Bitcoin Computing Power

Robot

Based on Computing Power

It would be difficult to create a new crypto-currency that is as fair as bitcoin because if it did start getting big, the people that were in early will get rewarded more than that got in later on. The big miners would own a lot of the new coins and people with money could buy them. There would be no little guys. I don’t think any of the alt-coins out right now are going to surpass Bitcoin. There are some interesting alt-coins where the processing is used to solve useful mathematical equations. A currency like Primecoin might get larger since the hashing algorithm also looks for prime numbers and those prime numbers are useful for scientist and engineers.

A new system could not be based on pure randomness for each wallet because whoever has the most wallets would get the most coins. It will end up being a race for whoever has the most computing power because the person with the most computing power could create the most wallets. Bitcoin has a good lead on any new crypto-currency since it has had so much time to mature. Currently, the newcomers with the most hashing power will earn the biggest rewards. If a similar system came out now, then the few major miners would take a majority of the mining reward. It would be a monopoly on the system. It is good that there were some little guys that got in at the beginning of Bitcoin. It is still the beginning of Bitcoin, so there is plenty of room for late stage newcomers.

Proof of Work

Proof of Work is the hashing that a miner does to show that a large investment was made to verify the transactions. It is a difficult math problem that needs to be solved by an ASIC. The rest of the nodes then validate the miners work. This is necessary because if there was no proof of work, then there would be bad nodes that would try to manipulate the system. This ensures that there will be no bad actors because it would be expensive to attempt and difficult to achieve. It is easy to verify that a miner did the correct work.

Here is an alternative proof of work that might be effective: a node gains power through validating & processing transactions. The more correct transactions that the node has  verified, the more power it has on the network. As soon as a powerful node is caught making an incorrect transaction, then they would lose power. The network would also correct the inaccurate transaction that the bad node might have attempted to change. The transactions would have to have a maximum of a single unit. This system is feasible and it is not so expensive to operate. If a system like this could verify transactions as Bitcoin does, then Bitcoin could be in trouble since it will take far less computing power. As there are more transactions on Bitcoin, an adaption to the protocol could be made to allow for miners to spend more computing power on validating and processing transactions instead of just hashing to prove they are doing work.

Bitcoin would be an ancestor system to any new ones. I think it will always be around. If a new methodology arises then Bitcoin could be adapted to follow it.

Unfair

A lot of people argue that it is unfair that the ownership of all the bitcoins is skewed towards such a small number of people. The miners that provided just a small amount of computing power at the beginning and held onto their bitcoins will have made an extremely large amount of money from a network that other miners are supporting. With the growing computing power that is needed, a newcomer has to provide thousands and thousands of times more hashing than the very first miners back in 2009-2012. With the maturity of bitcoin compared to any other crypto-currency, it would be hard to make another more fair currency. Whoever gets in on the next currency first will have more coins. If the algorithm was designed to not reward so many coins at the beginning, then that would make it more fair for people that come in later. With the price lowering as of early 2015, this should force some of the early adopters to sell some of their bitcoins to others that are interested in joining the market. However, the earliest adopters built the system. It wouldn’t be here if it wasn’t for them. Maybe they deserve the rewards.

In the long run, there will be some early adopters that might join the status of billionaire (USD). Currently, there are 1,645 billionaires in the world. There were 268 newcomers in 2014. There is plenty of room for a few more of them. The creator of Bitcoin, Satoshi Nakamoto, has over 1 million bitcoins. When the price of bitcoin surged to over $1,100, Satoshi’s worth was valued over $1 Billion. However, if he tried to sell them all for $1,1000 each or any price, the demand would fall and the price of the bitcoin would fall with it probably right down to $20. I don’t think bitcoin is going to shift the wealth of the world very much. Those early adopters would be better off slowly selling bitcoins over the years. If they sell too many, the price will plummet. If they hold onto them, the price should rise, but it will be lowered once they start to sell them. They will need to sell some of them to live a billionaire lifestyle. – not everybody accepts bitcoin as a payment. Even if they do accept bitcoin as a payment, then the bitcoin will be distributed more. Wealthy people will get their hands on their share of the bitcoin. They have the power to manipulate the bitcoin markets and get it from the early adopters for cheaper than what it will be worth in the future. In the long run, I think the bitcoin will end up mostly in the pockets of the existing rich people. And, it will create a lot of new wealthy people.

Advancement of Processing

Bitcoin is speeding up the rate at which computation advances. This has huge impacts on the timelines of predicted processing power. There are 3 important milestones:

  1. All the computers on the planet are equivalent to one human brain
  2. One computer is equivalent to one human brain
  3. One computer is equivalent to all the human brains on the planet

This is comparing apples to oranges some would argue, but brains and computer processors are more similar than most people think. We may see some or all of these milestones achieved in our lifetime. The implications of these could be a theme of many books, so I can’t get into it too deeply. Stephen Hawkings has already warned us of AI. If you are interested in learning more about this, I would suggest researching topics such as Robotics, Artificial Intelligence, Neural Networks, Data Mining and Natural Language Processing just to name a few.

Bitcoin is “Financial Tools”

Finance

Push vs. Pull

Credit cards are a pull technology. That is, when you go to purchase a service or product, you are giving your credit card and identification information and then they make a request for funds to your credit card company. The credit card company then authorizes the transaction resulting in the pull transaction. The company and anybody else can make this pull if they have your credit card information With bitcoin, you are sending money to the merchant directly. They don’t even have to authorize you to send them money. This is called a push transaction.

Irreversible Transactions

Once you send bitcoins to an address, there is no undoing this – it is an irreversible transaction. With credit cards and ACH, there is a wait period before the money is sent. Also, the money can only sent to merchants that have shared all of their information with the bank or credit card company. If someone buys something with a stolen credit card, then the merchant will not receive the funds from the credit card company. The merchant, in turn, makes up for these losses by raising there prices. The consumer ends up paying for this. The credit card companies also advertise that they offer fraud protection, but it is really the merchant that is being forced to offer the fraud protection.

Centralization vs Decentralization

There will have to be a balance between centralization and decentralization. Pure centralization would mean there is one large organization that controls everything. Pure decentralization would mean that each person contributes nearly an equal amount of effort to the system. There must be a balance between these two. We can’t go too far in  either direction or we won’t progress with technology. If we start heading in one direction, a revolutionary product will come out that will bring it back in the other direction. Look back at the mainframes – they were a centralized computer system where dumb terminals would connect to them. Then, we switched towards decentralization by having all the processing power in each individual device. More recently, we have gone back in the direction of centralization with cloud services. Bitcoin is a revolutionary service that is leaning towards decentralization – anybody can have a bank on their own computer. In the end, there will be computation going on everywhere – centralized and decentralized.

Risky Owning Lots of Bitcoin

It is necessary to keep hard copies of large quantities of bitcoins in fire proof safes or in an insured account – otherwise it is a risk and precautions need to be taken. Businesses surrounding safe bitcoin storage are arising. If bitcoins are not stored very carefully, they could be corrupted, lost or stolen. There have been countless tales of people losing bitcoins by computer crashes or having them stolen by hackers. $500,000,000.00, at the time of the theft, were stolen from customers on Mt. Gox.

The problem of safely storing large amounts of bitcoin will stop some investors from jumping on board right away. They will wait for an easy to understand and secure solution. They want their accounts to be insured by the FDIC. These services are being launched in Q1 2015. There is a market for professionals to advise wealthy individuals in purchasing bitcoin for their investment portfolio and this market will grow exponentially.

It is very dangerous to hold a large amount of cash since it can be lost or stolen. For Credit Cards, they pass the fraud expenses onto the businesses and customers. The loss is distributed more in CC – with bitcoin, it is more easy for an individual to get targeted and lose a lot. It would be a good general rule that if you have a large sum of bitcoins, then you better know exactly what you are doing or hire someone that knows what they are doing. And, make sure you trust the person that you hire – it would be easy for them to steal your bitcoins. Those bitcoins are almost certainly gone forever.

Banking for All

A high school student will have the power to run his or her own bank. A high school student from a 3rd world country will have the ability to run his or her own bank. 2/3’s of the worlds population does not have access to banking right now. Most of them have or will have mobile phones with internet access. They will be able to use Bitcoin and get access to the same banking systems that the rest of the world. They will be able to make orders for deliveries of items which otherwise might be more difficult.

In the not too future, drones will be able to deliver items to places around the world. This is not going to happen for many years, but large companies are currently working on drones that deliver items to people’s doorsteps. If this method of delivering goods proves successful, which it will, then drone development will grow exponentially and we will have drones that can deliver anything, anywhere at anytime. Since Bitcoin can be easily used by anyone, anywhere, at any time and for any amount of money, it will align well with an international drone delivery system.

SpaceX and Facebook have been looking to create satellites that will allow everybody on the planet to get on the internet. They will be providing cheap mobile phones for little to no costs. Facebook will be able to monetize the traffic from all the new users, so they have an incentive to move fast on this venture. These new people on the web will probably all be using Bitcoin for their financial needs – it is an international digital currency that allows any two parties anywhere on the planet to immediately exchange wealth for nearly free. I should say free since the costs will be absorbed by 3rd party apps that will monetize the traffic with advertisements.

History has never allowed for such a huge leap in financial internationalization before. Gold and the USD came the closest to allowing this so far; Bitcoin is the next chapter in this process. There has already been a confirmed transaction from somebody from North Korea. It is rare and highly illegal for residents of North Korea to make financial contact with anyone outside the country.

Getting People on Board

The biggest hurdle right now is getting people on board. Bitcoin has a bad name and it sounds like it is from a cartoon. People that never heard about Bitcoin before usually laugh when I try to explain it to them. One way to get people on board is by giving free and/or cheap bitcoins in order to get people to become familiar with the name Bitcoin and build trust in the Bitcoin system. For the average person, a very small amount, maybe $1, should be seeded to individuals that otherwise would not get into Bitcoin. For the wealthy people, a discount on bitcoins must be given to them so they can jump on board. The bitcoins need to be re-distributed from the early adopters to a larger population in order to get the Bitcoin market to go mainstream. The early adopters will still benefit because the value of the entire Bitcoin network goes up for each new person that starts using Bitcoin. The more valuable the Bitcoin network, the higher the price of a bitcoin will be!

Bitcoin Investments

Digital illustration of house on money stack

Bitcoin Hoarders

Hoarding will have to be balanced. If wealthy individuals hoard all of the bitcoins, then people will not want to buy it, so they have to sell some at fair market rate. The price should not skyrocket too much because nobody will buy it when it does and everybody that has it will want to sell it when it does. The price should find an equilibrium. There is a finite amount of bitcoins – there will only be 21,000,000 bitcoins ever and there is currently about 14,000,000 as of early 2015. Most bitcoins have already been mined and pretty much all of it will be mined by 2024. There are currently 7,000,000,000 people on the planet. That is 0.003 bitcoins per person on the planet. That seems like a very small amount of bitcoins per person. The numbers are not really important. Give 0.003 a name, like a millibit, then there are 3 millibits per person. The numbers are infinitely divisible. So people will be able to make transactions at small increments like 0.000003 bitcoins – this is called 3 microbits. Even if wealthy individuals hoard all of the bitcoin, the majority of people will still be able to make cheap or nearly free transactions with Bitcoin since bitcoins are fluid. This will make a lot of competition for the current banking markets. It will also make competition for creditors. It may go as far as making a strong competition against national currencies.

Middle Aged & Younger Will Love Bitcoin

They don’t have a choice. They will love Bitcoin because it is familiar to value such an item in video games and even in virtual reality. Most, if not all, video games have some form of point or coin reward system. In the future, these points that people can earn just might be bitcoins or some other equivalent two-way currency. Users of video games and virtual interactive systems will enjoy being rewarded for their participation. Makers of these software systems will be able to profit from their users and in turn reward them with some type of virtual & useful currency that can be used for real tangible products. A two-way virtual currency is one that can be converted from USD and back. Most virtual currencies are one way – you can trade USD for the virtual currency but you can’t trade the virtual currency for USD. Bitcoin is different since it has so many uses.

The Bitcoin Financial System

Bitcoin is more than just a currency. It is a large virtual and real financial system. It can exist outside of the pure software world. It can be printed onto paper just like money can and be used that way. There are actual coins that contain bitcoin value on them and they are marked with a symbol that provides evidence that the bitcoins on it have not yet been spent. There are gift cards that are available online and at some retail stores that can be purchased and redeemed. In the future, there will be innovative products that will allow Bitcoin to be used more conveniently than the USD is used.

Transfer of Wealth

A lot of wealth may transfer to some of the early adopters of the technology from the hands of the current class of wealthy individuals. The late stage early adopters will gain some amount of wealth, but not that much. The very early adopters are the group commonly labeled as “techies” or “hackers” or just lucky. They are, for the most part, regular people that are interested in computer science & computer engineering. Some individuals that have large amounts of bitcoins could become billionaires if Bitcoin goes main stream. You can view the BitcoinRichList. The numbers are actually worse than what is displayed at that website. Most large holders of bitcoins have their bitcoins spread out among many different addresses. There are a small number of people that own a large percentage of the bitcoins. This is also true for most currencies and stocks.

Current Systems Are a Monopoly

People have no alternatives to the current banking systems. Will the government try to make alternatives to the current payment methods illegal? They could try to ban Bitcoin stating “Terrorists Use Bitcoin“. The USA was founded on beliefs of a free market. Is it a free market only for certain commodities? It appears as though Bitcoin has been accepted in American society. It might be too late to try to outlaw it now. Some nations are banning Bitcoin. There have been too many investments that have poured into Bitcoin since its’ inception. The amount that is getting invested in Bitcoin is nearly doubling every year and it looks as though this pattern is going to continue or accelerate.

Bitcoin Will Hold Value

Bitcoin will continue to maintain its’ price over the long run. It is unique and valuable. It can’t die because the Bitcoin network is too powerful. I don’t see that Bitcoin will be replaced since it is a protocol that can be updated upon agreement of the community. If some feature is desired and the community agrees that it is good, then it should be incorporated into the protocol. This is similar to the HTTP and WWW protocol. The network won’t be replaced by a superior technology since it can be updated. For the short term, Bitcoin will be volatile – that is, the price will fluctuate up and down. You may purchase bitcoins and find out that it lost 30% of its price in a week. However, the average price of bitcoins has steadily risen since it was first launched in 2009.

Market Manipulation

There will be a lot of rich and average people that will want to use the market to make a profit. They will be attempting to buy at low prices and sell them at high prices. This will make the market swing up and down. This will hurt the average person because they will not have the best judgement as to when to buy and when to sell. They will buy the bitcoins when they need them or at a random time they will buy them for future use. The people that buy bitcoins on a downward slope will be forfeiting wealth to the people that buy and sell stocks for profit. This will hurt Bitcoin by stopping some people from entering the bitcoin market. However, this volatility should go away as more people are in the market. More people will buy bitcoins when the price goes down and sell bitcoins when the price goes up. This will stop spikes and crashes. The more people that are in Bitcoin, the more pressure there will be on the price. Everyone will see opportunity when the price is low and buy thus bringing the price up. Everyone will see opportunity when the price is high and sell thus bring the price down. Over time, the price will continue to increase just as it has been doing since 2009.

Price

The price of a single bitcoin is set by the popular exchanges. It works similar to the stock market. People list a certain number of bitcoins for sale on the exchange. This is called a sell order. People make bids to buy a certain number of bitcoins at a certain price. This is called a buy order. If somebody places a buy order for a price at or above a previously listed sell order, then a “buy” occurs. If somebody places a sell order for a price at or below a previously listed buy order, then a “sell” occurs. These trades will set the current price. The latest trade price will be the advertised current price of a bitcoin. This is affected by supply and demand.

Some people think that a single bitcoin will be worth thousands of dollars someday. This has a chain reaction that affects the price. If enough people think they will be worth thousands of dollars someday, then the price will go up. This could feed itself and make them worth thousands of dollars someday. This is not a pyramid scheme because there is great utility in Bitcoin. The value of the network needs to be considered. It is a powerful network of computers that are currently hashing at a rate of 340,000,000 GH/s and growing every month. That is a powerful network and the blockchain might be the most encrypted and secure piece of information that exists. It will have a history of all the transactions that happened on the blockchain. This will be an excellent way to store & exchange wealth.

Bitcoin Price Estimate

If someone was to ask me what the price of a bitcoin will be at the end of 2015, I would say that it could be between $200 and $2000. I don’t think that is a fair question due to the volatility of bitcoin. The price will dip and peak at a moments notice. A more fair question to ask would be what will the average price of bitcoin be for the entire 2015 year. I think that price would be in the range of $200-$400. I can not see the price of a bitcoin falling below what it costs to mine a bitcoin and it won’t stay above what it costs to mine for any significant period of time.

I would approximate that it costs about $150 to mine a bitcoin in an industrial setting. It costs $200+ to mine one from home. Whatever the price to mine a bitcoin, I think it will be a barrier that the price will not fall below. Overtime, the rewards to mine get cut in half, so it becomes more expensive to mine. Once that happens, the price should rise. Also, if demand is greater than the number of bitcoins mined, then the price will rise. If demand is lower than the number of bitcoins mined, the price will fall.

If the price of a bitcoin falls below what it costs to mine, then the money used to mine bitcoins will be redirected to purchasing bitcoins directly from the people that already own bitcoin. This will, in turn, cause more people to stop mining and that, in turn, will make it more profitable to mine bitcoin. This cycle will ensure that the price of a bitcoin does not fall below the threshold for any significant period of time. Most people say the price in the short run is not important at all. It is the widespread adoption that is important for now. Once widespread adoption occurs, then the price of bitcoins will have no other choice but to go up. It is the physics of the Bitcoin system – it is the laws of the Bitcoin network!

Here are four groups of people that could make the price of bitcoins skyrocket:

  1. There will be over 14 million that want 1 bitcoins for their investment portfolio
  2. There will be over 1 million that want 14 bitcoins for their investment portfolio
  3. There will be a few very rich people that will want much more than 14 bitcoins
  4. Then, there will be the rest of the people that will want bitcoins for spending.

Bitcoin Price Volatility

There are very few bitcoins relative the number of people that there are. People are psychological creatures and owning 1 bitcoin will be a milestone. If there are 14 million such people that will want to own 1 bitcoin, the price of a bitcoin will skyrocket – there are not 14 million bitcoins in existence right now. By the end of 2015, there will be about 14.5 million bitcoin. A large percentage of these bitcoins will be hoarded by investors and other people that got into Bitcoin very early.

Liquidity

Many large companies liquidate their bitcoins immediately after receiving them – that is, they immediately convert them to USD. If this is how Bitcoin will be utilized by many companies, then this may cause the price of a bitcoin to stay at lower prices for a while. People will want to buy bitcoins for its’ benefits of shopping online and off. Then they will spend the bitcoins and it will be sold again. However, there will be hoarders that will buy up the bitcoins and wait for the price to rise. This will work over time and it will work short term if people buy in the crashes and sell in the bubbles. Then again, when a lot of people are buying during a crash, then the price will rise. If a lot of people are selling during a bubble, the price will fall. Again, some equilibrium will be found with this being an important factor in the price equation.

Bitcoin Theories & Concepts

nuclear bomb explosion

Mutually Assured Destruction

Mutually Assured Destruction is when two nations won’t have a serious conflict with each other because both sides have the potential to destroy the other. Like a nuclear war between superpowers, there can be no winners. The Bitcoin network lives on the same principle. Too many people have investments in Bitcoin to allow it to fail. Nobody would benefit from somebody breaking the integrity of Bitcoin. If someone pulls a 51% attack, then people would lose the trust in the system and bitcoin would lose all of its value. The perpetrators would make now gains because the system would be destroyed. Any parties that are interested in Bitcoin will attempt to prevent such an attack. The overwhelming majority of the Bitcoin network and their supporters will back the integrity of the system.

Governments will back the integrity of the system because they are obligated to protect their citizens’ interests. However, there will be controversy when governments attempt to freeze wallet addresses on the blockchain that contain illegally obtained bitcoin. The protocol does not currently support these freezes, but could governments force such a change? Scroll down to read about the proposed Hot List.

Network of Trust

If all the parties can come to a fair agreement of how much hashing power is needed, then there wouldn’t need to be a race to the bottom by wasting efforts on mining. It is naturally competitive as to reward the parties with the most hashing power. This agreement will not come as a verbal agreement between the parties but it will be agreed upon naturally through the price of a bitcoin.

Like in real life, no one party will want to take over more than 51% of the network because the value of the system would dwindle and their profits would dwindle. There will always be several large competitors that will prevent any one entity from controlling 51% of the network.

Someone that has control of 51% of the network will want to keep the integrity of the transactions – they would not benefit from altering any information in the network. The system will maintain a natural balance between people around the world – they will want to be friendly with each other. A majority of people are good and the network is an image of the miners and users of Bitcoin. It is a natural trust based system with laws to hold integrity.

The price of a bitcoin will be worth what people will make it worth. People will naturally make the Bitcoin network worth the services that it provides. If it does provide all the services of banking and credit cards and a whole lot more, then it will be extremely valuable. All parties that are involved with Bitcoin will want it to continue to succeed. An attack from outside the bitcoin network would be the most likely since Bitcoin competitors would benefit from the system failing. However, it would be cheaper for an outside party to buy into the network and try to control it from within. Terrorists will not ever acquire enough power to take down 51% of the network. Governments may have the power to do this. But, the governments that have that much power would be able to acquire control of much of bitcoin through mining and purchasing bitcoin. Also, governments are obligated to protect their citizens’ assets.

Bitcoin vs Manual Audits

A transaction and store of value system like the current financial institutions use manual audits to ensure the integrity of their network. Any business can be audited to make sure all transactions are accurate and complete. If they are not, they will suffer legal consequences. Is the current setup of audits more efficient than Bitcoin mining? I would say no since the credit card and bank fees are so high. A competitor, like Bitcoin, will ensure that the financial institutions are working as efficiently as possible because if they don’t, then their customers may leave. The financial institutions will have to be able to compete with the services that Bitcoin is offering and they have to do it with either more quality, better security, or for cheaper. Options are always a good thing for consumers. It will force the financial sector to compete for customers. They may use many methods to compete.

Attention in Media

It can be profitable for news agencies to report on the fallacies of Bitcoin. These reports, in turn, make Bitcoin less valuable. It is a downward spiral. However, people communicate with each other. There are lots of more people using Bitcoin and their are statistics to prove it. They will teach their friends of its’ advantages. Their friends will teach their friends and that cycle will continue until the general public is educated about the facts of Bitcoin.

Community Agrees To Update

If a general consensus among the Bitcoin miners agree to change the protocol, then this could have significant implications for the digital currency. This happens a lot for minor updates and is discussed in the Bitcoin community for major changes. A hypothetical scenario where Bitcoin miners might want to change the having of Bitcoin rewards to every 8 years instead of every 4 years is possible, but it is unlikely that a majority of people would agree to that. It would be profitable for the miners to do such a thing. But, this would cause belief in the system to dwindle and hurt them more than reward them.

People value bitcoin as a store of wealth and unethical changes to the protocol would cause the price to plummet. Many miners are deeply vested into Bitcoin and they do not want this to happen because it would not be beneficial to them. If something like this did happen, there would probably be a fork and the existing version would run in parallel to the new version. That would be terrible for the system for everyone involved. People would have to decide which fork to choose between. Current holders would want the old version and people that want to get on board might want the new version. I think that the community would see all the struggles that taking such an action would cause and they would not want to damage the market that they exist in. These scenarios are hypothetical and not practical.

Fork

A fork in Bitcoin is when there are two separate versions that have been worked on and they share a previous point where they were the same – they share a common ancestor. For example, github hosts software projects for developers and when someone has a public project up there, someone else could fork a copy of the current version and start working on it in parallel. The original developer would also be working on the original version. They could both save their copies and they would be different and not share the changes that were made by both of the parties. Some people suggest that a fork in the bitcoin could be used. It would take a majority of the miners to approve a different version that will be accepted by the community. In practice, there would be an overwhelming majority that agrees to any updates because it would not be beneficial to anyone otherwise. It would be a guaranteed loss for everyone!

In the event that a successful 51% attack on the system happens, there would be a fork with the 49% that maintains the integrity. Users would have to ensure they are using the “good” fork. This attack is theoretically possible but in practice, it is impossible.

Hot List

Hypothetically, there could be a hot list added to Bitcoin. If enough miners agreed to update the core code, then a hot list of addresses holding stolen bitcoins could be frozen. They would then be able to use them for legitimate uses. This would render those bitcoins nearly useless and it would make it not so profitable for bad people to steal bitcoins from people. This would be hard to maintain and it should be hard for a person to place addresses in a hot list but it would be beneficial for the entire system and help it be accepted in the mainstream. The original holder of the bitcoins would have to prove that the bitcoins do indeed belong to them. Once it is on the host list, it would be worth little to nothing. This might even influence some hackers to give the bitcoin back for an agreed small percentage of legal bitcoin. This hot list would probably only be feasible for large thefts.

Charitable Donations

When you donate money to a 3rd world country, not all of that money reaches there. If you wanted to donate $1, probably about $0.10 will reach the hungry child that you wanted to feed and the other $0.90 ends up going to the 3rd parties in between. With Bitcoin, it will be possible to donate $1 to starving children and $1 will reach its targeted donation. The implications of what Bitcoin could do for the world are huge. It is arguably free to use! There will be 3rd party applications that will absorb any costs to send money. The applications will generate revenue with the traffic to its’ services just like Gmail provides free e-mail and Facebook provides free social networking.

Bitcoin Can’t Be Used to Pay Taxes

I have heard a lot of arguments stating that Bitcoin is useless because it can not be used to pay taxes. This is currently the case, but it is easy to convert bitcoins to USD and possibly in the future, the IRS might reconsider. NYC is proposing allowing people to pay parking tickets with bitcoins. This would save the people and the city a lot of money in financial fees with credit cards and the costs associated with mailing checks. Bitcoin would be useful for collecting tolls on highways for the same reasons. People could get a sticker on their car and have the payment automatically go through. This would save the highway management and people money by cutting out the banks from the middle of the transaction.

 

Bitcoin is Programmable Money

software program

Bitcoin is programmable because it is so easy to write programs to automatically send money back and forth. It is easy to write a computer program to accept an incoming transfer and then break it up and send a piece of it to several different addresses. The bitcoins that get sent around won’t have the fees attached to them like what happens in the market now. It is programmable because it is easy to write a program that automatically distributes funds based on actions the users take while using a computer application.

Visualize this scenario:

A third party wants to accept donations and divide it between several charities. This would be too expensive to do with credit cards and bank transfers. This can’t be completed or verified immediately either. Now someone will be able to donate $0.25 to their favorite 50 charities that they choose with a click of a button. Each of those charities will be able to receive a half penny. This will only count as one transaction on the blockchain since there can be multiple receiving addresses in a single transaction. It is immediately verified that the charitable addresses received the donation. This can all be done programmatically.

That is just one demonstration of how it is programmable. There are many other justifications as to why Bitcoin is more programmable than the USD. The USD takes days for transactions to clear and Credit Cards can take up to months before the transaction is cleared and the funds are available to the parties. Most banks and financial institutions have barriers to allowing money to be so easily distributed and utilized via a computer program.

It is difficult for the international community of businesses and individuals to cooperate financially with the current financial instruments available to them. With Bitcoin, essentially any individual or group of individuals can create and maintain their own bank. They can write the programs to do whatever they can imagine with their bitcoins. The program can send and receive funds with the only limit being its’ creators imagination. That is difficult to do with cash. When you send old-fashioned money, you are really just sending a note for your bank to transfer the funds to them. There is a physical presence of that money that needs to be maintained. There is no guarantee of payment with USD until you get the money physically. The Bitcoin you receive is guaranteed to be yours as soon as the financial transaction is verified by the network and recorded on the blockchain. This allows the money to be easily controlled by computer programs. Bitcoin essentially delegates financing to a powerful computer network where the integrity of transactions can’t be broken.

Financial Problems & Bitcoin Solutions

The decision of financial problems.

Financial Problems

The international community is unable to efficiently & securely make financial transactions with each other. The only technology that is widely available to the masses is provided by large corporations that have high fees, long waiting periods and lots of other restrictions. For example, try to make a $0.50 purchase online from a company in a different nation. The fees are too high for the merchant – the bank will make more than the merchant. The merchant will have to wait a significant amount of time before having 100% possession of the money – it can be as long as 6 months before the credit cards fully confirm a purchase. And, the credit card transaction will probably fail and force you to manually confirm the purchase directly with your credit card company. And, you do not want to upload your checking account information to some foreigners database for a $0.50 purchase or any size purchase. This makes international commerce nearly impossible. It can only be done by a small percentage of large spenders. The rest of the planet does not have access to digital financial transactions.

Bitcoin Solutions

Bitcoin is an open network that allows anybody with internet access to immediately send money to anybody else in the world that has internet access. The transactions can actually made offline, but eventually need to be merged with the network online. It is efficient & secure and is nearly free. 3rd parties will provide the service for free and make money off of advertising revenue just like the model with E-Mail & WWW. Bitcoin is a protocol built on top of the Internet and it allows for immediate, irreversible transactions between anybody. A lot of people do not have access to the internet, but this problem is being addressed by large companies like Facebook & SpaceX. They are trying to fund a program to launch satellites so that everybody can access the internet. Also, they want to ensure that everybody has access to at least a cheap mobile phone. It will be profitable for them to have all of these new users. Bitcoin will allow for direct banking between customers and merchants thus cutting out the banks and credit card companies that provide low quality services for expensive prices.

Bitcoin Micro-payments

bitcoin-dollar-xsOne problem that Bitcoin addresses is online micro payments. There are typically $0.25 + 2-3% or more fees for merchants. It is 2.2-2.9% + $0.30 per transaction for PayPal transactions (source). I think all internet users would like the freedom to be able to buy something for $0.25 online without giving banks $0.31.

Digital content is a big market that can only get bigger in the foreseeable future. The merchants currently pass these expenses onto the consumers. Merchants would have to charge the customer about $0.51 to make the same profits as a $0.25 sale using paypal or credit cards. For medium payments from companies that make $100,000/month that have $10 items would still be paying over 5% to PayPal or the credit card companies. They could offer the customer 5% off for purchases using bitcoins. I think people can be educated about how much of their purchase goes to the CC’s & Banks. If they choose to pay in Bitcoin, they could be shown the expenses that they saved and it can range from 50% for micro-purchases down to just a couple percent for larger purchases.

It used to be the case that merchants were not allowed to charge customers for the expenses. Recently, litigation for a class action lawsuit forced the government to implement laws to ban this practice (source). Now, merchants are able to attach fees to the consumers purchase. Merchants can utilize this practice with micro-purchases and show customers that they can save over 50% for micro-purchases using bitcoins instead of credit cards!

Bitcoin Replacing Physical Currencies

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The use of physical money will be replaced by digital currencies. You might ask: “What are we going to do with all of the old paper currencies?” Well, we could certainly start building financial museums and someday bring our grandchildren there telling them: “this is what we used to use when we were young”. Will it be just Bitcoin in the future? Absolutely not! The USD is almost a digital money already. Most transactions are done with credit cards or bank wires, but Bitcoin will have its role to play in the world. The USD is mostly just digits on a screen, anyhow – they are very similar, but Bitcoin has a lot of useful features that the USD does not have. It is possible that the USD will convert to a model that is more similar to Bitcoin, but that would be difficult to accomplish considering the foundations of our financial infrastructure was built on the current properties of the USD. If the USD acquires all the features that Bitcoins has, which it won’t, will Bitcoin still have a role to play? Yes, I would say – Bitcoin is an extremely powerful financial instrument that is easily programmable!

The current owners of the physical money are not going to need to trade in their old bills. It would be wise for people to diversify their assets in case if the price of a bitcoin rises significantly compared to the USD.

Will Bitcoin be one of the worlds’ currencies? It absolutely will be – it already has! The real question is: “how large of a fraction of the pie of currencies will Bitcoin become?”  Currently, most transactions with the USD and other fiat currencies are already digital. There is not actual physical cash that exists for all of the money that is out there. When someone gets a loan from the bank, they are lending out money that is in their accounts that belong to other people. So, do the people that have the money in their bank accounts also have that money, too? Does the account holder have $100,000 in the bank even though the bank lent that $100,000 to a home owner? That is $200,000 worth of money but only $100,000 in cash actually exists. Banks are required to hold 15% of the “money” as physical “cash”. The rest is insured by the FDIC (up to a certain amount) if account holders need their cash but the bank does not have it. There is no FDIC insurance for a Bitcoin wallet, but there are exchanges that offer private insurance on their accounts such as Circle and Xapo.

Bank account holders are in fact lending their money to people that are holding debt to the bank. The account holders sometimes get some small amount of interest for the money in their bank accounts – it is not significant; it won’t keep up with inflation. On top of the potential interest, the banks provide services in exchange for the bank holders’ cash. What would happen if a large number of people went to their banks and took out all of their money? The banks would not have enough. The FDIC insures the accounts so they have to send the money to the banks so they can give them to the account holders. If this happened rapidly, the FDIC would have to get the treasury to print a lot of money to payback the account holders. The people with debt to the bank would owe the bank and the FDIC the money on their loan. The home owner might or might not have a lot of wealth if they have a mortgage on their home. Homes would go way up in USD value since there is more money in circulation – most of them will have fixed rate interest.  The homeowners would benefit because there home would be worth more than what they owe on it but people holding actual money would be hurt because of the inflation.

How much would a large influx of investors buying bitcoins affect the financial system? The people that previously had the bitcoins and sold them to the people that took the money out of their banks to buy bitcoins will have a large portion of USD and possibly they will keep a significant portion of these bitcoins. This will potentially displace some of the funds from the banks and their other investments. Most of the USD will end up back in the banks which will, in turn, lend them out and the cycle will continue. Even if Bitcoin went mainstream, it will not cause a financial crisis; it will only open up more opportunity and cause the existing financial infrastructure to be more efficient and competitive. It may cause some obsolete services to go away.

What happens when transactions are replaced by bitcoins? The USD would be used less. This will cause the Bitcoin to rise against the USD and it will transfer wealth to Bitcoin holders. I think wealthy people will be able to purchase enough bitcoins and have enough control to mostly maintain the current distribution of wealth. Bitcoin has a long way to go to become relevant, but it is growing rapidly. There will be quite a few new millionaires and billionaires if Bitcoin goes mainstream. Bitcoin technology just might be the world’s next largest international financial system that is widely recognized. Gold is an example of an international transaction system, but it is for the museums & collectors now; it is impractical to use it for transactions.

“Receipts of gold” was the next international transaction system – these receipts were called dollars, but then the dollars got detached from Gold. They then started making receipts for the dollar and transacted the receipts instead of transacting physical dollars – those were checks. They then created the Internet and could send digital receipts of the physical dollars – those were wire transfers and credit/debit cards. The current system is a mixture of  dollars, receipts of dollars and digital receipts of dollars. It is easy to exchange the digital receipts of dollars. Bitcoin is superior to digital receipts of dollars since it is self-contained. There has to be a lot of trust built between the parties when utilizing the current financial model since digital receipts of dollars are worthless unless if they are honored. With Bitcoin, this trust is not needed; once the transaction is complete, the wealth transfer has been honored and it can’t be reversed. The Bitcoin system enforces integrity: money can only be sent from a wallet if a private key is provided. There is no need for an inefficient central authority to guarantee the integrity of transactions; Bitcoin transactions can be made almost instantly with absolute certainty.

Bitcoin is Revolutionary

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Bitcoin is a tool to move wealth from old financial institutions to a younger more tech savvy crowd. This revolutionary technology allows a college student living off student loans the ability to build useful financial applications that can be used by the masses. Before Bitcoin, only the elitist wealthy owners of financial institutions had this ability. Now, anybody can create a revolutionary app to manage financial affairs.

This is the WWW all over again; it is the beginning of a new era like the revolution that happened with smart phones. This one is bigger than the smart phones because Bitcoin has some fierce and powerful competitors unlike the smart phone. There was no competition for smartphones – well, land lines? Cellphones evolved into smartphones so they are “one and the same” instead of being a competitor. The WWW had no competitor; the old in store commerce did not even see the threat of e-commerce until it was too late.

The people that Bitcoiners will be taking business from are the most wealthy and powerful people. It is the top 1%. It is the top .1% and even higher. They have control of media and they influence what the general population sees and thinks. There is going to be a battle for this new business opportunity. The huge transaction fees that banks are bringing in are up for grabs. If Bitcoin offers superior services for less costs, then people should naturally move into Bitcoin.

Whoever creates the new “killer apps” may become wealthy in a short period of time. It won’t take much for technologists to enter or at least come close to the ranks of the 1% in this crucial point in history. The killer apps that will be taking the electronic financial market by storm are in development and some have already been launched, but there is plenty of room for more!

Besides the financial market, the blockchain has uses outside finance. It works as a proof of existence: store a hash of a file on the blockchain to prove that the file existed at a certain time in history. The document will be notarized and this can be done programatically – someone that wants to put 1,000,000 proofs of existence on the blockchain can easily write a program to accomplish that task. This public ledger of information is immutable, that is, it can not be changed once it is verified and written to a block. This transaction will be a part of history – it will exist for all time!

Bitcoin Security

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It is true that extra security needs to be taken to stop bitcoins from being stolen, but the same problem exists for automobiles. I don’t think people should not buy or use automobiles because they might get stolen. People could only use trains and buses so they don’t have to worry about their car being stolen, but a car can be much more convenient than a bus or train. Similarly, bitcoins can be much more convenient than cash or credit cards, however, it is more risky to use Bitoin for now, just like having an automobile is more risky than a train or bus. Credit cards and cash are much more limiting than Bitcoin and credit cards are also more expensive. Buses and trains are typically cheaper than cars, but are very limiting. If the proper precautions are taken, than it is nearly impossible for people to have their bitcoins stolen. There is always a possibility that any possession can be stolen from you! There is a learning curve with Bitcoin, but the advantages for individuals and the collective society to use Bitcoin outweigh the risks that come with using it; the risks of not using Bitcoin are also prevalent – try to make a purchase online for a small amount with your credit card or checking account and you may end up going through a lot of hassles to recover from identity fraud. Bitcoin eliminates that risk!

For Mt. Gox, it was concluded that it was an inside job by the owners of the company. They stole nearly $500,000,000.00 worth of bitcoins at the time. The price may have been artificially inflated by bots during that period so the actual value might be less. We are in the early stages like in the wild west with gold – there will be some high profile hacks and lots of little hacks. In the wild west, there were several notable high profile robberies and many small robberies of gold. Over time, the theft of gold was pretty much eliminated, but it does occasionally happen now – people get robbed for their necklaces and jewelry stores get robbed, but there are rarely any large scale gold heists anymore.