Bitcoin, is it here to stay?

As everyone is having a say on Bitcoin, I thought I’d write up my thoughts here. It looks like December 2017 may have been a notable month in the story of Bitcoin.

Mining for fun and profit: Can it be profitable? The idea is that bitcoins get awarded to miners according to the amount of work done to create a new block in the blockchain (the blocks being the ledger where transactions are recorded). The original premise of was that an increasing amount of work would be required to earn a bitcoin as more coins were minted. So while in the early days one could luck in on a few bitcoins by just downloading and running some software on your PC, this is no longer the case; now specialist hardware is required in order to have any chance of earning Bitcoin from mining.  According to this video  by TechCashHouse https://www.youtube.com/watch?v=UHQqWCreCBw (dated Nov 30 2017) there is only marginal profit to be made from readily available mining hardware. Money can only be made where there is a low electricity cost. Also mining machines noisy and hot, so not something that will be welcome in the lounge or bedroom alongside the games console.

Using it as a currency: Once the technicalities of holding Bitcoins (on exchanges, in wallets or safely on paper) and using them to make transactions is understood, it is possible to buy stuff with bitcoin. At one point it was apparently possible to buy a cup of coffee with Bitcoin. Recently however Bitcoin transactions appear to have become more of a practical challenge, for instance its no longer possible to use Bitcoin for Steam games https://www.theverge.com/2017/12/6/16743220/valve-steam-bitcoin-game-store-payment-method-crypto-volatility. There are a number of factors contributing to this: primarily volatility and transaction costs. Volatility making pricing a product difficult and transaction costs ballooning to $20 a go. Additionally the Bitcoin system is starting to struggle with transaction times during Nov-Dec 2017 it was very rarely less than 100 minutes but has regularly peaked at over 1000 minutes https://blockchain.info/charts/avg-confirmation-time.

Avoiding the man: As a distributed system the Bitcoin network is not in the control of any government or major business entity. Due to the cryptographic nature of the blockchain implementation at its heart, Bitcoin is considered by many to be able to anonymise any transaction. This had made it the currency of the dark web, but with the higher transaction costs this apparent secrecy now has a higher price premium. One use of Bitcoin has been to provide a means of currency exchange avoiding high exchange costs when moving funds between countries. Current volatility may make timing such a transaction more challenging than before, but the increased transaction charge would still compare well to bank charges for all but the smallest amounts. Monies filtered through bitcoin transactions however are increasingly being considered by governments, and there are questions about the degree of anonymity of transactions via the coin exchanges.

Ah but its a commodity: Bitcoin has been in the news this year as the finance industry and popular finance press have started to become energised about Bitcoin as a speculative commodity. Some brave souls have even spoken of it as an alternative store of value to gold. On the other hand there is also much comparison of the likely Bitcoin bubble to the Tulip bubble of the 17th century. On the downside Bitcoin has been bedevilled by scams and massive breaches of security at coin exchanges. Aside from the speculation in the day to day value and the potential bubble there are other ways to lose a good quantity of money/value in some of the side schemes that have arisen, such as Coinbase which appears to be a pyramid selling scheme for Bitcoin investments. On the less shady side there are now two institutions trading bitcoin futures as of this month (Dec 2017), these are:  Cboe Futures Exchange ( as XBT) and CME Group (as BTC). There has been some talk that a futures market will reduce the volatility in the Bitcoin price; that is yet to be seen.

Conclusions

My conclusion from my investigations into bitcoin is that this cryptocurrency is not going to become ‘the’ universal digital currency, but will be sustained as a store of value and probably remain traded as a commodity.  The blockchain technology that underlies the Bitcoin network is perhaps more important than Bitcoin itself, it may yet become a major influence on the future of both contractual and financial transactions. The serious finance community are more interested in other blockchain currencies. One that particularly caught my attention is Ripple, which can be used as a means of settlement between the major financial institutions.

It is likely that we are experiencing a bit of a bitcoin bubble, I think there will be a downside but have (like anyone else) no idea how big a drop or when. Ultimately I think on the other side of the bubble there will be a stable value (well as stable as any other commodity) since if treated right Bitcoin can remain a useful store of value albeit not at the current overblown price.

For a really clear explanation about the basics of blockchain I highly recommend a quick look at https://anders.com/blockchain/ where there is a demo video and a web application that lets you play with the blockchain implementation featured in the video.

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