Repost of my bitcoin post from February 7, 2017 on my Digitalifetime blog.
There have been plenty of great articles written on bitcoin and how it works so I’m not going to rehash that very good and readily available information. What I am going to do is put my personal spin on why bitcoin is so important to our coming Digitalifetime. What you should know and why you should buy at least one bitcoin now if you can possibly afford it. You will be rewarded nicely year over year and especially well in the long run. As you will see below, bitcoin aligns perfectly with the main tenets of our Digitalifetime as defined in an earlier post.
What is generally referred to as “bitcoin” has two distinct components. The first is the cryptocurrency / payment system component which is fairly widely known. The second and lessor known component is the “Bitcoin network.” This network is based on a framework of technologies creating a distributed database commonly referred to as the blockchain. Said simply, the blockchain network and distributed database enables the cryptocurrency and payment system aspects to function. The currency element and the network element are generally differentiated by using a capital B when referring to the network aspect of bitcoin. However, that is not a standard so you may experience mixed use depending on the source. The key takeaway is that “Bitcoin” and “bitcoin” are both revolutionary technological enabling functions that are key to our digitalifetime. Together, they will revolutionize business and society as we know it and in ways we can hardly yet imagine.
The currency element of bitcoin seems obvious. Our current monetary system is not unlike monetary systems that were in use 3,000 years ago. It would seem elemental that current technology could create a much improved system compared to the current government fiat based monetary systems with ever changing borders, rules, and regulations. Today’s governments, banks, credit card companies, PayPal, Western Union, and others fill the gap for payment with fiat, exchanged based systems that are manged by “trusted” third parties. This system performs adequately but there is huge cost, and at times huge risk, in maintaining and/or subscribing to such a system. The innovation question is how to create a fully transparent, fully decentralized, border-less, trusted, verifiable, peer-to-peer value exchange network. How to provide the ability for anyone, anywhere to exchange some stored value with anyone else, anywhere, publicly or privately, nearly instantaneously, and at a very low-cost.
Enter bitcoin and blockchain. In 2008, an unknown person (or persons), using the pseudonym Satoshi Nakamoto, published a ground breaking white paper describing a new system and method for a digital currency and payment system based on a collection of technologies called the blockchain. This new currency would be called bitcoin. The name came from a combination of “bit” for the digital aspect and “coin” for the legacy currency aspect (bit-coin or bitcoin). Bitcoins come into existence via a process called mining. The mining technology limits the total possible supply to 21 million bitcoins. Currently there are approximately 15 million bitcoins already mined with six million remaining to be mined in the future. This fundamental design aspect prevents future bitcoin dilution and future wealth destruction via inflationary approaches. This ALWAYS happens with current government fiat based approaches and has for thousands of years. It is simply a question of how quickly will that inflation will occur and the associated destruction of your wealth that results.
Since its implementation in 2009, both Bitcoin and bitcoin have demonstrated immense value creation abilities that should continue to grow exponentially. The structure and security of bitcoin make the currency aspect extremely attractive as a store of value and the network aspect extremely attractive as a decentralized trust mechanism. Solutions are currently underway for blockchain based contracts, voting, identity verification, peer to peer transaction processing, and other valuable business enabling services. Over the past eight years the value proposition of bitcoin has been demonstrated by the price increasing over 1,000 fold from its initial valuation of only a few pennies. The recent price of a bitcoin is approximately $1,000 and closing in on the all time high of $1179 per bitcoin set in 2014. Once the previous high is exceeded it should be off to the races for new all time highs resulting in many multiples of today’s price. My estimates are $2-3k by 2018, $5-10k by 2020, and $100k-$500k by 2030. And yes… that is for a single bitcoin. Your grandchildren will listen in wonder as you tell them the story of when you owned (or still do own) one or more whole bitcoins. As the price increases in value it will be more common for any average person to own fractional bitcoins and less common to own a whole bitcoin (or multiple coins).
Bitcoin does not come without risk of course. There is a risk of increased government regulations, a risk of loss or theft from bitcoin wallets that are not properly protected, and a risk of newer technologies such as quantum-computing rendering bitcoin protocols subject to hacking and/or theft. To date there has been hacking of companies who held bitcoin resulting in the bitcoins they held being stolen but the bitcoin technology itself has never been hacked.
And then there is China. Currently there is a proportionally large amount of bitcoin transactions as well bitcoin mining originating from China. China currently has strict regulations and capital controls and they view bitcoin no differently. Detailed forms and approvals must be completed prior to converting yuan to bitcoin. How well this could be monitored and black market transactions prevented are certainly topics for debate. Regardless, growth in China continues with continued speculation on future actions of the Chinese authorities. My prediction is that China will embrace bitcoin with a first mover type action. They naturally prefer digital transactions over cash, they realize the value and power of bitcoin, and they recognize they can leverage bitcoin to gain global advantage in the new age of cryptocurrency. Many you Chinese in large cities have no desire to use currency. I have no idea how China adopt bitcoin but one idea is they may issue their own cryptocurrency backed by gold, silver, and/or bitcoins. Or they may create some colored coins denominated in yuan that is linked to bitcoin and blockchain.
One thing is for sure, bitcoin will continue to demonstrate its value creation/value preservation capabilities worldwide as local currencies collapse due to government mismanagement and abuse. It will provide new and innovative ways to transfer value, enter and execute contracts, enable new peer to peer business models, enable new secured and incorruptible voting, among others. The awareness and use of both bitcoin and blockchain is growing in nations from Argentina to India to Russia to Africa and all countries in between. Over the coming years bitcoin and blockchain will revolutionize finance and business in ways we can yet imagine. I estimate ~5 years until some of the initial non-currency business benefits are realized with large advances in 5-15 years. People who are wise enough to see these facts and understand this reality can position themselves now to prosper greatly in the future. As said earlier, I’d recommend to get at least 1 bitcoin per person for your family. You’ll be very, very happy year by year and especially by 2030.
Why do you think? Do bitcoin and blockchain offer great promise or will it be real money evaporating into digital bits? Post your thoughts in the comments section below.
Disclaimer: I am NOT a financial advisor and do not give investment advice as a profession. Any recommendations mentioned above are merely opinions to stimulate you to do their own research and make your own decisions based on current market conditions, your available assets, your personal risk tolerance, etc, etc. By no means will I be responsible for wealth preservation you’ll achieve. It will be your research and your decisions that enable that to happen.