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Bitcoin Value Part 2 – BTC vs USD

Imagine you are an alien who just landed on Earth. You are introduced to two different systems of money. Which would you choose?

1 – How is the Value supported? What is it “backed” by?

Bitcoin is backed by math, which is a set of provable, irrefutable, uneditable facts that cannot be disputed. When applied to money, these characteristics are quite valuable.

Conventional currency does not have any of these valuable benefits.

The US Dollar and other conventional currencies are not backed by anything. They hold only the empty promise of value. Officially, the US Dollar is backed by “the Full Faith and Credit of the US Government”, which is presently almost $21 Trillion in debt and is actively lowering the value of your savings in order to reduce their debt, thru inflation.

2 – Supply

Bitcoin’s total supply is limited and has already been decided. There will never be more than 21 million coins. These rules will never be changed for Bitcoin. The rules can be changed by a hard fork which creates an entirely new cryptocurrency with different rules, but the new currency will no longer be Bitcoin. The original Bitcoin with a total of only 21 million coins will not be affected and can not be changed.

With a limited supply, Bitcoin is designed to be deflationary, meaning it will gain value as more people adopt it.

The US Dollar is designed to be inflationary, meaning the Fed can create it out of thin air. As they create more, the value diminishes, eroding away at the savings of hard-working, responsible, prudent Americans.

Look at how many USD has been printed in the last 59 years.  And you thought they stopped “quantitative easing” in 2010.  Nope.

If your great great grandparents put 100 USD into a safe deposit box in 1913, it would be worth $4 today.

dollar-devaluation-1913

Inflationary currency encourages spending and discourages saving. Deflationary currencies like Bitcoin encourage saving and discourage spending.

Saving is good, over-spending is bad and debt is not money. I don’t care what any Government or bank says.

3 – Centralized or Decentralized

Bitcoin’s decentralized governance removes power from a single dictator or group who can do whatever they want with your money, without your permission and without even telling you.

All Bitcoin policies are put thru months of rigorous examination, scrutiny and input by hundreds of the world’s smartest people. In order to implement any change, the community must reach 95% hash rate consensus.[1]

This stands in stark contrast to the USD, which has central governance. A private group of people dictate the policies and value (or lack of value) of your US Dollars.

4 – Transparency

Every Bitcoin transaction is open for all to see. At first, this seems like a huge security issue but when we go deeper, we realize that there is nothing to hide because every transaction is mathematically provable. Anyone can check the math and prove that a transaction is valid.

Transactions with conventional currencies are private to people outside the transaction. This is necessary for the banks’ existence because no one can see what they do with money. The system is purposefully set up such that the conventional Money Dictators can see every move the citizens make but the citizens cannot see anything the banks do.

5 – Trust

The Bitcoin network enables transactions of value without the need to establish trust between the parties. Trustworthiness of the parties is irrelevant. Because transactions are provable with math, trust never enters the picture. A transaction either happened or it didn’t. Banks are no longer necessary to “pre-qualify” people as trustworthy.

With conventional transactions, banks determine who can be trusted and who is a bad guy. Since banks are not good judges of character, they are often wrong. They sometimes put bad guys on the good list and good guys on the bad list.

Don’t forget this is people’s access to their money we’re talking about here. If a good guy is wrongly and suddenly cut off from his money and can’t buy healthcare for his mom, tragedy could ensue. Banks don’t care as long as the amount of people who get hurt is below a certain percentage deemed by to be acceptable. The banks don’t lose a thing for their mistakes

6 – Immutability

The Bitcoin ledger is immutable. It cannot be deleted or edited. Transactions are mathematically provable and cannot be disputed. There is no such thing as a fraudulent Bitcoin transaction.

Since banks sometimes put bad guys on the good list, people sometimes get screwed. When they do, the banks are there to issue chargebacks and refunds. These effectively erase fraudulent transactions, changing the ledger after it’s been written. Transactions can be changed and falsified after the fact. Doesn’t sound very secure to me.

7 – Decentralized

Bitcoin is a decentralized, distributed worldwide network, so there is no central point of attack. In effect, the Bitcoin network cannot be compromised. It is the most powerful computer the world has ever seen, and growing fast.

Banks, as we have discussed, offer centralized control of conventional money. The centralized point of control offers one central point of attack, making it far more vulnerable than the decentralized BItcoin network.

Conclusion

You Decide.  To me, the answer is clear.

Bitcoin Value Part 1 – Worldwide Individual Sovereignty and Economic Inclusion

What is Value?

The word is used in reference to a person’s principles and morals.

It is also defined as usefulness, worth, importance.

In this context, we must consider who finds something to be important and why. The more important it is the more value it has.

Why would anyone find Bitcoin important?

Different people and different societies value different things, usually depending on the surrounding conditions in which they live. Different external environments make different things important.

Let’s define 3 separate and distinct categories of people around the world.

1 – Banked

People who live in developed countries generally fit into the category of “Banked”. They have bank accounts which connect them with the financial world. Bank accounts allow them to buy houses, cars, food, vacations, toys and everything Amazon, Alibaba and Overstock have to offer.

Bank accounts allow people to send and receive money, as long as you don’t accidentally fall into one of their many “Evil” filters which automatically cut you off from your money without notice. It’s the Bank’s judgement call to put you on a blacklist or not. Maybe it’s not really your money after all.

2 – Unbanked and Underbanked

Then there are people who are not in the banking system or who have access to minimal banking facilities.

In fact, a full 2 billion+ of the world’s population are unbanked and another roughly 3 billion+ are underbanked. That’s more than half of the world’s 7 billion+ population.

Bitcoin holds the promise of including everyone throughout the world in a worldwide financial system without oversight. We all need to seriously consider the immense power of this.

The possible worldwide societal ramifications of Bitcoin are beyond what we can presently conceive. The transformation of money and worldwide society in the next 20+ years promises to be the most dramatic blossoming Humanity has ever experienced.

3 – Banked and Ruined

These are people who’s governments have destroyed the country’s currency with bad monetary policy usually leading to hyperinflation. When a currency hyper-inflates, it loses all its value because there is too much of it. (Scarcity, limited supply is a prerequisite for value. There will be a maximum number of Bitcoins which will never increase.)

When a currency becomes valueless, merchants will not accept it in return for goods and services. This includes healthcare, food, shelter and other life necessities. I’m not talking about a massage or getting the lawn mowed. Because their currency no longer holds value, they are unable to buy what is necessary for life.

When people lose access to life or death goods and services (thru no fault of their own), they will find another way to get what they need to stay alive. Bitcoin is the only solution these people have. It is a matter of life and death for them. They will find a way to use Bitcoin to save their lives because the option exists and is viable.

This has already happened in Greece, Cypress, Zimbabwe, Argentina, Brazil, Venezuela, Ukraine and others, in the past few years.

Financial Sovereignty

As you can imagine, the definition of Value differs greatly among the people of the different life circumstances above.

Underneath it all, we all (yes, even the Banked) want the same thing. Financial Sovereignty.

We want to be in control of our own money. We want to make our own decisions about our own money without the judgement and control of 3rd party oversight we did not choose, who doesn’t care at all about us as people or our money.

We don’t want to be at the mercy of a few people playing deceitful tricks and blindly experimenting with our money.

We don’t want to be denied access to our money because we gave it to or got it from someone the Banks put on their “not good” list, fully at their discretion, no questions asked.

Economic Inclusion

Economic Inclusion is necessary for Financial Sovereignty. What good is money if you can’t receive it from or send it to anyone?

Money is a classic Network Effect. That means, the more people who use it and the more widely-accepted it becomes, the more value it has.

Bitcoin enables the first worldwide financial network effect. Think Facebook for money. Facebook connects people worldwide. This is a worldwide communication network effect, like the telephone. The more people who adapt the technology, the more valuable it becomes.

Conclusion – Does Bitcoin Have Value? You Decide.

Bitcoin enables every person throughout the world to send and receive value (money) among every other person throughout the world, without any 3rd party oversight or control.

Does Bitcoin have Values? Bitcoin holds the promise of worldwide individual freedom from existing control structures of money. I’d say that’s a high moral standard.

Altcoin for Innovation Not Investment

Preface

Cryptocurrencies are also known as Altcoins, as in, not Bitcoin.

To be clear, Altcoin development is a very good thing.  Intensive Altcoin development is a powerful force of expansion for the world and Humanity.  I can’t wait to see the people and ideas that come of it.  Oh, what this world will look like in 20 short years.

With this article and others, I want you to slow down and consider different angles before you throw your money at cryptocurrencies as an investment.

Bitcoin and Altcoin Design Considerations

Even though total Altcoin investment is presently shrinking and moving into Bitcoin, there is still plenty of room for growth in Altcoins and plenty of fuel for the fire.  While Bitcoin grows because it extremely valuable to everyone throughout the world in many different ways, Cryptocurrencies will swell with speculation.

The real bubble will not be in Bitcoin, but in Cryptocurrencies.  This is where the most crypto money will be lost.  Over the long-term, most cryptocurrency money will be made in Bitcoin.  

Compared to Bitcoin, Altcoins are young, untested and perhaps not as well thought-out.  Many of the design “improvements” they boast over bitcoin are based on short-term benefits with serious long-term vulnerabilities.

For example, Altcoin developers have tried to improve on Bitcoin’s Proof of Work consensus algorithm because solving it consumes a lot of natural resources.

The Proof of Work algorithm is responsible for Bitcoin’s security, so if it is redesigned for a new coin, the security protocol for that new coin is changed.  These are experimental dynamic systems and the slightest tweak or oversight could have dramatic impacts in the future.

Many Altcoins propose an easier Proof of Work, so it’s not as challenging for the Miners, it consumes fewer resources and is more environmentally friendly.  Those stupid Bitcoin Core Developers forgot to consider Bitcoin’s Environmental Impact.  Those heartless coders don’t care about the environment.  They should all try stepping outside some time!

The fact is that stiff competition is the basis of Bitcoin’s security mechanism.  Mining Bitcoin is purposefully designed to consume a lot of resources and have high competition so that the network will be naturally tough and able to withstand concerted attacks by consortiums of nation-states.

Mining competition pitts honest against dishonest and enforces it with rules of consensus by offering a reward proportional to the risk.  As Proof of Work gets easier, the cost of mining a BItcoin goes down and the cost of attacking the network drops.  This means there’s less incentive to play fair and more incentive to cheat.

When it’s easier to mine a coin, there’s less of an incentive to play by the rules and more of an incentive to try and hack the system.  When it’s very hard to mine a coin, it becomes profitable to play by the rules and not profitable to cheat.  That’s the purposeful incentive structure that provides Bitcoin’s security.

With every decision, there is benefit and sacrifice, short and long-term considerations.

It seems like the sacrifice made in this long-term decision is the environment.  Bitcoin does sacrifice the environment in the short term in order to allow long-term benefits which far outweigh the short-term consequences.

What is often not considered is that this extremely competitive environment is designed to reward the most efficient Miner.  Because efficiency is rewarded among strong competition, there is a strong push toward ever-higher Mining efficiency.  When Bitcoin grows into worldwide transactions, the cost-per-transaction will be far less than today’s existing worldwide payment system.

And what about the Altcoins with easier Proof of Work?  Have they come up with alternative designs to compensate for the reduced security?  Always look deeply into a coin’s security mechanisms.  How is security naturally incentivized?

Some versions of the Proof of Stake consensus algorithm are very promising.  With the implementation of the Segwit soft fork (not segwit2x), in effect, Bitcoin becomes Proof of Stake upon Proof of Work.

If a few cryptocurrencies do grow like Bitcoin has or faster, what will happen at scale?  Will the management process fail because billions of dollars are at stake and people are people?   Will they be able to withstand attacks of all kinds, with $100 Billion as the reward?  In what ways could it become centralized?  We don’t want centralization anywhere in a cryptocoin.

Bitcoin Design Process

Another great example of short-term inefficiency for long-term gain is the Bitcoin Core Developer Design Process.

Among other things, the Bitcoin Core Developers are Long-Term Visionaries.  Every small design decision is critical and must be executed flawlessly.  Their design consensus mechanism is purposefully made to be inefficient, difficult, frustrating and long.  From the outside, it looks chaotic and unstructured, but the result is robust, secure code that is flawlessly implemented with long-term vision in mind.

The more centralized the design decision process becomes, the faster it gets and worse decisions are made more often.  Demands from centralized structures are often focused on short-term improvement at the expense of long-term viability and almost always have the Dictators’ interests in mind without regard for other necessary players in the game.

Pre-Investment Considerations

With Altcoins, long-term design consequences must be taken into account and are too often ignored for short-term gain.

I wonder how many altcoin developers have considered why Bitcoin uses a resource-intensive Proof of Work and why the parameters are set as they are.  How many have taken a hard look at the tough decisions that made Bitcoin the robust and resilient system it has proven itself to be, at scale in the real world?

How many developers have approached their Altcoin design with an attitude of, “That’s stupid.  Just do it this way and the problems are solved!” with no thought of why or of future consequences?

How many Cryptocurrency Hedge Fund Managers will take a hard look at the long-term security mechanisms of their underlying Altcoin Assets.  How many explore where the weaknesses are, what might go wrong?  Does your Crypto Hedge Fund discuss what they’re NOT seeing, as Ray Dalio has taught his employees at Bridgewater?

How many Cryptocurrency Individual Investors will throw far more money than they can afford to lose, into empty hype and baseless promises?  Even if the Coin has a great use-case, powerful backers and smart leaders and developers, all with the best intentions, if they come up with their own security mechanism, new, unknown risks manifest, and the system as a whole weakens.  

Altcoin’s weaknesses often won’t become apparent until the Coin grows.  That’s when it really matters, and often, it’s too late.

My advice is to buy and hold Bitcoin, and get your adrenaline rush watching it grow.

Quentin Danziger

Altcoin Exuberance

Preface

Cryptocurrencies are also known as Altcoins, as in, not Bitcoin.

To be clear, Altcoin development is a very good thing.  Intensive Altcoin development is a powerful force of expansion for the world and Humanity.  I can’t wait to see the people and ideas that come of it.  Oh, what this world will look like in 20 short years.

With this article and others, I want you to slow down and consider different angles before you throw your money at cryptocurrencies as an investment.

Bitcoin and Altcoin Design Considerations

Even though total Altcoin investment is presently shrinking and moving into Bitcoin, there is still plenty of room for growth in Altcoins and plenty of fuel for the fire.  While Bitcoin grows because it extremely valuable to everyone throughout the world in many different ways, Cryptocurrencies will swell with speculation.

The real bubble will not be in Bitcoin, but in Cryptocurrencies.  This is where the most crypto money will be lost.  Over the long-term, most cryptocurrency money will be made in Bitcoin.  

Compared to Bitcoin, Altcoins are young, untested and perhaps not as well thought-out.  Many of the design “improvements” they boast over bitcoin are based on short-term benefits with serious long-term vulnerabilities.

For example, Altcoin developers have tried to improve on Bitcoin’s Proof of Work consensus algorithm because solving it consumes a lot of natural resources.

The Proof of Work algorithm is responsible for Bitcoin’s security, so if it is redesigned for a new coin, the security protocol for that new coin is changed.  These are experimental dynamic systems and the slightest tweak or oversight could have dramatic impacts in the future.

Many Altcoins propose an easier Proof of Work, so it’s not as challenging for the Miners, it consumes fewer resources and is more environmentally friendly.  Those stupid Bitcoin Core Developers forgot to consider Bitcoin’s Environmental Impact.  Those heartless coders don’t care about the environment.  They should all try stepping outside some time!

The fact is that stiff competition is the basis of Bitcoin’s security mechanism.  Mining Bitcoin is purposefully designed to consume a lot of resources and have high competition so that the network will be naturally tough and able to withstand concerted attacks by consortiums of nation-states.

Mining competition pitts honest against dishonest and enforces it with rules of consensus by offering a reward proportional to the risk.  As Proof of Work gets easier, the cost of mining a BItcoin goes down and the cost of attacking the network drops.  This means there’s less incentive to play fair and more incentive to cheat.

When it’s easier to mine a coin, there’s less of an incentive to play by the rules and more of an incentive to try and hack the system.  When it’s very hard to mine a coin, it becomes profitable to play by the rules and not profitable to cheat.  That’s the purposeful incentive structure that provides Bitcoin’s security.

With every decision, there is benefit and sacrifice, short and long-term considerations.

It seems like the sacrifice made in this long-term decision is the environment.  Bitcoin does sacrifice the environment in the short term in order to allow long-term benefits which far outweigh the short-term consequences.

What is often not considered is that this extremely competitive environment is designed to reward the most efficient Miner.  Because efficiency is rewarded among strong competition, there is a strong push toward ever-higher Mining efficiency.  When Bitcoin grows into worldwide transactions, the cost-per-transaction will be far less than today’s existing worldwide payment system.

And what about the Altcoins with easier Proof of Work?  Have they come up with alternative designs to compensate for the reduced security?  Always look deeply into a coin’s security mechanisms.  How is security naturally incentivized?

Some versions of the Proof of Stake consensus algorithm are very promising.  With the implementation of the Segwit soft fork (not segwit2x), in effect, Bitcoin becomes Proof of Stake upon Proof of Work.

If a few cryptocurrencies do grow like Bitcoin has or faster, what will happen at scale?  Will the management process fail because billions of dollars are at stake and people are people?   Will they be able to withstand attacks of all kinds, with $100 Billion as the reward?  In what ways could it become centralized?  We don’t want centralization anywhere in a cryptocoin.

Bitcoin Design Process

Another great example of short-term inefficiency for long-term gain is the Bitcoin Core Developer Design Process.

Among other things, the Bitcoin Core Developers are Long-Term Visionaries.  Every small design decision is critical and must be executed flawlessly.  Their design consensus mechanism is purposefully made to be inefficient, difficult, frustrating and long.  From the outside, it looks chaotic and unstructured, but the result is robust, secure code that is flawlessly implemented with long-term vision in mind.

The more centralized the design decision process becomes, the faster it gets and worse decisions are made more often.  Demands from centralized structures are often focused on short-term improvement at the expense of long-term viability and almost always have the Dictators’ interests in mind without regard for other necessary players in the game.

Pre-Investment Considerations

With Altcoins, long-term design consequences must be taken into account and are too often ignored for short-term gain.

I wonder how many altcoin developers have considered why Bitcoin uses a resource-intensive Proof of Work and why the parameters are set as they are.  How many have taken a hard look at the tough decisions that made Bitcoin the robust and resilient system it has proven itself to be, at scale in the real world?

How many developers have approached their Altcoin design with an attitude of, “That’s stupid.  Just do it this way and the problems are solved!” with no thought of why or of future consequences?

How many Cryptocurrency Hedge Fund Managers will take a hard look at the long-term security mechanisms of their underlying Altcoin Assets.  How many explore where the weaknesses are, what might go wrong?  Does your Crypto Hedge Fund discuss what they’re NOT seeing, as Ray Dalio has taught his employees at Bridgewater?

How many Cryptocurrency Individual Investors will throw far more money than they can afford to lose, into empty hype and baseless promises?  Even if the Coin has a great use-case, powerful backers and smart leaders and developers, all with the best intentions, if they come up with their own security mechanism, new, unknown risks manifest, and the system as a whole weakens.  

Altcoin’s weaknesses often won’t become apparent until the Coin grows.  That’s when it really matters, and often, it’s too late.

My advice is to buy and hold Bitcoin, and get your adrenaline rush watching it grow.

Quentin Danziger