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.

Should we ‘out’ Bitcoin creator, Satoshi?

Everyone likes a good mystery. After all, who isn’t fascinated with Sherlock Holmes or the Hardy Boys? The thirst to explore a mystery led us to the New World, to the ocean depths and into space.

One of the great mysteries of the past decade is the identity of Satoshi Nakamoto, the inventor of Bitcoin and the blockchain. Some have even stepped forward in an effort to usurp his identity for fame, infamy or fortune. But in this case, we have a mystery in which the subject does not wish to be fingered. He prefers anonymity.

This raises an interesting question. What could be achieved by discovering or revealing the identity of the illusive Satoshi Nakamoto?…

The blockchain and Bitcoin present radically transformative methodologies with far ranging, beneficial impact on business, transparency and social order.

How so? — The blockchain demonstrates that we can crowd-source trust, while Bitcoin is much more than a payment mechanism or even a reserve currency. It decouples governments from monetary policy. Ultimately, this will benefit consumers, businesses and even the governments that lose that control.

Why Has Satoshi Remained Anonymous?

I believe that Satoshi remains anonymous, because his identity, history, interests and politics would be a distraction to the fundamental gift that his research has bestowed. The world is still grappling with the challenge of education, adoption, scaling, governance, regulation and volatility.

Some people are still skeptical of Bitcoin’s potential or they fail to accept that it carries intrinsic value (far more than fiat currency, despite the absence of a redemption guaranty). Additionally, we are still witnessing hacks, failing exchanges and ICO scams. Ignorance is rampant. Some individuals wonder if Satoshi is an anarchist—or if his invention is criminal. (Of course, it is not!).

Outing him now is pointless. He is a bright inventor, but he is not the story. The concepts and coin that he gave us are still in their infancy. Our focus now must be to understand, scale and smooth out the kinks, so that adoption and utility can serve mankind.

Related Ruminations:


Ellery Davies co-chairs CRYPSA, publishes A Wild Duck, hosts the New York Bitcoin Event and 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.

BCH: Did I throw away $$$$? Perhaps…

Yesterday was D-Day in the Bitcoin world: On Tuesday, Aug 1st 2017, Bitcoin Cash (BCH) forked off of Bitcoin (BTC). For anyone with control over their wallet and private keys, they now have an equal amount of BTC and BCH.

I have a Bitcoin wallet. Yet, I don’t have any new Bitcoin Cash—and I have no one to blame but myself. Will I ever get the BCH associated with my pre-fork coins? I think that it is likely, though certainly not assured. If not, it will still be my fault. After all, I had fair warning from the company that I trust as custodian of my assets.

A Cryptocurrency Mantra:
“Woe be the person who trusts decentralized cash to a custodian”

I trust Coinbase for good reason. I left my BTC in my Coinbase wallet and vault throughout the fork. Let me tell you how I view the risks of failing to remove my coins before August 1…

  1. Coinbase was clear in warning that BTC withdrawals would be frozen before and after a fork. No problem…I had no immediate need to access my coins.

2. Coinbase warned they had no plan to support BCH—not even for withdrawal after a fork.

I accepted this 2nd warning, even though their reasoning and motives were terribly weak. But, today, I feel very sore. I need a morning after pill! Bitcoin still trades at the level of the past week—about $2700 US/BTC. But my non-existent BCH holdings have significant value! It was briefly as high as $750 per coin, and is now trading at $475. This means that even if I have no desire to save or spend the new coin, I no longer have the option to liquidate my forked asset. I lost a slam-dunk opportunity to capture 17½%.

We’re not talking about a theoretical gain or a gain that assumes liquidation at a momentary spike. We’re talking about right now—a missed opportunity to pocket thousands of dollars!

Am I angry? Not really. I am disappointed in my lack of initiative, but I have only myself to blame. For the record, I don’t believe that I have a reasonable legal claim against Coinbase. After all, they warned me! But, I hope that they will give me my forked coins—eventually. They have already acknowledged to conspiracy theorists that they will not keep the forked BCH, in the event that they create a conversion mechanism. In that case, they will allow withdrawal by the owner of the associated BTC. Now that they see dramatic fractional value, how could they not complete the fork?!

Where Does This Leave Me?

I’m not poorer today than I was yesterday, and I am surprised to find that I have not lost value in original Bitcoin. But, I missed a zero-risk opportunity to gain 17½% overnight. It was staring me in the face and I passed it up. At least I draw comfort in my confidence that Coinbase will complete the fork. Please, Coinbase: Complete the fork!


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.

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.

Blockchain can dramatically reduce pollution, traffic jams

The World Economic Forum has posted an article that hints at something that I have also suggested. (I am not taking credit. Others have suggested the idea too…But advancing tech and credible, continued visibility helps the idea to be taken seriously!)

I am not referring to purchasing and retiring carbon credits. I like that idea too. But here is an idea that can enable fleets of autonomous, shared, electric vehicles. Benefits to individuals and to society are numerous. And the blockchain makes it possible early in the next decade. It is not science fiction.

The future is just around the corner. Non-coin applications of the blockchain will support great things. Goodbye car ownership. Hello clean air! The future of personal transportation is closer than you think.

Read about it at the World Economic Forum.


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 ETF Buzz Offers Short Term Opportunity

If you follow Bitcoin at all, then you know that its value is spiking. It has already surpassed a massive spike on Thanksgiving night 2013, and this weekend, a single Bitcoin surpassed the cost of an ounce of gold.                             [continue below image]

Like any commodity, the exchange value of Bitcoin is driven by supply and demand. But, unlike most commodities, including the US Dollar, the Euro or even gold, the eventual supply is capped. It is a mathematical certainty. Yet, demand is affected by many factors: Adoption as a payment instrument, early signs that it is being considered as a reserve currency, fascination by Geeks and early adopters and its use as a preferred tool by some criminals.

But chief among reasons for acquiring Bitcoin is speculation. Whether it is buy-and-hold or day trading, speculators still outnumber those who use Bitcoin to settle debts or to buy and sell other products and services. (Earlier this week, I argued that speculation is responsible for 85% of demand and of transactions—but that’s another story).

It’s a bit ironic that speculation—in the early days of a new market—retards organic adoption. It contributes to uncertainty and volatility, and it reduces the fraction available to the markets that make it both useful and liquid. Yet, in free markets, speculation is a necessary and critical antecedent to adoption.

This week, short term speculators have an unusually keen opportunity to profit, especially if they know how to buy a ‘put’ or sell a ‘call’ (i.e. to leverage a bet for or against the direction of Bitcoin, without actually acquiring any). For example, you can bet that an exchange-traded stock will fall, because it has an options market. But it’s not as easy to bet against commodities that lack a futures or options market.

I am not going to give advice in this article. I am not a licensed investment professional and although I am bullish on long term, organic adoption of Bitcoin, I really don’t have an opinion on the current news or the short term prospects for a pull back. But, if you have an opinion on a current news event, then there is an immediate opportunity for you to make (or lose) a significantly leveraged sum in the next few days…

SEC and ETFs  (Alphabet soup of investment banks)

Next weekend, on Saturday March 11, the United States Securities and Exchange Commission (SEC) will approve or deny an application for the first regulated, recognized and significantly backed Bitcoin Exchange Traded Fund (ETF). Why is this significant? Because most investments are not hand picked by individual investors. Most investors choose the level of risk or diversification that seems reasonable for their life stage and then they leave the decisions to a formula, a market sector basket, or a fund manager. That is, they invest or park their money in a fund rather than betting on Space-X, PayPal or the local electric company.                             [continue below image]

If approved, an ETF potentially adds massive new demand for a commodity, by offering a financial instrument than can be subscribed by the vast fraction of funds, investors, pensioners and speculators who prefer to leave asset management to an organization, outside broker or formula.

The first ETF application is created and backed by the Winkelvoss twins. They were Olympic rowers, but found fame & fortune by contracting Marc Zuckerberg to create an early platform for Facebook. If their application is approved, a dozen more investment banks, brokers and hedge funds are standing by to jump in with both feet.

This morning, Cointelegraph put the odds that the ETF will be approved at 50%. Some analysts place the chances even higher. But consider that Bitcoin has already spiked dramatically in the past few weeks. The excitement is already reflected in the price. So, where is the opportunity?

The opportunity, as with any speculative decision, is in the dissonance between your research and hunch compared with the overall market expectation reflected in the current price. So, for example, if Bitcoin is accepted as the basis for an ETF (and if it continues to grow in more fundamental adoption), the current price is actually remarkably low. Under these assumptions, it hasn’t even begun its period of rapid ascent. Perhaps more obviously (and even more short-term), if you believe that an ETF will be blocked by regulators, then the recent rise is likely to be reversed quickly, at least in the minutes after the March 11 decision is announced.

So how can you profit from your belief that a commodity will drop in value? I leave that to your personal investment knowledge and research or your financial advisor. My purpose is not to advise, nor even to teach about puts and calls. It is to point out that a few people will win or lose a lot of real money this coming weekend—at least on paper. And it all hinges on whether they can correctly predict the outcome of a regulatory decision process.

Again, Bitcoin is a very limited commodity, There are only 15.2 million coins today, and there will never be more than 21 million coins. This does not present an obstacle to adoption, because the coins can be sliced smaller and smaller as needed. In a noteworthy demonstration of ‘good deflation’, there will always be enough units for everyone—even if the entire world adopts it for every transaction under the sun.


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.

What Fraction of Bitcoin Value is Driven by Speculators?

At Quora, I occasionally play, “Ask the expert”. Several hundred of my Quora answers are linked at top right on this page. Today, I was asked “How much of Bitcoin’s value is driven by speculation”. This is my answer…


This is a great question! While the value of any commodity is determined by supply and demand, speculation is one component of demand. Another is the unique utility value inherent in a product or process. This is sometimes called ‘intrinsic value’.

It’s ironic that when a high fraction of value is driven by speculation, short-term value becomes volatile and long-term value becomes less certain—and less likely to produce returns for those same speculators.

Editor’s Note: In the past few weeks, a significant spike in Bitcoin’s value and trading volume relates to a pending regulatory decision expected at the end of next week. This activity is certainly driven by speculation. But for this article, I am considering periods in which the demands of individual events are less clear.

The value of Bitcoin is influenced by:

  • Day traders who buy and churn
  • Long-term speculators who buy and hold. This includes me.
  • Criminals who hope that cryptocurrency transactions can be more easily hidden than government backed currencies
  • Early adopters who use Bitcoin as a payment instrument or to send money
  • Vendors who accept the coin in exchange for products and services
  • Vendors who retain a fraction of revenue in Bitcoin (rather than exchanging to Fiat). To avoid a round trip, they seek to purchase materials, pay staff or settle debts with the Bitcoin they earned.

Here’s the rub: Bitcoin will not become a store of value unto itself (i.e. a currency), and it will not gain a significant fraction of the payment instrument market until the transaction volume of the first to user categories in the above list are overtaken by the the ones further down. Likewise, Bitcoin will not enter its biggest growth spurt until the last two items swamps the others as the largest motive for acceptance and use.

Put another way: Long term value must ultimately be driven by organic adoption from actual users (people who buy and spend Bitcoin on other things).

In another article, I expand on the sequence of events that must take place before Bitcoin grows into its potential. But make no mistake. These things will happen. In tribute to the brilliance of Satoshi, the dominoes are already falling.

In response to the question, I estimate that at the beginning of 2017, 85% of Bitcoin value is still driven by speculators. I have not analyzed wallet holding periods compared against the addresses of known vendors. Furthermore, it would be difficult to understand the relationship between the number of speculative transactions and the overall effect on value. Therefore, my figure is more of a WAG than an calculated estimate. But it’s an educated WAG.

The fraction of speculative transactions will drop significantly in the coming months—even as late speculators jump on board. That’s because uptake from consumers and businesses is already taking off. The series of reactions that lead toward ubiquitous, utilitarian applications has begun. Bitcoin’s value will ultimately be driven by use as a payment instrument and in commerce.

Because it is a pure supply-demand instrument, Bitcoin will eventually be recognized as currency itself. That is, it needn’t be backed by precious metal, pegged convertibility or a redemption promise. When that happens, you will no longer ask about Bitcoin’s value. That would be a circular question, since its value will be intrinsic. Instead, you will wonder about the value of the US dollar, the Euro and the Yen.

As a growing fraction of groceries, gasoline and computers that you buy are quoted in BTC, you will begin to think of it as a rock, rather than a moving target. One day in the future, there will be a sudden spike or drop in the exchange rate with your national currency. At that time, you won’t ask “What happened to Bitcoin today? Why did it rise in value by 5% this morning?” Instead, you will wonder “What happened to the US dollar today? Why did it drop in value by 5%?

MIT: 3 Big Blockchain Initiatives

MIT has never stood stand still in the presence of change and opportunity. Their Media Lab Currency Initiative is at the forefront of Blockchain and Bitcoin research. With the fracture of the founding core team, MIT stands to become the universal hub for research and development.

The initiative has a team of 22 people and—currently—seven research projects. It nurtures three startups that use cryptocurrency and blockchain in a variety of novel ways. Blockchain research now sits alongside transparent robots that eat real-world fish, solar nebula research, and other imaginative, futuristic projects in progress at the university.

The initiative has already funded the work of bitcoin protocol developers and has supported research, going far beyond bitcoin—even partnering with Ripple Labs and developing enterprise data projects.

Now, the MIT Media Lab Digital Currency Initiative is working on 3 big Blockchain ideas:

  1. Shattering online ‘echo chambers’
  2. Improving blockchain privacy
  3. Building central bank currencies

The DCI is led by former White House advisor and research director Neha Narula. Read about the three BIG blockchain projects at CoinDesk

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