successfully block payments or deter growth (they cannot—and they are gradually realizing that it does not interfere with taxing or spending or sovereignty),
• that another digital coin will overtake Bitcoin (it cannot—the reasons are subtle, but they are well understood)…

Even if you believe in all of these limiting factors, the overall demand for Bitcoin has barely begun. We have not even started climbing the hockey-stick curve toward limited adoption as an occasional, alternative payment mechanism.

At conferences and in my own classroom, I am often asked: Should I still acquire Bitcoin? —Or is it too late? After all, it has risen from a fraction of a penny to $6,000 in just a 7 years. And from under$1000 to $6,000 this year alone! I am not a financial advisor. I often speculate, but never offer guidance. I embrace the wisdom that past performance is never an assurance of future gains. But, I ask students to look at the assumptions and at the math: Unlike US dollars, shares in Apple, pork bellies or gold pressed latinum, Bitcoin is firmly capped. There will never be more than a paltry 21 million coins. That means that each coin absolutely, positively must increase in value with even a modest adoption scenario. The Argument Against Bitcoin Bitcoin is a pure supply-demand commodity. Since the supply is fixed and well understood, the only argument against acquiring Bitcoin arises from a belief that demand will dwindle. This is the argument of someone who believes that Bitcoin will fail to gain any further traction in any sector. Perhaps you believe that something else will displace it, or that governments will find a way to effectively defeat it. If you have been reading my Blog (or my Quora answers) for more than a few months, then you already know that neither scenario is realistic. I believe that investment in Bitcoin a speculative asset retards adoption. I defend this opinion in many interviews and articles. Although I hope for fewer speculators and more ‘legitimate’ users, I own an outsize share of the world’s future value store, transfer media and fungible, liquid asset. I am guilty of the speculation that I seek to deter. 1 & 2 CRYPSA Research, Feb 2015 and Oct 2017, Cryptocurrency Standards Association. Polls conducted at Rein’s New York Deli in Vernon CT and Spectrum Center, Irvine CA. Ellery Davies co-chairs CRYPSA, publishes Wild Duck and hosts the New York Bitcoin Event. He sits on the New Money Systems board at Lifeboat Foundation and kicks off the Cryptocurrency Expo in Dubai this month. He frequently consults and presents. # Jump into Bitcoin with Intuitive Understanding In the past, I have written articles for beginners: More recently, I have written about economics of adoption, tech issues / growing pains, and the politics of a stateless money that cannot be controlled: It’s time to try something different. The largest segment of society is still sitting on the sidelines. They want to know more about Bitcoin, but they don’t want baby steps. They are business people, students, armchair economists or investors—and they want to get up to speed quickly. Grab a cup of coffee and view these two videos by the eloquent and charismatic Andreas Antonopoulos. They can bring anyone up to speed on the economic and geopolitical ramifications of Bitcoin—without wading through code, math or gobbly-geek. If you are college educated or experienced in finance or economics, these short presentations are all you need. You can fill in the blanks with your own experience or by checking out the articles linked above. They provide the missing details. Who is Andreas Antonopoulos? No one knows who is Satoshi Nakomoto, the effusive genius behind Bitcoin and the blockchain. So without an inventor or founder to appear on TV news interviews or the evening talk shows, we have Andreas Antonopoulos as the charismatic face of Bitcoin. He is intelligent, passionate, incredibly articulate and he is an advocate for individual empowerment. Like Andreas, I teach a class on the Blockchain, give academic lectures, consult to banks and businesses, write columns and develop courseware. But there is no way to get around the fact that I run a distant second behind Andreas. His voice (and his widow’s peak hairline) are associated with the most important financial development of the 21st century. I first met Andreas at the 2015 MIT Bitcoin Expo. Later that month he was keynote speaker at the New York Bitcoin Event at which I was co-host and producer. Way back then, Andreas told me that Bitcoin would never become a money—and so, it would never be a threat to national currencies. Well, if these two videos are any guide, then he has certainly changed his mind. Either way, my more popular peer is now in violent agreement with my view of Bitcoin’s full potential, and so it is no accident that these videos will also give you a dose of our shared economic and political perspective. 1. Fake News, Fake Money (26 minutes) 2. Money as a System of Control (17 minutes) These videos don’t describe how Bitcoin works, where to obtain it, or how it is mined. Those are just details. Instead, the videos put Bitcoin into perspective against the history of money and the geopolitical interests of governments. Once you have viewed the videos, browse the articles linked at the top of this page. They backfill the details. Then, you will have become a Bitcoin pundit the quick way…by jumping into the deep end of the pool! # Bad News is Good News for Bitcoin Investors Bitcoin was hit by a double whammy this week. On Tuesday, Jamie Dimon of JP Morgan declared that Bitcoin is a fraud that will “blow up”. Then, just this morning, a Bitcoin exchange in China announced that it would shut its doors in response to verbal pressure from regulators and an uncertain regulatory environment. Don’t ya just love it when bad news breaks on Bitcoin? I sure do! It creates a buying opportunity. After all, just look at what happened after the last five bouts of bad news: [chart updated at end of Oct 2017] In each case, the Bitcoin exchange rate dropped—very briefly—and then climbed higher with renewed vigor. Heck it, doubled from$2400 to $4800 in just the past month! But here’s a the real question: Does either bad news events have legs? Does it spell the end of Bitcoin adoption and enthusiasm, at least for now? After all, if it were discovered that the math behind Bitcoin were flawed, and that anyone could create forged coins, the empire would come tumbling down. In my book, this would constitute a crisis. But what about now? Do these two damning events—and a 35% correction in the past week—constitute a long-term crisis? To answer, we must first determine if public fears over these two events are credible… China and JP Morgan: (a) A frightened authority (b) Simple Ignorance Like most governments, the Chinese are concerned that the growing flight to Bitcoin is impacting liquidity of their national currency. [A superb presentation by Andreas Antonopoulos—Click it, after you read this article]. They are also concerned about the large number of Bitcoin exchanges that operate outside of a tight regulatory framework. They obscure the flow of money in and out of the country and they are a clear scapegoat for tax evasion or other criminal activity. Like any agency charged with financial regulation, the Chinese seek to reign in and regulate these maverick exchanges. It is interesting to note that the Chinese government is not discouraging Bitcoin mining or even personal savings—only the proliferation of unlicensed exchanges and quasi-anonymous users. After all, More than 50% of all mining is done in China, and it helps to balance the loss of liquidity in the national currency. Bitcoin is experiencing increased adoption—not just as a payment mechanism—but as a new form of stored value. Is this is a bad thing for governments? Surprise! When a government loses control over its own reserve and monetary policy, it may present more of an opportunity than a threat—for both citizens and governments. Gradually, economists, treasury secretaries, reserve board governors and monetary tsars will are coming to the same conclusion. But regardless of your position on this point of debate, here is a fact that is less controversial… When governments attempt to restrict an activity that cannot be economically monitored or enforced—or at least when they attempt to do it in a way that leaves no relief valve for hobbyists, business, commerce, research or NGOs—they ultimately fuel the activity that they set out to stifle. Ultimately, if the public cannot discern a reasonable basis for government censorship or excessive restrictions, it leads to interest, innovation, adoption and the emergence of hot new markets. Consider, again, the graph of Bitcoin price -vs- Bad news events at the top of this page. On each date highlighted above, there was a damning piece of information that should cause early adopters to reconsider their enthusiasm for Bitcoin. In fact, the Hearn Dump really should have ended the whole party. A core developer sold off his entire BTC savings and claimed that the experiment was a failure. He published an article with his reasons for believing that Bitcoin was dead. Likewise, the SEC decision to prohibit the creation of an exchange traded fund (the Winkelvoss ETF), it sent a clear signal that governments really didn’t consider cryptocurrencies to be an asset at all. But the graph demonstrates that each piece of “bad news” fueled a miniature rally. That’s because Bitcoin has none of the elements of a pyramid scheme. It is not an MLM and it cannot be manufactured or controlled by any organization. Rather, it is an exercise in pure supply, demand and market recognition. It is pure adoption mechanism that leads to a two-sided network. It’s benefits multiply as more users join the party. What about Jamie Dimon at JP Morgan? He says that Bitcoin will crash. Bitcoin has had a rocky road these first 8 years. Major exchanges have been bankrupt or worse, enormous criminal conspiracies were among the early adopters, the SEC has prohibited the creation of an ETF based on cryptocurrency, rogue spin-off coins are driving a wedge among users, and there are serious problems related to scaling and governance. A casual observer might wonder who is in control and who can be held responsible? After all, the idea of an economic mechanism that is altered by democratic—but decentralized—factors is new and radical. How can Bitcoin evolve, adapt and grow in the absence of an authority at its heart? This confusion arises from the newness and unfamiliarity of blockchain architecture. Skepticism is natural. Indeed, Bitcoin is guided by an authority, but it doesn’t reside at the center of the network. It resides at the edges. This is the concept behind Proof-of-Stake and Proof-of-Work. Unlike a classic authority, your will matters just as much as anyone else’s. It is exceptionally democratic, self-enforcing, and resistant to gaming. This is a difficult concept to wrap our heads around, because it is so different than we were taught and it is different than we have experienced for centuries. For this reason, Jamie Dimon’s statement that there is nothing behind Bitcoin presents a buy opportunity for individuals who were late to the table. Jamie may not yet understand intrinsic value, but we can educate ourselves. Bitcoin has more standing behind it than the US dollar. … But don’t take this as investment advice. Bitcoin should not be thought of as an investment. It is the future of money. Speculation (both day trading and long term buy-&-hold) act to retard the eventual adoption of Bitcoin as a serious monetary instrument. Although I have Bitcoin, I do not encourage people to think of it as an investment. It is more important that it be used for ordinary business and commerce: • Products and services • Loans and debt settlement • Stored value transfer (gift cads & prepaid services) • Escrow • Quotations and price guarantees • Interbank exchange • Smart contracts • Liens and letters of credit When the fraction of Bitcoin transactions servicing these consumer and business activities exceeds the fraction driven by savers and speculators, the dominos will begin to fall rapidly. Articles about Jamie Dimon and JP Morgan… 1. Jamie Dimon: Bitcoin Is A Fraud 2. John McAfee: I challenge Jamie Dimon’s bitcoin skepticism 3. Crypto Is Here to Stay (Whatever Jamie Dimon Might Say) Can we draw a conclusion? Certainly, we can. And, we can toss in a prediction. It’s not even a high risk prediction. The recent pullback has no fundamental basis. No legs at all. The two “bad news” are not just a red herring—they present a buying opportunity. If I were allowed to give investor advice (I am not; and I don’t), I would express my opinion with more verve and obvious conviction. Caveat Emptor (Everything comes with a disclaimer)… I am a Bitcoin educator, proponent, early adopter and blockchain consultant. But here is the contradiction: Although I am also a Bitcoin investor, I discourage others from treating Bitcoin as an investment. Use it, but please don’t save it! Why do I discourage others from investing in Bitcoin? It’s not that I don’t believe that Bitcoin will increase in exchange value. It will rise spectacularly, as adoption grows. But Bitcoin will not become ubiquitous and trusted until the majority of coins are recycled into the market for payments, settlement, loans, interbank transfers, escrow, contract settlement, etc. That is, its use for business and commerce must exceed the fraction of trades that are driven by savers and speculators. Until this happens, Bitcoin will remain volatile. It will be the subject of suspicion. It won’t be used for large settlements and it won’t become the money itself. Speculation acts against fluidity. It won’t block the eventual acceptance of Bitcoin as a global currency. Hoarding is not a deal stopper. But It retards momentum and delays the inevitable. Ellery Davies co-chairs CRYPSA, produces The Bitcoin Event, edits A Wild Duck and is moderator of LinkedIN Bitcoin P2P, the largest discussion group of it’s kind. He is keynote at this year’s Digital Currency Summit in Johannesburg and sits on the New Money Systems board at Lifeboat Foundation. Use the contact form to inquire about a live presentation or consulting engagement. # Spell it Out: What, exactly, backs Bitcoin? On August 1 2017, the value of a Bitcoin was at$2,750 US dollars. Today, just over one month later, it is poised to leap past $5,000 per unit. With this gain, many people are asking if Bitcoin has any genuine, inherent value. Is it a pyramid scheme? —Or is it simply a house of cards ready to collapse when the wind picks up? In a past article, I explained that Bitcoin fundamentals ought to place its value in the vicinity of$10,000.* (At the time, it was less than $450, and had even fallen to$220 in the following year).

For many consumers viewing the rising interest in Bitcoin from the stands, there is great mystery surrounding the underlying value. What, if anything, stands behind it? This is a question with a clear and concise answer. In fact, it has a very definitive and believable answer—but it is easiest to understand with just a little bit of historical perspective.

At one time, G7 fiat currencies were backed by a reserve of physical Gold or the pooling or cross-ownership of other currencies that are backed by gold. That ended in 1971 when the Bretton Woods agreement was dissolved by president Richard Nixon in Ithaca NY.

Today, US currency is backed by “The good faith and credit of the American worker” (This is the government explanation of intrinsic value). But in truth its future value is loosely tied to one simple question: Does the typical vendor or consumer (for example, someone accepting a $20 bill in exchange for a movie ticket or 2 large pizzas) expect it to buy these same things in the next few months? A considerable number of speculative components contribute to the answer. For example: • Debt: This is the elephant in the room. A house built on debt cannot thrive forever—without a fresh stream of exports and productivity. These are the measures of a nation’s income and its balance sheet. Here, then is the key question: Is new money being printed without a commensurate added value to GDP? After all, this is how a nation repays its debts. • Public Trust: Good faith goes beyond debt. Can consumers and creditors be certain that a change of government won’t cause rampant inflation or a willful failure to retire future debt? Can they be assured that their fellow workers will continue to produce and export manufactured goods in ever increasing quantity? • Guns & Tanks: Citizens are compelled by law to pay their taxes in official state currency. Even for those who attempt to fly under the wire or use alternate currencies during the tax year, this ultimately forces fiat currency to be recognized and honored. • Geopolitical Stability: The US has been a debtor nation for decades and it has significant political and economic disputes with its largest creditors (China and nations of oil-rich gulf states). What would be the effect of these trade partners (a) moving away from the dollar as their reserve currency, or (b) investing the trillions of dollars they have earned in some other country—or within their own borders? This list is not exhaustive, but each constituent boils down to two fundamental concepts: Supply-and-demand –and– How long will demand last? The dollar is an invention of a transient government. Even with a long history of stability and a complex banking framework, it is no more real than Bitcoin. Supply and demand for any commodity is based on popular recognition, anti-counterfeit features, innate desire and public goodwill. The real question is: What contributes to the desire to own or spend Bitcoin? The answer is that Bitcoin is backed by something far more reliable and trustworthy than the transient whim of elected legislators. It is backed by something that carries more weight than the US government. What could possibly guaranty the value of a Bitcoin? After all, it does not convey ownership in gold, and it has no redemption guarantee. There is no picture of Caesar on the coin. (In fact, there is no coin at all!)… Answer: Bitcoin is backed by math, a firm cap, a completely transparent set of books, and the critical mass of a two-sided network. Although it can be taxed (like any asset), it can be owned and transferred with impunity and without recourse. These may not seem like critical components of intrinsic value, but they are. In fact, they define intrinsic value in the modern era. Related: Ellery Davies co-chairs CRYPSA, produces The Bitcoin Event, edits A Wild Duck and is keynote at this year’s Digital Currency Summit in Johannesburg. # Free, Online Blockchain Courses I develop Bitcoin and Blockchain courses for a profitable venture—And so, I may be shooting myself in the foot with a competitive referral. But, hey!—It’s for a good cause. Jeremy Boris; Zero to 60 in six months Jeremy Boris has a degree in business management. He became interested in blockchains a few months ago. In just the first half of this year, he has leapt beyond the realm of enthusiast. He already casts himself as a blockchain developer. Now, Jeremy seeks to spread the joy (and the potential for career income). Here is his annotated list of free, online blockchain courses, covering all six critical technologies. Everyone needs a starting point. This is a great one! # Wallet Security: Cloud/Exchange Services 3½ years ago, I wrote a Bitcoin wallet safety primer for Naked Security, a newsletter by Sophos, the European antivirus lab. Articles are limited to just 500 hundred words, and so my primer barely conveyed a mindset—It outlined broad steps for protecting a Bitcoin wallet. In retrospect, that article may have been a disservice to digital currency novices. For example, did you know that a mobile text message is not a good form of two-factor authentication? Relying on SMS can get your life savings wiped out. Who knew?! With a tip of the hat to Cody Brown, here is an online wallet security narrative that beats my article by a mile. Actually, it is more of a warning than a tutorial. But, read it closely. Learn from Cody’s misfortune. Practice safe storage. If you glean anything from the article, at least do this: • Install Google Authenticator. Require it for any online account with stored value. If someone hijacks your phone account, they cannot authenticate an exchange or wallet transaction—even with Authenticator. • Many exchanges (like Coinbase) offer a “vault”. Sweep most of your savings into the vault instead of the daily-use wallet. This gives you time to detect a scam or intrusion and to halt withdrawals. What is a vault? In my opinion, it is better than a paper wallet! Like a bank account, it is a wallet administered by a trusted vendor, but with no internet connection and forced access delay. Exchange and cloud users want instant response. They want to purchase things without delay and they want quick settlement of currency exchange. But online wallets come with great risk. They can be emptied in an instant. It is not as difficult to spoof your identity as you may think (Again: Read Cody’s article below!) Some privacy and security advocates insist on taking possession and control of their wallet. They want wealth printed out and tucked under the mattress. Personally, I think this ‘total-control’ methodology yields greater risk than a trusted, audited custodial relationship with constant updates and best practice reviews. In case you want just the basics, here is my original wallet security primer. It won’t give you everything that you need, but it sets a tone for discipline, safety and a healthy dollop of fear. Ellery Davies co-chairs Crypsa & Bitcoin Event, columnist & board member at Lifeboat, editor at WildDuck and will deliver the keynote address at Digital Currency Summit in Johannesburg. # Incentivize Bitcoin Miners After All 21M BTC Are Awarded Individuals who mine Bitcoins needn’t be miners. We call them ‘miners’ because they are awarded BTC as they solve mathematical computations. The competition to unearth these reserve coins also serves a vital purpose. They validate the transactions of Bitcoin users all over the world: buyers, loans & debt settlement, exchange transactions, inter-bank transfers, etc. They are not really miners. They are more accurately engaged in transaction validation or ‘bookkeeping’. There are numerous proposals for how to incentivize miners once all 21 million coins have been mined/awarded in May 2140. Depending upon the network load and the value of each coin, we may need to agree on an alternate incentive earlier than 2140. At the opening of the 2015 MIT Bitcoin Expo, Andreas Antonopolous proposed some validator incentive alternatives. One very novel suggestion was based on game theory and involved competition and status rather than cash payments. I envision an alternative approach—one that also addresses the problem of miners and users having different goals. In an ideal world the locus of users should intersect more fully with the overseers… To achieve this, I have proposed that every wallet be capable of also mining, even if the wallet is simply a smartphone app or part of a cloud account at an exchange service. To get uses participating in validating the transactions of peers, any transaction fee could be waived for anyone who completes 1 validation for each n transactions. (Say one validation for every five or ten transactions). In this manner, everyone pitches in a small amount of resources to maintain a robust network. A small transaction fee would accrue to anyone who does not participate in ‘mining’ at all. That cost will float with supply and demand. Users can duck the fee by simply participating in the validation process, which continues to be based on either proof-of-work, proof-of-stake — or one of the more exotic proof theories that are being proposed now. Ellery Davies co-chairs Crypsa & Bitcoin Event, columnist & board member at Lifeboat, editor at WildDuck and will deliver the keynote address at Digital Currency Summit in Johannesburg. # Bitcoin closes in on (US)$2000; Why it matters

At the beginning of 2016, Bitcoin was fairly steady at $430. Richelle Ross predicted that it would finish the year at$650. She would have been right, if the year had ended in November. During 2016, Bitcoin’s US dollar exchange rose from $433 to$1000. In the past 2 months (March 24~May 20, 2017), Bitcoin has tacked on 114%, rising from $936 to$2000.  [continue below image]…

If this were stock in a corporation, I would recommend liquidating or cutting back on holdings. But the value of Bitcoin is not tied to the future earnings or property value of an organization. In this case, supply demand is fueled—in part—by speculation. Yes, of course. But, it is also fueled by a two-sided network built on the growing base of utilitarian adoption. And not just an adoption fad, but adoption that mirrors the shift in our very understanding of bookkeeping, trust and transparency.

Despite problems of growth, governance and regulation, Bitcoin is more clearly taking its place as the future of money. Even if it never becomes “legal tender” in any country—and is used only as a mechanism of payments and settlement, it is still woefully undervalued. \$2000 is not an end-game. It is a beginning.

Ellery Davies co-chairs Crypsa & The Bitcoin Event. He is a columnist & board member at Lifeboat Foundation,
editor at WildDuck and is delivering the keynote address at the 2017 Digital Currency Summit in Johannesburg.