Here’s a link to Part 1. Let’s get right to it.
Government Interference
It’s no secret that governments aren’t crazy about Bitcoin. I’m convinced the only reason Bitcoin wasn’t killed in the cradle is that no one in the various world governments A) understood the technology B) understood the threat it represented, and C) took it seriously.
That’s no longer the case. These recent price swings came as a result of people using Bitcoin to facilitate the transfer of Yuan out of China, and the Chinese government’s response of flexing their muscles to make it stop.
Closer to home, the IRS has set off on a Bitcoin fishing expedition, serving Coinbase with a John Doe subpoena for all customer records since inception. Coinbase responded by politely suggesting the IRS go fuck themselves, but it’s going to cost at least a million dollars to fight them in court.
It’s for these reasons that there is massive volatility in Bitcoin. I’ve already mentioned the lack of liquidity, but that’s a condition that is self-correcting (as more BTC are mined every day). Government interference is likely to remain a constant.
What they dont seem to realize is the more they sweat the Bitcoin community, the larger it grows. I think it’s safe to say that globally we’ve entered a post central government era (Brexit, Trump, the upcoming elections in Europe, etc), and people are deeply mistrustful of government control. Bitcoin fits that narrative rather neatly.
Bitcoin Storage
Okay, here’s where I’m probably going to get some pushback.
You should not be storing your Bitcoin on an exchange, even Coinbase (well, especially Coinbase, now that they’re locking horns with the feds). Don’t get me wrong, Coinbase offers great storage options that are safe and convenient, but that also makes them vulnerable to both hacking and government asset seizure.
Before I go further, I should probably mention that I use Coinbase myself. After trying several services in the US and Europe, Coinbase is the most reliable I’ve found. That said, I never leave more than one Bitcoin in my wallet at Coinbase, and I use that for transactions (they offer the best mobile phone app).
For my real storage, I use paper wallets exclusively. It’s as analog as you can get, and if you can hide a piece of paper (or a thumb drive), you can sleep well at night knowing that you’re impervious to hackers and bad actors in the government.
The other interesting aspect of paper wallets is that you can ostensibly print your own currency. I use bitaddress.org to generate my wallets. It defaults to single wallet (which I use most often), but if you select paper wallet it will actually allow you print multiple wallets on a single sheet which look somewhat like currency. So maybe you load a few of those up with .01 BTC (about $9 at today’s price) and it’s similar to carrying a $10 bill.
If you’re not comfortable with paper wallets and you really want an online solution that isn’t connected to your exchange, I would use blockchain.info. It’s the original home of the blockchain, and the most agnostic about how you handle yo bizniz. Here is more info about how they work.
Maybe I’m paranoid, but I’m a firm believer that you should take your BTC offline. It might be that I’ve been a victim of shady shit (an early Bitcoin wallet provider I was using disappeared overnight) or it might be that I’m just a security freak, but I really think you should have as little at risk online as possible.
Where’s it going?
As I stated before, I think Bitcoin will someday be $10,000 apiece and more. I suspect that’ll happen in the next four years or so, as governments get jittery and try to clamp down on it. Several countries are experimenting with cashless societies, and Bitcoin provides a nice counter to those efforts. All that increases demand.
I could be completely wrong, but I don’t think I am in this case. There has already been enough mainstream adoption of the blockchain to drive Bitcoin along with it. So, in short, you should probably own some before it becomes obvious that you have to own some.
Let me know what questions you have.
Do you believe Bitcoin could ever replace conventional money?
Well, this borders on futurism, but I honestly believe that at some point in the distant future we transcend money altogether. If I'm right about that, then the steps leading to that will be a whittling down of the many currencies until they are few, and eventually one. Will that one be Bitcoin? Impossible to predict. But it's on the safe side to say that whatever one world currency we end up with it'll have to be universally accepted, frictionless in transaction, and portable. BTC checks those boxes.
Thanks Eddie, I've been looking forward to this since pt. 1
Is Bitcoin going to be the Friendster/Myspace or Facebook of cryptocurrency?
EDIT: Nevermind, you comment on this in a response to a previous question.
eddie, this is purely out of ignorance and misunderstanding. full disclosure, I only invest in stocks, bonds, and alternative investments, I don't touch commodities and I don't touch currencies, so I'm much less educated than you. I just read both threads on this, but I still can't get past one overarching question: why?
why would you buy bitcoin? what gives you confidence that it's a better use of your money than a sovereign currency? was there some incident in your life that caused you to have a distrust of the gummint?
I have a hard time with bitcoin, I hear that it's insurance against a central bank currency going away or being massively devalued, and I hear that people distrust the gummint, but how secure is it really?
enlighten me. what am I missing? I don't picture you as the type of guy who has a bunker for the zombie apocalypse, so I imagine you've thought this through.
All great points.
I trade Bitcoin, even though I'm a bit of an evangelist. I'm absolutely convinced it's a 10-bagger from here, but that doesn't mean I buy and hold. It's a small part of my overall portfolio and I'm in and out of it four times a year on average (currently out). It's been one of the best investments of my life (as far as pure return goes).
As far as why vs a sovereign currency, that's easy: volatility. Bitcoin has massive swings, and even the most exotic sovereign currencies are staid compared to it.
You're right, I don't have a zombie apocalypse bunker, though I generally consider myself an anarcho-capitalist. I'm not a fan of the way government does business, and manages to pervert its way out of monetary crises. I'll be the first to admit that this is largely a philosophical argument, but I see Bitcoin as a proof of concept that an unfettered free market produces better solutions than a central government.
Not sure what you mean by security. If you mean safety of principal, there is none. Bitcoin could go to zero. If you mean physical security, Bitcoin is harder to steal than pretty much any other currency. If you use paper wallets (or other offline solutions), it's virtually impregnable.
Thanks for the question!
ok this helps, especially the point about it being a philosophical argument rather than an actual prediction of the future of the world, and BTC is a way to invest in this belief.
On your last paragraph, how is Bitcoin harder to steal than any other currency?
I thought my deposit at a credible bank is at least 99.99% safe. If some hacker steals $1000 from me, doesn't the bank just generally give me the $1000 after forensics/fraud investigation?
If I have $1000 on Coinbase, and some hacker steals it - doesn't the very nature of Bitcoin make it so that I can't never get it back?
I get that if you have paperwallet, its impregnable... but can't I just steal the paper? How's that different to just holding cash?
That very volatility makes it unusable as a currency for everyday people (until/if it stabilizes)
It's worth noting that the most secure way to store bitcoin is on encrypted hard drives that aren't connected to the internet. This is typically the path for serious miners or people that have quite a lot of bitcoins.
For most the people currently researching BTC, chances are you will be a casual buyer. Coinbase is insured for all coins it holds and would issue payouts in the event of a site-wide breach. Coinbase also follows similar offline storage techniques as I previously mentioned to help combat potential breaches.
Additionally, if you are storing actual fiat currency on their site, that is FDIC insured.
Well mtgox got hacked and bitfinex as well. I wouldn't trust an exchange
Comparing Coinbase to BitFinex or Mt. Gox is misguided, to say the least.
What platform is it best to purchase Bitcoin?
Depends on where you are in the world, really. Different jurisdictions have different requirements for opening and funding accounts, etc. If you're in the US, Coinbase is going to be really tough to beat for ease of use, security, and overall user experience.
If you just want to buy some without all the rigamarole of opening an account and funding it, you can do a Google search for Bitcoin ATMs in your area or find your local Bitcoin Meetup and just buy it from someone there. All of my first Bitcoin purchases were done face to face on the streets of Paris, which sounds pretty weird now.
They have an ATM here in Chicago at the Merchandise Mart. The more BTC sticks around the less skeptical I become.
Some great info here Eddie, I've been aware of BTC for years now (I remember 1 BTC = $13 or so at one point), but only now really researching more about the technology. I was skeptical at first to say the least, mainly because the first I had heard of it was in context of Silk Road... As I've researched more in depth, you could say I'm a believer at his point and I'm hoping to start trading/buying some up slowly.
It's a pretty fascinating concept - not all too different at its core than the fiat currencies we're all used to, but with many amazing benefits that should (hopefully) become more apparent as it continues to pick up steam and adoption increases. Ethereum is pretty sweet as well, that should be something to keep our eyes on as well.
Thanks for the writeups!
I don't understand the deep distrust in government. Most scandals, when put under scrutiny, have been due to incompetence not a malicious conspiracy. Though Hollywood and populism would have us believe otherwise. It's like Glen Beck selling Gold and raking in massive profits doing so...from his audience...giving him financial incentives for fear mongering. I'd never make a decision based on that... Sort of, not a fan of a ROTH IRA.
That's a fair point. My counter to that would be that every government is going to act in their own best interest (and that doesn't always align with global interests, or even their own people's interests). Bitcoin removes that inherent layer of interference. No one controls Bitcoin because everyone in the world controls Bitcoin.
In what way is Bitcoin, beyond criminal usage (used for illicit activity or tax evasion), a threat to government or central banks? What conflicting interest do they have?
"As I stated before, I think Bitcoin will someday be $10,000 apiece and more. I suspect that'll happen in the next four years or so, as governments get jittery and try to clamp down on it."
Why would the price of Bitcoin rise if major governments make it more difficult/illegal to own/trade?
What happens to gold when governments crack down on ownership, or pervert their fiat currencies?
Since this is a forum for the financial services industry, do you think Bitcoin and blockchain's capabilities will represent a threat to the industry (and if so, how?)
All automation is a threat to finance. Finance is about middle men, and technology is about eliminating friction (i.e. middle men). Blockchain is certainly a threat, but at the moment I would say that AI and machine learning are bigger threats. Short story: finance is fucked.
Curious your thoughts on China and BC. I the one hand I'm totally with you. On the other, I'm some what skeptical on the fact that some very large number (could be wrong but like 90%) of BC transactions are in China. Plus some of the largest mining operations are there. What are you thoughts on this aspect of BC? This, more than long term adoption / underlying technology, is what makes me the most nervous. Eddie Braverman
The Chinese miner situation is definitely disconcerting. I worry less about Chinese transaction volume (mostly because I'm not convinced the numbers are that high).
Have you read Mike Herns blog post? Interested in your thoughts on his piece. I do want to be a believer but stuff like this makes me nervous, especially because of the China aspect.
https://blog.plan99.net/the-resolution-of-the-bitcoin-experiment-dabb30…
I'm a little late to the game, but I wanted to address one point in your opener:
"It's for these reasons that there is massive volatility in Bitcoin. I've already mentioned the lack of liquidity, but that's a condition that is self-correcting (as more BTC are mined every day)."
I am not convinced mining is a liquidity solution for BTC. Yes, the number of tangible BTC increases as time passes via mining, but that is not the source of BTC illiquidity, in my opinion. Remember, BTCs are fractional, so more BTCs entering circulation doesn't impact supply/demand imbalances the same way it does for things that are only available in whole numbers. By way of example, let's say there was 1 BTC available and the price per coin was $1,000,000. As it stands, we can trade for 0.001 BTC ($1,000) or even 0.0001 ($100) with the same degree of difficulty. Now let's say 1 more BTC was mined, and each coin is now worth $500,000. Instead of trading for 0.001 BTC, you are now trading for 0.002 BTC. Yes, the $ value per BTC has changed, but has the liquidity profile actually changed? I would argue no. This is a key difference for how traditional investments trade (like gold, stocks, bonds, etc.); you don't need to 'bid up' the price to acquire a whole unit. Because of this, I do not believe BTC's illiquidity can be solved by mining.
The primary driver of BTC illiquidity is the lack of velocity of fiat monies entering/exiting the ecosystem. In my opinion, the only way to increase this is for B2C or C2C adoption to significantly increase.
Well, you're not wrong, but mining is the only liquidity solution. It's the only thing that increases the supply, and even that will stop one day.
Completely agree that increased adoption would be great for BTC, but right now there isn't enough supply to handle it (without ridiculous price spikes).
Volatility is a non-issue regarding bitcoin today. You have futures and options exchanges around, and the market is relatively liquid and decentralized. If you think bitcoin is a "bad investment because it is too volatile", there is a market for you: options. If you think bitcoin is "bad for businesses because it is too volatile", there is already a solution for that: instant conversion services, and a futures market of course. If you think bitcoin is "bad because it is worthless, it is only speculation", there is a trade for you: go short on futures, buy put options. We are at a point where there are no excuses, all these problems do have a solution. Regarding the currency itself, bitcoin brings private ownership to the extreme: no one can confiscate your bitcoin if you store it properly - you can go to prison, you can get killed, but your bitcoins will be yours, which is a very strong property. Bitcoin and the underlying blockchain "technology" allows direct transactions between users, so that at some point you will be able to trade shares anywhere with anyone and your shares (or any other virtual asset for that matter) will be truly yours (and not something registered in your name in some jurisdiction), which is another very strong property. Bitcoin allows large amounts of money to flow around virtually at zero cost and without barriers - a problem for the authorities, but a blessing to many people. The problem today is that most people criticize bitcoin without understanding how it works and pointing non-issues as big "problems", to their own mistake of course, as they are the ones losing in this inevitable trend. I am absolutely confident that bitcoin will be worth 5, 10, 100x more in the future due to all these features and many others that people around insist in disregarding and ignoring.
All great points, crazy how Andreessen posted this in Jan 2014! https://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/?_r=0
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