Tuesday, 29 July 2014

BitCoin: Like Father Like Son


Bitcoin symbol
In Bitcoin We Trust
Yes, it's a very odd concept when I first heard it. But the more I studied and analysed it, the more fascinated I got. This is the Bitcoin as I see it.


 Birth 
Like the Internet, the Bitcoin was born free. They're both not owned by any government or company. They're decentralised.

Maybe it was simply a coincidence, the BTC (original currency code for Bitcoin. Now XBT) came to this world during early 2009 soon after the Fed announced QE1 (quantitative Easing 1) on Dec 2008 to resuscitate the fatally wounded U.S. economy. As the QE progressed, the gold price rose considerably to all time high.

Gold feeds on fear, whether it's economic or political uncertainty (or both). The economic uncertainty and the loss of faith in fiat currency started in 2008 spurred many investors to look for alternative store of value. Gold was the traditional alternative. When Bitcoin arrived on the scene just the opportune moment, it was the alternative to gold, for those who believe that this revolutionised digital currency is a form of store of value.

Gold price chart from 2009 to 2014
Gold price from 2009 to 2014
Source: Kitco

Gold started to fall at the all-time peak in late 2011 as the fear subsided. As stock market rose from 2011, gold was on a steady decline. Money flows between asset classes. From 2008 to 2011, money flew out of stock and into gold asset. From 2011 to 2014, that flow reversed direction because stocks provided higher price rise due to QEs while gold had a hard run, and needed a rest to catch its breath. Also, Indian government has been trying to make it hard for Indian to buy gold lately.

Bitcoin was on a meteoric rise since its birth, even during the period when gold fell.

BTC - like gold - was nourished by the uncertainty and instability from 2008 to 2011. If it was born in, say 2012, its birth may not as welcoming or promising or as successful. One could only speculate. It was a blessed birth.


 The Toddler Years 
During the early 1990s, surfing the net was synonymous with looking at porn. That's why all that beeping and hissing modem sounds tend to be heard at night. That was not much else on the Net in those early days. In fact, child porn started literally one month after the official opening of the Web in Feb 1993. The online adult entertainment industry - made up some 80+% of the Internet - helped to bolster the Internet's promising future (throughout this article, I'll ignore the technical differences, and use the terms "Internet", "Web" and "Net" interchangeably. The context should make it clear what I actually refer to).

This is the 2nd likeness that Bitcoin shares with its daddy the Internet - its unsavoury beginning. The Silk Road is doing for Bitcoin what the porn industry (illegal or otherwise) had done for the Internet. These less than wholesome industries helped to fuel the growth of the Internet and Bitcoin.

Silk Road websites
Silk Road website and its contraband trading
Source: wikipedia

The online porn industry have grown many folds today alongside the growth of the Internet. The adult entertainment industry no doubt will continue to expand, but its slice of the Internet pie will continue to shrink as every conceivable area of interests are joining the virtual world with social media and video gaming leading the charge (for now. Something else will come along).

The point is, the Internet haven't found its many higher callings in those early days. That came later when it's growing up and take up many more interests. One could certain that will also be the case for Bitcoin where this illicit use will continue and even expand, but it makes up smaller and smaller percentage of the whole Bitcoin pie.

You could say the Internet were paid by porn, especially during the nascent period of the Internet. Just a related side note, many of the adoption of innovations of media technology were also driven by porn: Polaroids (you don't want your naked photos developed by the photo labs), digital cameras (you're the director), video chats (need I explain?), etc.

Where would media technology be without porn? For one thing, its growth would be much slower.


U.S. law enforcement agencies website seizure notice
U.S. law enforcement agencies website seizure notice
source: wikipedia

BTC didn't give the Silk Road operators diplomatic immunity, and they have been stamped out by law enforcing agencies around the world. These operators had been doing vice trades before the invention of the Internet. When Internet came around, they made use of it. When Bitcoin came around, they didn't play favourites.

Bitcoin critics would like to discredit Bitcoin because of its use in Silk Road. The Silk Road traders probably also use Swiss Bank, mobile phones, or any other tools to do their deeds.  They're very fair that way.

Don't blame the tools; blame the people. One shouldn't throw the baby out with the dirty water. (I have more of these snappy sayings where that come from).

Silk Road operators also helped to prove the concept that Bitcoin works well. It's besides the point if it's tested by criminals. In fact, Open Bazaar Project was the above ground market place that was grown out of the Silk Road concept.

Bitcoin detractors dismiss Bitcoin because they can't see any other functions of BTC beyond Silk Road, which in turn because this digital currency is still in its infancy with its many potentials waiting to be discovered or realised.

It's not where something had been, but where it's going that matters.


 Adolescence 
This period of growing is always the most difficult when it starts to engage its critics. During the toddler years, Bitcoin would be too small to be under the radar of public interests. When its market value reached the psychological 1 billion dollars mark, it attracts some unwanted attention.

[ Growing Pains ]
Grown ups would love to give the adolescence lectures of their abundant wisdom. Many of these growing pains came from critics who doubted Bitcoin's legitimacy of its existence.

Some of these critics, whom we consider financial experts, appeared on CNBC as guests to denounce - ok ridicule - Bitcoin. Maybe it wasn't done out of contempt, but fear. Let me explain.

Since the Fed has such a cosy relationship with Wall Street, and came to bail out every mistakes from the LTCM fiasco in 1998 to the wholesale bailout of Wall Street in 2008. So if something like the Bitcoin was created outside Wall Street, and it's a currency that meant to take power away from the Fed, Wall Street folks wouldn't take it too kindly. If Bitcoin isn't a friend of the Fed, then the Wall Street suits would see it as a threat.




Let me try to defend some of the labels these Wall Street types slapped onto Bitcoin.

Ponzi Scheme
This is one of the most popular name that Bitcoin being called. The CNBC guests were quick to give it that label. This knee-jerk reaction is understandable considering the recent financial events that took place just before this broadcast. Imagine someone who was one of your own on Wall Street. Someone, who is arguably - quite respectable - turned out to be the ring leader of a Ponzi scheme circus, ripping off millions from his clients that included big name Hollywood celebrities.

Bernie Madoff
Bernie Madoff
Madoff made off with millions right in the heart of Wall Street.  He has an established name, and only people with influence and connection could join his Ponzi scheme (which was a brilliant move on the part of Madoff).

For the Wall Street people, once bitten, twice shy. Even if the experience is second hand.

On the other hand, this Bitcoin thing was born outside Wall Street, and so that alone would warrant suspicion from the Wall Street suits. The whole financial world is losing trust, including those in it. I detect some resentment in their ridicule of Bitcoin. We can hardly blame them.

In a Ponzi or pyramid scheme, you need a big cheese (or big enchilada, depending on your taste), but we don't have a person in such position in Bitcoin in any way, shape or form.

Bitcoin just doesn't have a pyramid structure. The selling point of Bitcoin is decentralisation and transparency. The Ponzi scheme has neither. Decentralisation suggests there're no head poncho that is the defining feature of a Ponzi scheme. Madoff scheme worked - before it was busted - because its reports that it sent to its clients are cooked up by Madoff. It wouldn't have worked if there was more transparency.

I think it looks more like a square, or a ticket line for a rock concert, or even a dodecahedron. But it ain't a pyramid from any angle I look at it. People are seeing things.

In short, if it's a scam of some kind, why hasn't the U.S. government stepped in and shut it down after nearly 5 years? Unlike Madoff's private operations, Bitcoin is an open system where governments around the world have full knowledge about it.

The governments had crackdown on the illegal Silk Road Operators who used BTC, but they didn't outlaw Bitcoin. The question if Bitcoin is a scam should be already settled by now (although I still hear such voices). I'm very interested to know if these CNBC guests still hold these views today. Scepticism is healthy, but they should do a bit more homework first.


Tulip Mania
Although not categorically correct, this is a better characterisation of Bitcoin than a Ponzi scheme. Tulip mania and Ponzi scheme are completely different things, and yet according to some, Bitcoin is both. Speculator of the tulip mania bought tulips with the understanding that it had no value other than its potential rise during the craze.

Tulip Price Index during the tulip mania
Tulip Price Index during the tulip mania
Source: wikipedia

At the very least, Bitcoin is a revolutionised decentralised, p2p payment system. And whatever else values Bitcoin supporters give it is on top of this basic service. You can have something that has value but still could be very overvalued.

The CNBC guests mentioned the dotcom bubble of 1999. Many internet related companies were very overvalued during the dotcom bubble. Microsoft is an example of this in bubble state. Microsoft's stock price valued a all-time high near the end of 1999. When the bubble burst, its share price collapsed, had never recovered since.

Mircosoft price chart from 1999 to 2014
Mircosoft price chart from 1999 to 2014
Source: Yahoo Finance
(Click to enlarge)

On the other hand, Amazon also participated in the bubble of 1999. Its stock price also rocketed to unrealistic level. Without exception, Amazon share price collapsed like the rest of companies in the dotcom sector. But its stock price today dwarfed the stock price during the bubble of 1999. But nobody call Amazon a bubble today.

Amazon price chart from 1999 to 2014
Source: Yahoo finance

Internet companies aren't tulips. Tulip produces no economic outputs, but these companies do.

There's nothing wrong with Microsoft or Amazon, but they still could reach a bubble state. On hindsight, Microsoft's price in 1999 was a bubble, but Amazon, not so much. And Amazon wasn't the only one. In fact, Apple was even a better example. Its price during 1999 is only a little blip, much like the peak of BTC in 2010.

Why is it that Microsoft stock price hadn't recovered from its peak in 1999 while Amazon left it in the dust?

This answer is very complex to answer. One simple answer would be that Microsoft was a far more mature company than Amazon in 1999. Microsoft's market sector is also more mature than Amazon's. Hence Amazon has far more growth than Microsoft as a newer company in a new market. Another thing is that Microsoft isn't strictly a dotcom company, but it has products and services that benefit from the dotcom growth.

Many IT or dotcom companies survived the 1999 bubble bust went on making impact on the world.

Bitcoin maybe going through such a phrase. Or maybe simply the very early stage of a bubble. Nobody knows. Not yet.

If we compare Bitcoin to the 1999 tech bubble, it would be more like Amazon than Microsoft during the 1999 bubble because of its infancy.

Remember too that these bubbles are recurring, and is called cycles. Gold has many such cycles in the past. Bitcoin is no exception, and there were already three in the past.

While tulips are similar to gold or Bitcoin in that they don't have any economic outputs like companies, but they don't last long. That makes them have no economic value.

I only mentioned the dotcom bubble because of the CNBC video. Gold would be a better comparison with Bitcoin than dotcom companies as both the prices of Bitcoin and gold are valued quite different from companies. The prices of companies are valued based on DCF (discounted cash flow). Since neither Bitcoin nor gold generates income streaming or cash flow, they priced at whatever the market decides they should be worth. Their prices boil down to the only force that any (unbiased) market obeys: supply and demand.

If tomorrow, something terrible happens to Bitcoin, its demand will reduce to zero, and so its price will follow. If more and more people warm up to Bitcoin in the future, its demand will increase, and so will its price.

Looking at the gold chart over many decades, they have many "bubbles" or price spikes, which then collapsed. But the subsequent "bubbles" would usually dwarf its previous "bubbles" and making them look like blips. Not dissimilar to the Bitcoin situation, except gold covers a longer time span. But this could simply because BTC is still in its early days in addition to the perfect timing of the arrival of Bitcoin.



Bitcoin price chart from 2009 to 1014
Bitcoin price chart from 2009 to 1014. It price had gone up more than 10,000%
Source: Mt. Gox

Just like gold, BTC's price will be decided by the market. Because of the perishable nature of tulips, it couldn't be used as a store of value. One of the CNBC guest, Michael Pinto, said that Bitcoin shouldn't be used as a currency because it could be destroyed (technically the term is 'durable', which is 1 of the 4 must-have property of a currency, but I'm not going to be pedantic). Actually banknotes could easily be destroyed, but a Bitcoin couldn't be destroyed. You can't destroy virtual reality.

Bitcoin could be hacked and stolen, so could banknotes be robbed, burgled or pickpocketted. You can lose your Bitcoin wallet, so can you lose your leather wallet, and far more likely because you carry it out in public everyday (and a Bitcoin wallet costs you nothing, and your leather wallet could be the most expensive thing in your wallet. Sentimental value is priceless). If you keep your Bitcoin wallet offline, you remove the possibility of your wallet being hacked. Could you be tricked by buying Bitcoin? Probably just as much chance as buying fake (less than pure) gold or silver from dodgy sellers. As far as the measure of durability and safety, Bitcoin is superior to banknotes or gold.


Mt. Gox
Mt. Gox's bankruptcy was one of the many trials and tribulations that Bitcoin had to face as it was growing up. It proved to have passed the test as the crypto-currency soldiered on after this temporary setback.

Mt. Gox exchange website home page
Mt. Gox exchange website home page with an ironic catchline of
"Trade with Confidence on the World's largest Bitcoin exchange" in hindsight


Pie chart of Bitcoin volume distribution by currencies
Pie chart of Bitcoin volume distribution by currencies (July 2014)
Source: bitcoinaverage.com
While its impact was considerably on the Bitcoin community as a whole, one specific sector of it felt this fiasco the keenest.

Since Mt. Gox was Tokyo based and the largest Bitcoin exchange at one time, it would be logical to think that if the JPY currency traded if not the heaviest, it would be at least 2nd or 3rd heaviest currency after USD.

If we look at the currency volume distribution chart for today, we can see that the BTC trading volume in JPY ranks 11th (even less than NZD).

The Mt. Gox naturally made Japanese shy away from trading BTC (at least for now. Time heals all wounds).

Chinese, on the other hand, are big savers but have limited outlets for them to put their savings. Property is in a bubble itself and unaffordable, and stock market aren't for the average folks. So they turn to gold. And many believe gold and Bitcoin serves the same function of gold as a store of value, rightly or wrongly.

If the Chinese could affect the global gold prices, they certainly can do so with the much tinier Bitcoin market.


Money Laundering
This is another thing Bitcoin is quite often being accused of - being used as a tool of money laundering. This digital currency has a somewhat contradictory features. It has the quality of transparency and anonymity. So the result is a compromise of the two.

This mixed outcome in Bitcoin transaction being pseudo-anonymous. Its anonymity of transaction is therefore somewhat between credit card and paper currency. So why would money launderers prefer this virtual currency over the more anonymous paper currency for money laundering?

Furthermore, the laundering of paper currency had been well established and money launderers are very experienced at it. They may have used BTC for money laundering when it was new and they were one step ahead of the law enforcement. Once this is understood by both sides, using it as money laundering isn't such a good idea.

Once again, don't throw the baby Bitcoin out with the laundry water.


Volatility
Most of the issues I outlined above - money laundering, Ponzi scheme, Silk Road - are not real issues. They're image or perception issues. These things have nothing to do with BTC, Unfortunately, perception is sometimes as important - if not more important - than reality.

Volatility, on the other hand, is a real issue for Bitcoin. Low liquidity causes large swings in stock prices for small companies. Same thing happens to small market like Bitcoin. This is especially when the Bitcoin markets are fragmented with many exchanges around the world. This gives rise to low liquidity issue at any given exchange.

A baby can double its height in 1 or 2 years; a toddler can double its height in 5 or 6 years; an adolescence's growth spurt is slower still.

This volatility should reduce as BTC market grows, and more players like merchants enter the market. It's a bit of a catch-22 situation. The large volatility would discourage merchants in participating in the world of crypto-currency. Still, in time, the volatility will likely to decrease with more Bitcoins enter the system and the Bitcoin participants are expanding.

Contrary to popular belief, speculators don't contribute to market's wild swings. In fact, speculators increase market liquidity, and therefore lower market volatility. Speculators are like the grease for the Bitcoin machine. Without them, Bitcoin is still clunking along. With them, Bitcoin should run more smoothly.

While I don't know it for a fact, I don't rule out some manipulation of BTC market that could also further lead to large volatility. Once again, manipulation of the Bitcoin will become increasingly risky for manipulators as BTC rises in values. As Bitcoin market had grown exponentially in the last few years, as should the risk of manipulation grows exponentially. This is , once again, where regulators can be instrumental.

Last but not least, in the early days when there're few miners, and the mining operations hadn't been perfected, there were a much higher chance of Bitcoins at any time not being supplied.  This led to a temporary supply-demand imbalance. Another scenario of supply-demand imbalance is that because in the early days, the Bitcoins didn't worth as much, they weren't converted to fiat quickly via selling. Remember that many early miners definitely weren't do it for money because there was no money in BTC market when each Bitcoin is measured in fiat cents.

Having said all these, volatility has been relatively calm since 2013 when we didn't see any sharp spike like those in previous years. This is good for Bitcoins. Of course, it's still unstable relative to fiat currencies. As I said, still early days.


Fake Money
I understand it when some call Bitcoin fake money, toy money or Monopoly money (best name). Because up until now, Bitcoin holders have very limited places to obtain goods or services for their Bitcoins.

Bitcoin Accepted Here Sign


While Bitcoin is called and intended to work like a currency, because of its limited acceptance in the business world right now, most Bitcoin participants treat it more like gold than a currency. Much like gold, Bitcoins are bought in the hope of its rising price in the future because of its limited supply, and its price is being determined by nothing but market participants.

This is why Bitcoin are so intriguing for many academics and economists who studying it. It's unlike anything that came before it, and yet it has qualities of many things that came before it. It could be seen as a global digital currency, store of value, payment system, and whatever else we discover in the future.

Bitcoin is considered by some as fake money because it has no intrinsic value. Its value is based on faith, which is no different from the fiat currency we're using ever since the gold backing was removed. Another thing that make paper currency appears to be more real than Bitcoin is the actual tangible paper where the currency are printed on. We can solve this psychological problem by printing Bitcoin paper money. But that's going backwards, not forwards. I guess that's the crux of the matter, Bitcoin is too dissimilar to anything that came before it, and it will take some getting use to. There has to be a shift in the mindset before it could be accepted widely.


Monopoly money
Monopoly money

Having said that. Today 97% of transactions in U.S.A are done digitally. Nowadays, who actually receives pay packets? Money are transferred from one bank account to another, whether we do so directly or using our credit cards or cheques. So the idea of using a digital currency from using electronic money today (not tomorrow) isn't really a quantum leap. In fact, electronic money has been around for awhile, and is looking like old money by now.

Perhaps the most important thing that people attach the paper currency with is that they're endorsed by their governments as legal tender. No such status exists for Bitcoins, which makes it being viewed more like gold than currency. I think this is probably the most significant criteria if Bitcoin is to be adopted almost instantly and universally.

In a way, such move would contradict the spirit of a global currency that it's independent of any government. The only institution that could endorse Bitcoin to be a global currency would be some international institution like UN or World Bank. I can't see this going to happen. At least, not in the foreseeable future.


Gold
One can't really talk about Bitcoin - or fiat currency for that matter - without mentioning gold because of the similarities they share. It had been mentioned a few times in this article.

Gold had been used as the medium of exchange for many cultures around the world before the paper banknotes became the norm. So when there's a widespread loss of faith in the fiat currency, people naturally turn to gold.

Gold bars
Gold bars
Source: wikipedia

Several Western currencies were used to be backed by gold. The gold standard were taken off one by one (usually so they could print money to pay for wars). Depreciating currency becomes the norm because of inflating supply. People today buy gold to hedge the currency devaluation. In other words, the governments divorced their currency from gold, and their citizens who buy gold are trying to re-marry the couple, in a sense.

Some are talking about bringing back gold as legal tender. Some states in the U.S. already have done so (Utah, Texas, et al). So Americans can't blame foreigners for losing confidence in their currencies. U.S. States lose faith in their own currency.

How practical is such a move (not specifically refers to those states)? Are we going to lug a few a gold bars around to pay for cars, holidays, houses, etc? Well, one can keep the gold in the gold vaults and pay by electronic mean. You may actually never see the actual gold bars. You'll get some certificates to say that you own them, and monthly statements showing the transactions. How much different is physical gold in this way differs from Bitcoin if one never lays their hands on one?


Dollar Standard
Increasingly, the talk of the demise of the American Empire due to its economic and financial ills in the system is getting louder (if you prefer the term "superpower" over "empire", I'm not going to be pedantic about it. To me, "superpower" is just a modern term for (or modern form of) the traditional "empire"). One of those delivered this prophesy of doom is the award winning documentary entitled Four Horsemen. Others who joined in the chorus including Mike Maloney, who runs the Hidden Secrets of Money website, pointed out the demise of empires throughout the ages from Greco-Roman Empires to the British Empire were all accompanied by the demise of their fiat currencies. Jim Rogers and George Soros also believe the collapse of the US currency (as a reserve currency or not) is inevitable. Well, nothing last forever.

This thinking also helped to spur the growth of Bitcoin.

Take a look at the global currencies since the Portuguese Empire, which marked the start of modern Western domination of the world.

Historical chart of the ages of global reserve currencies since 1450
All parties must eventually end
(Source: fxempire.com)

This chart simply suggests USD as a global reserve currency is approaching its historical used-by date. Funny enough, the longevity of these modern Western empires - for one reason or another - last about a century. The demise of the empires logically follow the deaths of their global reserve currency status because this status allow the empires in question undue power and influence in the economic (and thus political) sphere. More money more guns.

Of course, the conclusion that the end of Dollar Standard isn't something that's based solely on history, but it's based on what's happening to the US currency as a reserve status, right now.

Mike Malony made the following episode, which appropriately called the Death of the Dollar showing how nations around the world are holding USD as their monetary reserves in a declining trend. The BRIC countries, especially, are doing this more keenly.




While Maloney is a goldbug, he was more positive about Bitcoin than previously as evident from this video.




They prophesied the dying fate of fiat currency and a return to gold. What if we have a 21st century alternative? Gold was always considered as an alternative when fiat currency is bellied up because there was no 2nd alternative, until now. Okay, there're other precious metal alternatives. But when I say gold throughout this article, I mean precious metals - gold, silver or platinum. I actually like silver more than gold as a hedge against currency devaluation (or collapse in worst case scenario) because silver is more undervalued than gold.

Just a comment regarding to what Maloney said in the video, "...Bitcoin is a digit that grows to a certain point, and eventually stops". I believe he was talking about Bitcoin's divisibility, which is one of the 4 must-have property if it's needed to be qualified as a currency. He erroneously saw this divisibility of 8 decimal places as a limiting factor of Bitcoin's potential. There's no stopping in Bitcoin in terms of its divisibility.

Side note: a Satoshi is the base unit (or the smallest divisible unit) in a Bitcoin at the moment. As I said, the protocol can be easily changed to accomodate smaller unit. There's simply no practical limit to the BTC's divisibility.

Bitcoin, as it stands today, can be divided into a maximum of 8 decimal places. I suspect we wouldn't have to worry that it runs out of decimal places in our lifetime (the Bitcoin holders would be ecstatic if it does !). If the BTC grows so large that even 8 decimal places aren't enough, the Bitcoin protocol could easily be changed to accommodate any additional number of decimal places one would like. This is a far less of an issue than Y2K because this issue had already bought up when Bitcoin was born (and Y2K didn't end the world as we know it). What a delightful problem to solve. Oh no, my wallet is simply too small for my stash of cash ! What am I going to do?

Here I like to point out once again that even somebody who supports Bitcoin and an expert in currency still having problem grappling with some of the technical issue. Warren Buffett simply called it a "joke" and says it has no "intrinsic value" (his favourite phrase). He didn't get it either. I bet he didn't spend considerable time in studying it. Why would he? He didn't have too many positive things to say about dotcom companies because he didn't and still doesn't understand them. Bitcoin has to be more difficult to understand than dotcom companies for him.

Is the world going to end because USD as a global reserve currency is ending? It won't happen overnight, but gradually over many decades (you may not even see it in your life times, depending on how old you're). So its effect is probably not very noticeable, but adjustments would constantly be made over time.

Would it be replaced by Chinese Yuan? Chinese Yuan is nowhere near ready. And why wouldn't RMB suffer from the same issue as a global reserve currency status as USD today one day (many generations from now)?

What about SDR? SDR is based on a basket of currencies. But they're still fiat currencies. That's just the same story played by different actors (or more actors). Maybe the future reserve currencies should be backed by a basket of limited supply materials instead of printed papers. The basket might consist of portion made up of different currencies, precious metals, and Bitcoin (why not?).


Government Regulatory Control
This is the 4th trait that Bitcoin inherited from its daddy the Web. Like the Internet, Bitcoin is born free, and not owned by any government or company. In reality, while the Net is in many ways still a global, non-sovereign entity, on the other hand, some parts of it are very much under the direct controls of various government bodies, companies, and so forth. For example, in various countries, the Web can be, and is censored to various degree. Search engines, on the other hands, are owned by companies. The web's Infrastructure providers like ISPs are companies that abide by the rule of the governments, etc.

Similarly, government controls are applied to Bitcoin via its various infrastructure. All BTC exchanges around the world are subject to the laws and regulations of that country. Take Coinbase, which is American company. If U.S. puts an economic sanction on a particular country, you will find that Coinbase won't be able to do business with that country. So the ideal of an utopian currency in a world without sovereign state interventions can't really exist.

The idea that Bitcoin is a payment system that would get rid of the middlemen. Yes, we still don't have the middlemen in Bitcoin when we send or receive payment, comparing to say, Paypal, which is the middle man. But we still have "middlemen" in various infrastructures such as exchanges, ATM operators, operators that facilitate merchants' access to Bitcoin, and so forth. Without these "middlemen", Bitcoin can't be used by the popular mass. At least, not at this stage of Bitcoin's development.

On the other hand, government regulations aren't all bad. Some are put in place to protect the users of those infrastructures. At the very least, give the public confidence. One would agree that majority of the public would feel safer to get into Bitcoins if there're more government regulations, not less. Mt. Gox bankruptcy may have been avoided if there were regulation. For example, government may demand exchanges to have things in place that prevents the repeat of Mt. Gox. At the end of day, Bitcoin exchanges are businesses like every other businesses. One would agree businesses should be regulated.

Mt. Gox collapse occurred because it was so new that the regulations hadn't caught with it yet. We need regulators to bring the public into Bitcoin. Without it, BTC would only be some toys in the hands of the few. Nothing works without give and take. That applies to freedom as well. Freedom without regulation is anarchy.

Having said that, just like the Web, while the various sovereign states place censorship on it, but there're always ways to go around it. Similarly, there're always ways to bypass regulatory controls to various degrees. I see these controls by governments that exist alongside with various circumvention of controls not only the way real life operates, but a very human way. And that has always been the way our societies worked. No more, no less.



 Adulthood 
We're not there yet. Bitcoin is there when it becomes mainstream like its daddy the Net. It gets there when it reaches a critical mass. That happens when supporters far outnumber doubters. When governments step in to regulate. This legitimise Bitcoin, at least in the yes of the public mainstream.

When even the so-called financial experts - even the supporters - have so many misunderstanding about this digital currency, the Bitcoin community has work cut out for them. Of course, they too are learning.

At the moment, it faces many growing pains, issues and self-doubts. Some issues are technical, others legal, and political. One of the technical issue that Bitcoin is facing right now is the dominance of a specific Bitcoin miner. This may break the digital currency if it couldn't be resolved.

One of the thing we should and can do something about it is the name Bitcoin, which doesn't inspire confidence. In business, and definitely in currency, confidence is everything. The decline of USD dominance is precisely that: loss of confidence.

Remember how concerned parents labour over the name for their child? Imagine, especially a child growing up, what a bad name is doing to him or her confidence? If people are going to poke fun at Bitcoin, it certainly has the name for it.

Which part of the word "BitCoin" inspire confidence, and demands respect? "Bit" as in "little bit", "2-bit worth"? What about "Coin"? Sounds like small change, or something for a poker machine. When I first heard the name, I didn't take it seriously because I thought it was tokens for some video games. Seriously, didn't you have the same reaction when you first heard it? Remember, we probably have over 6 billions people on earth who never heard the name.

I know, I know, in the nerdom, "Bit" is cutting edge. Also, BitTorrent is another very popular p2p protocol not too dissimilar to BitCoin. I know it's only a name. Every little bit helps.

Apart from the name, other more serious and challenging technical or operational issues also exists. For example, because one of the Bitcoin feature is its decentralisation. When a miner, which acts as fact checker, monopolies the process, the whole decentralisation ideal is destroyed. We would rather trust our central banker than a central miner. Wouldn't you? They're just individuals.

But one can also trust the miner to regulate themselves not to reach such a position because their absolute or near monopoly would lead to the collapse of the crypto-currency due to its loss of faith in the system. This collapse wouldn't benefit themselves.

motherboard of a dedicated Bitcoin Mining machine
Motherboard of a dedicated Bitcoin mining machine

But if somebody intends to harm such a system for whatever purpose, that's what they need to do. This brings me to the question of regulation. Just as its daddy may have been created under the noble libertarian geeks who want to give people power by giving them knowledge (because knowledge is power) freely, and without any hindrance.

At the end, in order for the Internet to go mainstream, it's needed to be regulated. In many parts of the world, governments try to limit that power by giving only limited access to the Net. This is the 3rd genetic trait that Bitcoin's daddy passed down to it.

In order to go mainstream and function probably, it will needed to be regulated by governments. For example, recently PBOC banned financial institutions in dealing in Bitcoin transactions. Some of the value that may have to be discovered or realised with this deflationary currency is its function as a viable alternative currency to economy that suffered from runaway inflation.

Zimbabwean banknote that denomiated in one hundred trillion dollars
Source: wikipedia

Zimbabwean adopted the fiat currency of USD as a hedge against the severe depreciation of ZWD. While USD is inflating too, but does so at a relatively slow pace than ZWD. It's a lesser of the 2 evils. What if they adopt a deflationary currency? Would it be a boon/boom for their economy? Are we just scratching the surface of Bitcoin's many future potentials ?

While Bitcoin has a long way to go (the Bitcoin community would hope), it had came such a long way since 2009. We don't know where it's going just as nobody knows the future of any growing child. What we can't rely on is where it's going by looking at its unsavoury past. But if Bitcoin is anything a fraction nearly as promising as its daddy, it would be the most important thing since its daddy. ome believe it's more important than the invention of the Internet.

If Bitcoin isn't a scam, what it is then? It's an experiment of a 21st century global currency. An experiment has only just begun. USD is also a fiat currency that accepted globally, but it's under the control of one sovereign nation. This mean that the rest of the world accept the fiat currency status but at the mercy of Uncle Sam's policy towards it. If it needs to go to war and print some money to bankroll it, and therefore depreciate its worth, USD holders can't do anything about it. Fiat currency system isn't very democratic or fair or has staying power.

While Bitcoin experiment could proven to be unworkable tomorrow (I hope not), like a growing human, its chance of dying during an infancy is much higher. It had survived the baby and toddler years, and growing into adolescence, I'm hopeful that it will grow into adulthood. The most difficult, and trying transition is yet to come.

The BTC supporters - usually more technically minded people - would see a bright and promising future for Bitcoins because it's more technologically superior than anything we have, and would cite how technology always win at the end.

Time again and again, we see products that are more technically superior lost the battles because they're market better or reasons other than technology. For example, VHS vs Beta video formats. And surely Windows aren't the best operation systems around technically? Examples abound.

Of course, I'm comparing 2 or more similar technologies rather comparing a technology with something completely different (like comparing apples with oranges). But the same reasoning applies. To a technologist, technology is a panacea to all ills just as a hammer sees everything as a nail.

On the other hand, there're certainly plenty of groups, institutions like Wall Street would like to see Bitcoin go away. And they have the power and resources to do it.

The kid has to grow up to be taken seriously. In BTC community, it means it needs to prove itself to the rest of the world that it has staying power. The longer it survives, the larger the community grows, the more track records it has, the more it will be taken seriously, the less chance that it will fail.

I think BTC is close approaching a critical mass, a point of no returning at which the doubters would be outnumbered by supporters, and would be accepted by public at large. Close, but not quite there yet.

Who knows where it's going? All we know it's going to be an exciting and thrilled ride. If something's worth having, it's worth the risks.

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