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My Perspective of Bitcoin

There is a lot of hype and controversy going around regarding Bitcoin right now. I have been interested simply because the idea of Bitcoin and cryptocurrency fascinate me. It isn’t the speculative aspect of Bitcoin that most draws me in (although I will mention that it does play its part) but more so the possibilities offered by the new coins or digital currency. In this article I plan to go over my entire understanding and analysis of Bitcoin. It should serve not only as a learning tool, but also simply as a source to view Bitcoin through the eyes and mind of someone who is not yourself (from another perspective).

I am going to go through the entire story in chronological order and then touch back on parts of it I find extra important to review/summarize at the end. Finally to finish off I will draw the best conclusion that I can from the research I have done regarding Bitcoin.

Bitcoin, My First Glimpse

I first heard about Bitcoin in October of 2013 (I know kind of late huh?) and I never even gave it a second thought. I was told by my roommate that Bitcoin was a cool and innovative crypto-coin and that I should look it up. I responded back to him “Why would I want to look up some weird nerdy fake currency?” Sadly, that was my first impression of Bitcoin and I didn’t look it up. A few weeks later he said I might want to look it up again in passing and I told him that I just don’t see what the point is. I asked him what they were worth and why and he couldn’t explain it very well, so I just ignored Bitcoin entirely. I mean, I knew sort of what it was, but I really didn’t understand it at all. Finally, in November of 2013 I went on a work trip to Las Vegas and heard (no joke) a shoeshine guy talking to his friend about Bitcoins! I was so confused and surprised that I had to listen in a little and he was just saying how they were going up in value. I thought nothing of it to be honest aside from that it was kind of cool how I had heard about them now from two sources in completely different areas. I still didn’t research them or care much, but I remember telling my friend at the time that it was kind of neat how these Bitcoin things were getting popular. Little did I know just how popular they already were, or were about to become.

At this point in my life (the last few weeks of November 2013) I had been a little intrigued about Bitcoin, but never done any research on it whatsoever. I left Vegas on Thanksgiving and flew back home to a funny look from my roommate and an even more surprising statement… “Yep, remember those Bitcoins I told you to look at when they were at like $150 a piece? Well now, they are $1,000 each and climbing”. I was so shocked, I didn’t even know they had skyrocketed while I was on my trip. I remember laughing and saying. Wow, if I had just spent my airfare money on Bitcoin instead of the flight I could have stayed here and made far more money than working there the entire month! Needless to say more, I was floored by the news. I finally decided to look into Bitcoin on December 1st, 2013.

My Initial Bitcoin Research

Finally, I was interested in Bitcoin and wanted to see what it was really about, so I looked all over the internet… Google, Wikipedia, Youtube, Bitcoin.org, anywhere I could find. What I came across was a lot of confusing talk about Bitcoin and how it was the next big thing, yet no real explanation outside of Bitcoin.org and even the information there was not easy to comprehend. I mean what really is a block-chain?, how does mining work,? what is a Bitcoin wallet and why would I trust it to hold my coins?, What is with all of these other coins like Litecoin? Devcoin?, Peercoin?, Namecoin?, and the other 50 some coins listed on coinmarketcap.com. I knew from my first hour or so of research that this was going to be a long and taxing project.

 
Eventually, over the next week or so I looked at more info, asked my roommate a bunch of questions, and was looking to possibly obtain some BTC. I still hadn’t figured out, #1 if they really had any value at all or if it was just some crazy hype, #2 Where I could buy them, or even a reliable miner that could be delivered and working in less than 3 months!, and #3 how the coins worked in general. I mean where did they really come from, how was there only 21,000,000 possible, and what makes them secure exactly? My thought was that the system could be tricked somehow and the coins created some other way or even double spent. My roommate told me that Bitcoin has been around for nearly 5 years, its market cap is around $10,000,000,000, if it could be hacked, someone would be doing it, or have done it by now with that big of an incentive. I agreed, even though the logic wasn’t entirely sound.

Anyway, long story short was that I looked at all of the other coins like Litecoin, Peercoin, etc… and decided that 90% if not more of them were just cheap copies of Bitcoin. My stance is pretty firm on alt-coins and always has been. Either it is revolutionary and really adds a lot of value, or it is trash. The only alt-coins I really got into during this time were Bitcoin, Namecoin, and Devcoin. This is because they are all nearly impossible to mine at this point, they all have their own unique value that they add, and although Namecoin, and Devcoin, really are duplicates of Bitcoin, they still have their differences and own communities. Don’t worry, I’ll discuss Dogecoin later (oh boy). The most exciting to me was Devcoin.

Devcoin, the Ethical Crytpocurrecny

I researched Devcoin and came to the conclusion that the best way to obtain Devcoins was not to buy or even mine them like I was planning with Bitcoin and Namecoin, but it was to complete any bounties I was capable of and also to write for them on Devtome, which is actually what I am doing right now. I will be getting a few shares of Devcoins for writing this article which is great, because it allows me to invest in them with little risk aside from my time spent. So I completed a Devcoin video and got 24 shares for that as a bounty, and am still being paid those shares slowly over time up until the end of this month. By March I will finally have received all of my bounty coins (it takes a few months to get your coins). While making that video I learned a lot about Bitcoin and Devcoin. I learned that BTC was created on January 3rd, 2009, and that Devcoins did not have a hard cap like Bitcoins do, they will be mined forever.

Devcoin has a fantastic community of people who are all looking to expand open source projects and I really love the group as a whole. I have been watching them closely and have been writing on Devtome for a few months now. Anyway, getting back to the story, I finally decided that mining was risky and expensive due to having to wait for all of the miners to get here, set them up, and all of the other problems that can arise with mining coins, so I wanted to simply buy some as a speculative investment and trial of the currency. I bought my first .50 BTC for $420 in December from coinbase.com. I refused to use Mt.Gox and with all of the recent news about them I am glad that I did.

My Adventure as a Bitcoin Holder

Now that I was the proud owner of a Bitcoin I had to find out what I could do with it in terms of storage, trading, etc… So I looked up Cryptsy and created an account to trade part of my BTC for other coins. I bought a few Namecoins, some Unobtanium coins, and kept the rest of my Bitcoins where they belong, in BTC. I played with these coins and watched their prices daily until one day everything got crazy. This day was the first day I had ever heard of the dreaded Dogecoin! Dogecoin went from non-existence on coinmarketcap.com to some ridiculous amount of money over Bitcoin (like in the trillions or higher) as a result of some glitches or perhaps someone really overpaying for a few of these and the market price reflecting that price for all coins. Either way, it scared me half to death because it made me realize that if a coin like Dogecoin (a total joke of a coin) could be the most valuable coin, than what real value does Bitcoin have.

From there I went on to research the true value that came from Bitcoin and how I could value them. The answer I found is still being worked out, but it all comes down to the technology. If I could bet on the technology as a whole I would do so with very little fear, but since I can’t I have decided to just go with the first mover (Bitcoin) and perhaps hedge a little in any other coins that seem innovative enough to compete effectively with Bitcoin. The truth of the matter is that while researching I realized a lot about economics and money in general that even as an economics major in college I didn’t learn. Money is supposed to be the physical representation of work done and is supposed to be traded as such. This is why, Bitcoin to me is the closest thing we have currently as a society to the “perfect” money.

It is created from work done (miners mined it originally). It is decentralized, and it is used in nearly every country in the entire world. The best part is that nobody controls it and can simply print it up out of thin air (except some argue the creators). Even the people who made Bitcoins though cannot create more of them than the 21,000,000. They simply were able to get them for less work done because the demand for them was so low at the time. I mean they took a risk, if they sold them all for a penny each back when they were only worth a penny, they could have had some money, instead they risked that and now have more to show for it because Bitcoin has been successful thus far.

To get back to a timeframe here, we are now into early January and Bitcoin has had its first crash down to a level lower than I bought it, but was somewhat stable around $850 a coin. Everyone was talking about the crash and how unstable the coins were saying that this was not useful for a currency (which I can understand), but at the same time this is to be expected simply because people can’t predict the future acceptance rate of the coin and therefor just like me cannot price it exactly. A currency or even a commodity which is what a lot of people are calling Bitcoin currently is something that is only worth the price someone else is willing to pay you for it. If nobody will pay for gold, gold is worth nothing, same with the USD, BTC, or anything for that matter. I was really starting to understand the potential of Bitcoin, so I decided to make a sizable investment into miners.

My Crypto Miners

I purchased $6,000 worth of miners from Newegg in late January and was supposed to get them all by the 29th. I did not purchase Bitcoin miners though, although I like BTC more than any other cryptocurrency, I decided to bank on the fact that people really liked alt-coins and bought script mining GPUs. My plan was simple, mine alt-coins and then convert them to BTC, immediately. I bought a total of 18 GPUs, 3 mother boards, 6 power supplies, 18 card risers, 4 power squids, 3 wooden cases, and had a total expected hash rate of 8MHash. These consisted mainly of ASUS 270x cards. Finally on Feb 5th all of my parts arrived and I got to putting these together. What a nightmare… Everything was about 3x harder than expected and now it is the 18th of February and I am sitting at 6.5MHash. This is to be honest an accomplishment since most of the time I was having constant issues with the miners going down etc and was only doing about 3.3MHash.

My total coins mined and converted thus far is .40 BTC. My average daily BTC payout is now about .05-.06 BTC which is decent, but I was hoping for higher. This means at current prices which have fallen sadly from $850 to $630 per coin, I can expect to recoup my investment in approximately 5-6 months assuming the payouts remain the same. They will most likely fall though so it will take longer. The good news is, since I bought my units they prices have risen about 25% of become sold out entirely which means that I could turn and sell my entire setup right now and at a minimum break even. My family has been hearing a lot of about BTC lately and asking me my thoughts. Some have brought to my attention that it may be a mania like the tulip mania of the past, so I looked into this.

The Bitcoin and Tulip Mania Discussion

The main reason that I have found that Bitcoins are not like the tulips in tulip mania is that the tulips where rising as a direct result of governmental oversight. The real situation regarding the tulips in tulip mania that most people won’t tell you is that the government had recently changed futures contracts for tulips and options contracts (all derivative type of contracts) to different rules that made it safe for speculation. The way the contracts are supposed to work is that you agree to pay now for tulips in the future and so you receive the tulips at whatever their future price is and that is that. Well the new rule was that you agreed to pay later for the tulips and you instead could decide that you no longer wanted them so could cancel and only lose around 3-10% maximum of your investment usually closer to 3%!

Imagine what would be happening with BTC if that type of speculation was allowed… People would be buying contracts through the roof. The fact is that Bitcoin is not being boosted up by speculation based on nearly risk free derivative contracts. It is being boosted by increased speculation and demand due to the fact that people have faith in it. In tulip mania you could leverage your money 30x for free essentially. If you made money you earned 30x what you would have earned, but if you lose you only lose 1x what you risked. This is why people took the bet so easily and the prices soared. If this was offered on any investment opportunity that even had a lick of viability, people would do the same thing today and then you could call it tulip mania #2. Bitcoin is not like that, it is very risky, and you stand to lose a full 100% of your money per 100% of the money you risk into it should it collapse to a price of zero. The same as you would if you put your money in gold or any other asset and it collapsed to zero.

Conspiracy Theories

I’m not huge into conspiracy theories, but one of the ones I have noticed popping into my head recently is just how against Bitcoin the media tends to be. I mean during tulip mania which was provably a mania and bubble and also had roots that could be seen (I like the pun, but not intended), you didn’t have thousands of people all saying this is a bubble, this is a mania, get out! With Bitcoin it is like 90% of what I hear in the media is either bad news, or it is news trying to tie Bitcoin to the black market and illegal drug trade etc. These are somewhat reasonable views, but the fact is that the illegal drug trade is done just fine in cash and other asset trades, Bitcoin does not facilitate it much better than any other currency out there.

The fact that Bitcoin is bashed so ruthlessly, and so hard, by so many people just shows me that someone out there is against it and wants the view to be negative, or that people just really don’t understand what it can do. This scares me because the #1 fear I have for Bitcoin is that either governments ban it (which can happen when the view is negative, and people don’t understand it). My other fear is that people don’t take the time to learn about it and so let it go to waste. Bitcoin is a fantastic technology and sure any coin now can do what it does, but all the other coins were not the first and are not the biggest, so to take away from Bitcoin to go to these other coins just doesn’t seem either fair, nor likely since people tend to do things in a herd mentality. Anyway, I know I am rambling on, but my point Is that all of the negative press and discussion about Bitcoin makes me even more skeptical not of Bitcoin as a currency, but of the people making these negative claims, and their true intentions.

Change is Inevitable, but People do Not Welcome Change

Through my research I have found that change is inevitable, nothing lasts forever and so with brighter technologies will come change sooner or later, the question is, will that change be positive for Bitcoin or not. People could decide based on manipulation or simply a herd mentality and some really good marketing efforts to adopt a different cryptocurrency. That really wouldn’t matter to me because regardless, people are going to eventually be using cryptocurrency more and more since it now exists. My fear is that with all of the debt the USA and other countries have generated that if and when people do move to cryptocurrency or some other form of currency that is decentralized such as gold. We are going to see some nasty economic turbulence since the real value of our money is not as high as it should be.

What I mean by that is we have printed and multiplied our money with our banking practices to allow a lot more money than there is work put into the system. Since money is supposed to be the physical representation or the trading of work done, we are going to see tons of work done that we are trading simply evaporate because it never actually was done in the first place. This is good in the long run, but it is going to cause a lot of problems in the short term. The tulip mania in my opinion is the current fiat money supply and its current worth. Sure people are not going crazy buying it up because all of their assets are already in it and most people are paid directly in it, but it is way overvalued as a result of government oversight just like the tulips in tulip mania. Imagine if gold or bitcoins was the paradigm and fiat was some mania that everyone has put most of their assets and work into having. This is similar to how it could be viewed from a gold perspective. We need to get back to a system where our work is not being evaporated away by fraudulent work or counterfeit work that is being poured into the system. That is my thought, even though it is a scary one.

The Biggest Problem With Bitcoin

The biggest problem with Bitcoin is actually that it is not being used! Imagine if Bitcoin was being utilized right now instead of being used more like a crazy investment game (which is honestly what I see people using it for right now and it bothers me). Bitcoins is supposed to be a payment system and currency. For example let us say a store decides to accept Bitcoins (like Tiger direct for example since they have). That is great except that they are going to for safety reasons directly convert all BTC received to USD instantly. Here is the issue with that… We are now paying transaction fees for no reason except the fact that we don’t want to use BTC. If whoever Tiger direct wanted to pay instead took BTC then there would be no need to convert out of it and thus no fees involved.

Here is a clearer example and one that I hope happens in the future. Let us say that Visa or some other credit card company decides to accept BTC payments. Now visa usually pays merchants in USD. If those merchants instead take BTC then Visa does not need to covert to USD anymore and also those merchants can use their Visa cards to make purchases if they want to use a credit card instead of BTC in cash form and then pay them off in BTC with no transaction fees yet again. So the biggest problem with cryptocurrecny right now in my opinion is that it is not being utilized! It would be far easier and more efficient for me to make all of my monetary transactions or at least most of them in BTC but the problem I see is that people are afraid to keep their money in it because not everyone accepts it. I mean why keep your money in a gift-card only acceptable at certain places when you can have USD which are accepted mostly everywhere.

The other issue is that companies that deal with payment processing such as banks, the government as a whole, and credit card companies are incentivized not to accept it since it will lower their profits. They can’t charge fees when people know they can just use BTC instead. Well sooner or later people are going to realize it and that is the point when things will change, but you can be sure that these companies will be fighting it tooth and nail the entire way. It is just like solar companies being shut out by oil companies. Cars could have been running on solar for over 10 years now, but have just recently been doing it because finally the solar has gotten to the point where it cannot be silenced any longer. The same will happen to cryptocurrency, but until it does, it is going to be a very bumpy ride. Expect to not be able to predict prices for a long, long time.

The Best Way to Play Cryptocurrency

In my opinion the best conclusion I can draw on how to deal with cryptocurrency is to use it whenever you can in order to get used to it and avoid transaction fees, invest a little in it if you feel comfortable making that investment while understanding that it is indeed risky, and just let the cards play out as they will. One thing is for sure, the more people that use cryptocurrency, the easier it will be to use since more people will be using it, and it grows from their as a network effect. It has already grown and it will grow more in the future, that part I am confident in, and I have made all of the investments I have made into it as a result of that confidence.

In closing, imagine a world where other currencies are backed by Bitcoin to hold their value similar to how we used to be on a gold standard. Or if it is easier, imagine them backed by gold. Or heck, even backed by themselves so long as the amount of them is stable and not increasing!

Cryptocurrency Bitcoin


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