Bitcoin Cost vs. Value

Cost-value graph on blackboard

The Bitcoin network is not free – it costs money to run. It is a network of super-computers. The miners, which run the network, get paid with transactions fees and rewards for providing this valuable service. They are currently rewarded with 25 bitcoins every 10 minutes and the transactions – this is the cost of Bitcoin. When I say value, I am not talking about price. Price is how much a bitcoin costs and value is how well of a service Bitcoin offers. The inflation started off at 50 bitcoins every 10 minutes in 2009 when Bitcoin was first launched. This number gets cut in half every 4 years. This “minting” or “mining” of the bitcoins is inflationary in nature. Every 25 new bitcoins mined will make the rest of the bitcoins worth a little bit less. So, the holders of bitcoins are paying the high transaction fees right now. However, this cost is offset by new-comers buying the newly minted bitcoins, so the current bitcoin holders aren’t taking 100% of the costs. The transaction fees are negligible right now but they will grow over time and should accumulate with the large quantity of transactions. Around 2140, Bitcoin will stop mining new bitcoins since it gets cut in half every 4 years. This is when the inflation stops. The price of bitcoins should be affected dramatically at the next halving scheduled to happen around the end of 2016 or beginning of 2017. The supply will be less and if the demand stays the same, then the price of the bitcoins will have to go up. Currently, the price staying high depends on the number of people entering the bitcoin purchasing market. It seems to be maintaining to some extent right now. The price is still around $250 per bitcoin at the time of this writing. The miners are able to sell their bitcoins. The $250 price seems low compared to the high of $1150, but the high was an artificial spike. The average price of bitcoins has steadily risen since the launch of the Bitcoin network. Some would argue that since the price of the current holders of bitcoins depends on new generations of buyers, then Bitcoin must be a pyramid scheme. However, it is not since the value of the services offered by Bitcoin, the blockchain, and bitcoins. And, the fact that the inflation steadily goes away. If the number of bitcoins generated instead doubled every 4 years instead of halving every 4 years then that would make it much more similar to a pyramid scheme. If it stayed the same, then I think the value of the services offered by Bitcoin would still outweigh the costs of inflation.

Bitcoin Deposits to Ensure Quality Content

Proposed System

A very small amount of bitcoins could be used as another means to moderate web content in 3rd party applications. A system could be created that is used to organize data. A content creator could put up some bitcoins for an article. Users would be able to up-vote it and down-vote it. The more up-votes, the more bitcoins the content creator gets back. If it goes up above the average, the content creator could get more bitcoins back then was first put up. The content creators would be rewarded by the expense of the advertisers or spammers that are posting bad content. There should be some leeway for content that is just a little below average because that just might mean it is controversial to a significant percent of the population.

If content gets all down-votes, then it is most likely spam. Some content that might be good but is looked at as bad by a significant portion of the population might be labeled as spam. I think those articles could be spotted by requiring at least a few people to see it. Users would have a power attribute. Users that make “good” votes could have increased power. Maybe they could upvote by +1, +2 and +3 and downvote -1, -2, -3.

Voters could be shown some guidelines to not downvote a controversial issue. Sometimes a large percentage of the population has bad feelings towards some issues that were illegal or immoral that might now be regarded as legal and moral. Some of the bitcoin generated from the bad content could also be given to the customers that view the content. This could be done with money but the fees might be too high for content creators to put up a deposit. A content creator might only want to and need to put up $0.25 for their content. That would be impossible to do with a credit card. Amateurs might spend years attempting to create good content and want to try to publish it, but they don’t have money to pay for advertising.

The large search engines are good for organizing content so that people can find it, but they typically favor the same large media outlets. They also place a lot of advertisements that would avert users away from finding their content. This would also entice advertisers to produce better content and pay the users for finding it. That money currently goes to the large search engines and advertisers. And, there is a ton of money going to them – that money could stay between the online services providers and the customers.

This system would also hurt entities that attempted to make bad content because they would have to fork over some deposit. Add that to all the money that the merchants and customers save from having to “pay” for advertisements. Both the merchants and the customers pay for those advertisements because the merchant relies on the advertisement to reach the customer. The merchant then has to raise the price of the product to make a profit. The customer pays the increased fee.

When someone is at shopping sites, the shopping site and banking system take in a large amount of profits from their merchants and customers. A new system could be created that could cut them out. With well trained customers and merchants, the middle men really can be cut out. When I say middle men, I mean the advertising companies, credit card companies, banks, online shopping networks, online social networks, etc… There could be more free and open international systems that are not owned by nations and corporations but are owned by the international community.

Electronic Financial Instruments



Onedolar2009series

Moving Resources

For every dollar that goes into Bitcoin, it is taken away from somewhere else. That is, if an investor is holding $25,000.00 in Apple stock and they sell that to invest in Bitcoin by buying bitcoins or investing in a Bitcoin related company, then the price of Apple stock will go down – this will effect the resources that Apple has. The economy has plenty of room to adjust to Bitcoin – possibly, the government could print more money to expand the economy and make room for Bitcoin?

Bitcoin has a current USD market value of about $3 Billion which is tiny considering the market it is entering. This does not count the USD that is invested in the businesses surrounding Bitcoin. Investors poured about $350 Million into start-ups focusing on Bitcoin in 2014 an that is up from only $100 Million the year before. There has already been over $100 Million invested into Bitcoin in the first month of 2015. These investments are growing exponentially and if it continues at the rate we have seen, then should should be over a billion invested in 2016. This huge amount of funding going into something this early shows that Bitcoin is a serious contender in the international financial market. The money poured into Bitcoin would be in banks or stocks otherwise – Bitcoin is already disrupting the economy by re-allocating funds from banks and certain corporations.

The price of bitcoins will adjust to what the value of Bitcoin is worth. Bitcoin provides extremely useful services and the valuation of Bitcoin related companies and the price of a bitcoin will eventually reflect the services that it provides. If it accounts for just 1% of the economy, then the price of all bitcoins should be worth about 1% of what the economy is worth. That number is huge compared to what they are priced at now! The price of a bitcoin needs to be worth enough to sustain a certain dollar amount of trade and store of wealth. We will watch these extraordinary events unfold over the next few years and it will be an exciting show!

Nations Will Need To Participate

The economies of each of the nations will have to start participating in mining in order to keep the network secure. This is especially true for a particular nation if its’ citizens has assets at stake in the blockchain because it is necessary for nations to protect their citizens’ assets. The IRS already labeled bitcoin as an asset and, therefore, the USA is obligated to protect the Bitcoin network. Nations will be responsible to keep the integrity of the ledger if their citizens’ are vested into Bitcoin. They will need to invest into monitoring the ledger to look for attempted attacks and they will need to retaliate to the attacks. There is already regulation because of the announcements of how bitcoins should be handled – there is proposed official regulation and it will become law in a matter of time.

The nations will have to balance their economies to make room for Bitcoin just like it did for the large technology companies that arouse since 2000. A lot of money was moved from different sectors of the economy into technology and a lot of new money was printed to handle the expansion of the economy. The economies will have to find a new equilibrium with Bitcoin factored into the equation. Bitcoin provides us with a super advanced technology that has never been seen before. The concept of international trade has been around for around 10,000 years or more. Bitcoin is a radical innovation; it is not just a small step! There will probably be more that will happen in international finance in the next 10-20 years with Bitcoin than has happened in all of human history.

Growing Pains

Google had its’ problems with web spam, computer viruses, phishing and other growing pains. These problems still exist even after Google has been around since 1998. Bitcoin has been around since 2009 and it has had problems like Mt. Gox and other illegal activity that happens using Bitcoin. Mt. Gox had nothing to do with the core technology of Bitcoin nor does most of what media reports – they are problems with businesses and individuals that use Bitcoin; they are not problems with Bitcoin itself! It is usually a third party that steals the bitcoins that people have stored on their servers. With Mt. Gox, it is believed to be an inside job. Bitcoin technology does have its’ problems, such as scalability, but the protocol can be updated to handle the problems.

Banks Reserves

The money that you have in your bank is not technically at your bank. The banks lend the money out and are only required to hold 15% of their customers funds. The rest is, of course, covered by the FDIC up to certain limits. If there is a mass adoption of Bitcoin, then all the funds that get converted to bitcoins get diverted away from certain banks. Banks will no longer have that money to lend out and collect interest on. The people that sell their bitcoins and the miners of new bitcoins might just take that money and put it in the same bank, but that money will most likely be diverted away from its’ prior trajectory.

When Bitcoin goes mainstream, there will be an amplified effect on the economies of the world and the economies will have to adapt – the banks will have to compete with Bitcoin for their customers’ money. This competition is a good thing because banks will be coerced to keep you depositing their funds in order to stay in business. This will force the current financial institutions to compete and offer lower prices for their services or it will entice them to take anti-competitive and unethical actions to stay in power.

Bitcoin Credit Limit & Credit History

photodune-715349-credit-cards-xs

Credit Limit

Users will need to be able to get a credit limit with Bitcoin. This also needs to be reported to some credit bureaus. For Bitcoin to succeed, there will need to be some 3rd party agency that offers services similar to credit cards. People want a spending limit of money that they can pay back by the end of the next 30 day billing cycle just like they do with credit cards. They want the 60 day grace period on their balance they don’t have to pay interest right away. This is a major blocking factor for Bitcoin to go mainstream. Once a reputable company can provide users that have good or excellent credit with a spending limit, then this barrier will be broken. This would open the door to thousands or even millions of new users.

With Bitcoin, you will not, anytime soon, get the same 0% APR for 18 months with a $10,000 limit as easily as you currently can with the major credit card issuers. People would rather spend money that they don’t have than to pay immediately with the money that they do have. Most people have debt that they would rather put that money towards so they don’t have to pay interest on it. This gets a lot of people in financial trouble, but it just the way that it is. Hopefully, there will be Bitcoin credit cards where people with excellent credit can get a 10 bitcoin credit where they must pay back just like they do with current credit cards.

Credit History

People like to have their spending recorded on their credit reports. This shows to the banks that they are capable of repaying a debt. If someone only used bitcoin then they could not build a credit history that is widely accepted as a verification of a users agreement to pay them back. If there was a serious credit agency that could be listed at the end for specifically bitcoin credit history, then this would provide for a major breakthrough. Bitcoin could allow for an effective international credit reporting agency.

It would be possible to give someone a credit limit in US dollars and allow the user to convert it to bitcoins as needed. This could then be reported to the the standard credit reporting agencies.

Current Status

There is a company called BTCJam that allows users to lend their bitcoins to other users. The borrowers will repay the bitcoins they borrowed plus an agreed upon interest rate. The credit history is internal to the system. The borrowers will have their online profiles like Facebook & PayPal verified. They also allow them to have a credit card and checking account that can be verified. If a user has all of these verified, they should be more trustworthy.

However, this does not meet the requirements of what is needed for Bitcoin to go mainstream. They need a serious player that will verify credit history on their credit report and report spending to the credit reporting agencies.

Further Ideas

An identity could be linked to a wallet and a users spending could be made available to creditors. A 3rd party app that allowed a user to report their wallet address to their identity and gave it to creditors upon request and approval is an interesting concept.

Bitcoin: “A” Money of the Future

Earth, world map on money background

Bitcoin will not be “the” money of the future. It will be “a” money of the future. It will have applicability in the international free market. The free markets in the world have always won and caused for greater innovation. Markets that are not free will fall behind the free markets since a free market sparks the greatest innovation. People can competitively attempt to solve problems.  Humans are naturally a competitive species. It is the only way we can prosper.

Outsourcing Financing to Machines

Bitcoin can manage financing for cheaper than the current banks. The overhead to support all of the millionaires and billionaires in our current financial markets is overwhelming. The rich are feeding off of the economy one transaction at a time.

Bitcoin is the Next…

Bitcon is not the next Facebook, Apple, Google or Bank of America. It should be looked at more like the next telephone, internet or e-mail. It is the next step in the evolution of technology on our planet. I wouldn’t be surprised if there are other intelligent life forms in our universe that use, have used, or will use some form of crypto-currency during their evolution.

Bitcoin is a Trustless Currency

The parties do not need to trust each other for an exchange to happen. For credit cards and ACH, a lot of trust is required. That is not so much for the credit card case, but it is not a good experience to have your credit card numbers stolen. Your credit card company is responsible to cover any unauthorized purchases on your account. With bitcoin, if you use it properly, somebody can’t steal any bitcoin from you if you don’t give them your password and/or private key.

Printing Hard Copy of Bitcoin

It will be possible to have a wallet containing bitcoin converted to paper. Further, someone could verify that the paper wallet still contains the bitcoin. This would be done with a barcode. The password could be built into the barcode, so that it could be redeemed by whoever possesses it. A potential security problem for this would be that someone could steal it by taking a picture of it. A scratch off surface such as on lottery tickets could be utilized. A trusted corporation could manufacture a large number of these scratch cards and sell them at a small mark-up. It would be a huge business. The government is not as efficient as the free market! There have already been offline hard versions of bitcoin created https://en.bitcoin.it/wiki/Casascius_physical_bitcoins Casascius. These physical coins can hold value of 1, 10, 100 or 1000 bitcoins. I have a feeling there will be a version two of these items in smaller decrements and cheaper mediums like scratch off tickets.

Infinitely Divisible

A bitcoin can be divided up to very small parts. My sample wallet address 1HdXXkqjmHcTdX5FyMMUkARP6i4rtr1C74 from Bitcoin Core currently states a balance of 0.00007303 BTC.

Digital Funds In General

People are going to want an international digital currency. People want access to their funds in any currency that they would want online. This needs to be done without the user having to do any manual actions.

Bitcoin Accounts

Balancing Account

A balancing account is an idea that I have. Some variation of a spending & saving account could conceptually be created. They would contain an equal amount of bitcoins and USD when adding funds to it. This could be used to maximize savings and minimize spending. If the price of bitcoin has fallen since making a deposit, then spend cash on the current purchase. If the price of bitcoin has risen since making a deposit, then spend bitcoin on the current purchase. This will ensure that the user always made money of their deposits before spending.

Bitcoin Arbitrage

Arbitrage is when investors buy a bitcoin from one exchange at a lower price and sell it at another price for a higher price. This balances the price between the exchanges. It can be profitable for the investors engaged in this activity. It is a risk, though. If the price is crashing before they make the buy and sell, then they will lose money.

Trading Stocks

The price of a stock depends on the value of the service that the business provides. Bitcoin is an extremely valuable service. The value of this service will be reflected in the price of a single bitcoin and in the value of the businesses surrounding bitcoin. As long as the 51% of the servers is not taken over by a malicious attacker, then bitcoin should retain some value. Even if the 51% attack was to happen, there would be a fork that the rest of the community would start moving forward with. The network is not theoretically impenetrable but in practice, it is impenetrable.

Volatility Insurance

Companies are afraid to hold onto bitcoin that they receive because it could go down by 20% in the next few days. That would make them lose money on a sale. An insurance to cover volatility could be created. It could be commission based on the fluctuations. The insurance company would collect a percentage of the increase in value in an exchange to cover the dips in value. This would take the risk out of a crash for some companies that may hold bitcoin.

Insured Bitcoin Accounts

There are currently insured accounts available at some exchanges. I’m sure more will grow. They are responsible for any bitcoin that was lost or stolen because of them. This includes hackers attacking their systems. It does not include someone getting ahold of your username and password. Also, they usually have 2 factor authentication so they would need your password and either your email or cellphone authentication. Authentication would be done by sending an e-mail with a confirmation link or sending a text message with a confirmation code that needs to be entered into the site before a transaction can take place. Fund that are stolen from a traditional debit card are usually not insured. However, funds stolen off of a credit card are usually covered by the credit card company. Those funds come from the consumers through fees and high interest rates. The problem with insurance is relatively easy to address for Bitcoin. Corporations will provide this service. They will need to make a profit for that service, so bitcoin holders that choose these services will probably pay for them. Some companies make their profits through other ways that will offload the costs to the customer.

Bitcoin Only Backed by Faith?

Faith in the Digital Age

I keep hearing the argument that bitcoins only have value because people believe they have value. They state that a bitcoin is worthless by itself – the only reason it is worth something is because of some magical belief system that people can not prove.

However, it has so much applicable utility in digital (and non-digital) international finance. It has value because of its’ utility not because people “believe” it is worth something. It has value because it provides most of the same services as banks, CC’s & treasuries and so much more. It has value because it provides business opportunity for miners, developers, financial professionals, etc… It has value because if you steal it from someone (in a modern country) and get caught then you will face legal punishment!

It is not valuable just because people believe it is valuable.

That would be like stating that automobiles only have value because people believe they have value. People believe automobiles have value because of their utility. They provide for detached transportation unlike the prior train services. If automobiles did not have any utility, then they would not have value. There are some obvious exceptions to antique collectible automobiles. The same argument applies to Bitcoin. Bitcoin has an intrinsic value because it is a mechanism to move value from any two points on the internet nearly immediately.

Alt-coins

An argument might be that an alt-coin provides the same services as Bitcoin. However, how stable is the the alt-coin? There are no alt-coins that have the market capital as high as Bitcoin. If you wanted to buy $100,000 worth of an alt-coin, the price would probably triple and then many people would dump the coin and you would not be able to sell the coins for the same price that you paid for them. If you bought $100,000 worth of Bitcoin, you have some assurance that the price of your bitcoins should remain near what they were when you bought them – the price wouldn’t be impacted too much because of the purchase. Also, what is the security of the alt-coin? There are no alt-coins that provide the level of security that Bitcoin provides. Overall, there are currently no alt-coins that provide the benefits that Bitcoin provides. If an alt-coin has some new and improved feature that Bitcoin does not have, then the Bitcoin protocol can be updated to acquire the feature. If the feature is in a different family as Bitcoin, then possibly the new alt-coin would provide a different set of services than Bitcoin and the market would allow for both of them. The world of crypto-currencies is in its’ infancy and it is the next era of technological evolution.

Bitcoin Money Tactics

Adding Another Factor

For new purchases online, I wonder whether to spend bitcoins or USD when I am purchasing. If I think that the price of a bitcoin is going down, then I should use the bitcoins before it goes down and then just purchase bitcoins when it is lower. Some people watch the markets and might be good at being able to make predictions. They could record when they bought and make sure to use it only after bitcoins reaches +20% in value versus the USD. When you receive cash, use the cash only after bitcoins reaches -20% in value versus the USD. If we still see all of this volatility, people that do this will see a maximum purchasing power versus just using one form of payment. You might want to keep 50% USD and 50% bitcoins out of all of your disposable income. If you have leeway of when you can make purchases, then wait for a price dip or spike before making any purchases for goods or services.

Transaction Fees

For the near foreseeable future, transaction fees are an insignificant cost since the miners make their profits by being rewarded a certain number of bitcoins. The number of bitcoins rewarded gets cut in half every four years. If the volume of transactions grow large enough, then the fees will be significant profit for the miners. The volume of transactions or the transaction fees themselves must grow in order for the system to survive since the newly rewarded bitcoins get diminished over time.

The system can make an estimate for a fee for a transaction and the time it will take to process it. The client application calculates the fees. The transactions that include a higher fee will have higher priority in the system. There will be a huge market for free transactions just like the model with E-Mail and WWW. Most websites and e-mail services are free and the providers make their profits by advertising. This is what is happening with Bitcoin. Intelligent and innovative people will find ways to handle transactions for free by attaching an advertisement to the transaction so people in the network will see them.

Buy/Sell at Spread

People can make money by buying and selling at the same time around the asking price. Try to buy at 0.00000001 above the highest listing order and sell at 0.00000001 below the lowest selling price. If you continue to do this and keep a spread between the buys and sells, then there is a profit to be made. There are bots that do this in Bitcoin exchanges and many other types of exchanges. This creates a window between the buy and sell thus making a profit.

If the price is tumbling and the buy and sell does not happen immediately, then as long as the buys and sells take place at some point in time, than a profit is to be made. That just might take a while since we don’t know when the price will rise again. I’m certain that the price of bitcoins will rise again since the technology is so brilliant and there is a large international demand for such a technology. This can get complicated because the value of the US dollar or other currency that the bitcoin gets exchanged for might change in relation to Bitcoin. There is a natural equilibrium between the value of a dollar and a bitcoin keeping it at a fair market exchange price. However, the money invested into the bitcoin would be locked up and the investor would not be able to invest that money into anything else. Bitcoin makes it easy to automate this task since it programmable money.

Setting Up Antminer S5 Tutorial

This tutorial will guide you in setting up a AntMiner S5 ~1155Gh/s @ 0.51W/Gh 28nm ASIC Bitcoin Miner from Bitmain.

First, you will need an open ethernet connection for each device that you will be running. You will need to put them away from your living quarters since they are just a little bit to loud. You basement, garage or a room with a thick door should be just fine. If you don’t have a wired connection in the room, you can get a Wireless Extender.

You will need an external power supply. You can use a EVGA 650W Power Supply to power one of the AntMiners or use the EVGA 1300W Power Supply to power two AntMiners.

You will need to plug a paper clip or similar into motherboard hook up that is coming from the power supply. There is an actual electrical component that does that, but I can’t recall it’s name right now. I just use the paper clip and that works for me. For the 1300 watt power supply, only one power supply can be plugged into its own electrical circuit. If I plug two power supplies with 4 miners into same circuit (not outlet), the fuse gets tripped.

You will need to log-in to the Antminer S5. Use Advanced IP Scanner to find their IP Address on your network. The default username and password is root/root. You will need to configure them so they join a pool. F2Pool works the best for me.

After you do all of these, you should be earning bitcoins constantly! These devices have gone up in price over the last few months so you will probably be able to resell the device for close to purchase price after mining bitcoins for several months!

Bitcoin based P2P Advertising


P2P

A Bitcoin based P2P advertising network could be created that would allow publishers and advertisers to negotiate the sale of space on the Web. Any publisher could drop a JavaScript and HTML tag on their website which would broadcast data about the traffic to their website. The open P2P network would take this data and propagate it through the network. The website would then allow the free advertising space to be auctioned off to the network. The network would automatically transfer the bitcoins from the advertiser to the publisher as it is displayed or clicked. Anybody would be able to set-up a server node and start bidding on traffic from their home computer. The advertisers could bid on traffic that is from a certain region and traffic that will only result in a minimal CTR and an infinite of other criteria.

<div adspaceid=”zdsdfeaSDAFgraw8w2a” walletaddress=”1wauiAWEFeW839Fwo3ifhn” width=”728″ height=”90″>

<script>
//broadcast information about this ad space
//poll an open network for bids on this ad space
//if i find a bid that i like, show the ad
</script>

The network would naturally be controlled by a system of bots that would bid for space on certain locations. If publishers had bad traffic or were trying to get more bitcoins for their traffic than what it is worth by unethical means, then the bots would be able to “learn” about this and not bid for that space. Also, the publishers would “learn” about the advertisers and choose to not accept their bids if something unwanted is happening such as attempted double spends. It might be challenging for the advertisers to acquire good traffic, but the network would know what the best traffic is because of the laws of supply & demand. Traffic would be tagged with ID’s so an advertiser can monitor the traffic from a certain source and see if it results in purchases. If that traffic results in purchases, they would raise their bids for traffic with those characteristics. If the traffic does not result in purchases or is from an unwanted region, then they would lower or remove their bids for that traffic. The advertiser nodes would have a live wallet that sends payments for traffic in real-time.

This could cut out the expenses associated with some of the advertising/publishing networks. Sometimes the advertising/publishing companies get over 50% of the revenue from advertising space. An open solution like this would return billions in revenues back to the smaller companies. Most of this revenue is currently going to the large corporations.