Category: bitcoin basics

Bitcoin’s biggest flaw

Bitcoin’s biggest flaw

I love Bitcoin and there’s no denying that its arrival has changed everything, but I’d be lying to you if I said it’s perfect.  It has some flaws, in this article I’m going to illustrate for you what I consider its main flaw: by default all completed Bitcoin transactions, from the very first one up until the present, are publicly available information since its blockchain is a public “ledger.”

If you read my earlier article you might recall that I had said Bitcoin was private, which is true but only to a certain point.  Once you have someone’s public/receive address for their Bitcoin wallet you can use the blockchain explorer (https://blockexplorer.com) to see the total amount of Bitcoin ever sent to that address, as well as the current available Bitcoin balance, if there is any.

Here’s a real world example of the problem I’m describing.  Currently thepiratebay.org has published this Bitcoin address on their main page so people can send them donations in Bitcoin: 129TQVAroeehD9fZpzK51NdZGQT4TqifbG

Now if you search for that address on https://blockexplorer.com it’ll take you to this page: https://blockexplorer.com/address/129TQVAroeehD9fZpzK51NdZGQT4TqifbG

Now you can see every deposit ever made to that address, its date and time, and same for every withdrawal as well.  So at this moment thepiratebay.org has just over a quarter of a BTC sitting in their donation wallet while just under an even dozen BTC total has been donated to their address.

That’s a pretty obnoxious amount of info to have, isn’t it?  The address itself is nameless, just a bunch of random alpha numeric, but once you know who or what an address belongs to then the public blockchain offers too much information in my opinion. I know I wouldn’t want everyone I send Bitcoin to or receive Bitcoin from (especially as adoption increases and those who you give to and recieve from are from IRL instead of from online) to be able to access any personal financial data with that much accuracy and depth.

Of course being Bitcoin means it (hopefully) isn’t the full story as far as our complete finances go, but it’s still more information than you’d want out there if you’re using Bitcoin on a daily basis.

If you’re aware of the coming of a possible Bitcoin hard-fork and wondering why this article isn’t about that, it’s because even after the hard-fork is over and done with this will still be a significant problem for Bitcoin.

 

If buying a hotdog at a ballgame means the vendor can see your account balance, Bitcoin isn’t going to work for everyone.

Is Bitcoin real money?

Is Bitcoin real money?

I’ve been asked this question so often that I’m compelled to include it here: is Bitcoin real money?

Here’s my short answer: yes. You can cash Bitcoin (BTC) out for USD or other fiat currencies easily, there are a number of online exchanges that can be used or there may even be a Bitcoin ATM in your area. There’s also a growing body of merchants that accept BTC directly as payment, just google ‘who accepts bitcoin payment’ and you’ll be treated to lists of vendors that see its value.

So that’s my short answer, but let’s take a deeper look at the question and explore a deeper answer.

Real money.

Just what do you consider real money? US Dollars, perhaps? Isn’t the question about BTC’s “real money” status more a question of where does Bitcoin’s value come from?

So let’s look at that. But first it might be helpful to take a look at what came before, like where does the US Dollar’s value come from? The US Dollar used to be backed by gold, this was called the gold standard, up until the 1970’s when it was decided that there’d be no more gold standard. Today the USD is backed by debt, essentially.

Moving back from USD for just a moment, let’s look at gold- where the USD used to pull its value from. I know some people, acquaintances, who buy up gold and keep it stashed just in case of some sort of cataclysmic event. If civilization as we know it were to suddenly collapse, as in suddenly the biggest and most immediate concern for 98% of us has become where our next meal is coming from or finding a source of clean water, I can’t see gold having any value in this hypothetical world- especially if re-establishing civilization wasn’t anywhere on the horizon. In a purely utilitarian philosophy/society, gold is almost worthless. You can’t eat gold, gold won’t keep you warm at night, you can’t use it as a fertilizer or a fuel, you wouldn’t even be able to make decent weapons or tools out of it because it’s too damn soft. Things that would be valuable would be antibiotics/medical supplies, tools, weapons, fuel, blankets, etc.

But in our world today, gold has quite a bit of value. Why? Why does the USD have any value?

Both these things have value simply because we’re all in agreement that they have value. Perception creating reality. Same way a king has power over a nation. If one day everyone in a kingdom decided that they’d no longer obey the king – as in all the king’s personal guards and servants to the military to the commoners, everyone – the king would no longer be a king, would they?

Bit of a philosophical tangent just then, so back to the subject at hand: Bitcoin. Where does its value come from?

There are three big things to consider in a currency regarding its value. They are supply, liquidity and adoption.

Supply is defined by how much of this currency exists, as in how rare or how common is it?

Liquidity can be explained by “how easy is it to chop this up into pieces and use those pieces as a medium of exchange?” So a house is not a very liquid asset, cash is a very liquid asset.

Adoption is simply asking “what are the chances this [random party/person] would be willing to receive this as payment?”

Let’s compare USD and Bitcoin and see where each falls on those three indicators.

In regards to supply: Bitcoin beats USD. Bitcoin, unlike USD, has a maximum supply of 21 million Bitcoins. It’s impossible for more than 21 million Bitcoins to ever be in circulation simultaneously. The US Federal Reserve controls the supply of USD, the Federal Reserve is a private bank and their meetings are closed. Cheng Siwei, the late Chinese politician, was in the news in recent years expressing Beijing’s alarm that the Federal Reserve had been ‘printing money’ to buy Treasury debt. A policy like this would create a sort of rebound inflation, surplus USD created to be spent internationally wouldn’t have the same immediate reaction on inflation that surplus USD used domestically would, but it would catch up once those international holders of that surplus USD decided to use it for payments to US merchants. Regardless if the Fed does print money like that or not, due to inflation your USD loses, on average, 2% of its value annually.

In regards to liquidity: Bitcoin again beats USD. Bitcoin/cryptocurrency is the most liquid asset that the world has ever seen. Bitcoin’s price right now is about $2350 per Bitcoin, this doesn’t mean that you need $2350 on hand today to own some Bitcoin, you can just buy $20 worth of Bitcoin if you want and get 0.008515 BTC at the $2350 trading price. One cent USD is 0.00000426 BTC. So if you sent someone 0.00000213 BTC right now then you’d be sending them half a cent USD. So it’s more liquid than USD.

In regards to adoption: USD beats Bitcoin, for now. Bitcoin has many advantages over USD and all other fiat currencies so as time goes on and more people around the world begin to understand and see these benefits Bitcoin’s adoption will continue to rise. More and more fiat currencies from around the world will continue to be exchanged for Bitcoins. Since there’s a maximum supply of 21 million Bitcoins for the entire world, Bitcoin’s price will inevitably continue to rise over the next decade.

What is Bitcoin?

What is Bitcoin?

Bitcoin can be a difficult subject even for technically-inclined individuals to fully wrap their minds around when first exposed to it. So I’m going to try to explain it here more simply than other explanations I’ve read online.

Bitcoin (BTC) is a currency like US Dollars (USD), Euros (EUR), Yen (JPY), etc. Unlike USD/EUR/JPY/etc however it isn’t a fiat currency, meaning it isn’t backed/issued by any government- it is a cryptocurrency or an encrypted currency and was the first cryptocurrency created. Being encrypted just means that it’s both secure and private (anonymous). It’s also purely digital, enabling payments across the globe 24/7/365, transfers completing their initial confirmation on average in about 10-15 minutes.

Although it has nothing to do with email, the simplest way to look at it is it’s almost like digital cash that can be “emailed” anonymously between people. Instead of an email account or a bank account doing the sending and receiving you have a Bitcoin wallet that stores, sends and receives payments. You can install a Bitcoin wallet on your home computer or smartphone.

Another important aspect of Bitcoin is that it is entirely decentralized, so there’s no single organization or individual that controls or supports it. One benefit to decentralization is that there’s no single point of failure, there’s no single server-farm or geographic point out there that if a sinkhole were to open up and swallow that would hurt this currency. One detriment to decentralization is that there is no customer service or support, so if by accident you sent, say, $1 million USD worth of Bitcoin to the wrong address you’d have no recourse to undo that transaction. You’d be screwed. Also, if you aren’t careful with your Bitcoin wallet details you run the risk of someone else gaining access to your Bitcoin wallet. If this occurs it’s a pretty safe bet that they’re going to dump your entire balance into their own wallet. Again, you’ll be screwed in this scenario.

Sending Bitcoin to a wrong address or having your Bitcoin wallet compromised are both unlikely scenarios. There’s some anecdotal evidence from around the web that each of these worst-case scenarios has occurred but their occurrence is pretty rare. Just be aware and be careful.

Again, this has just been a simplified overview of Bitcoin. In later posts we’ll go more in depth on the different aspects of Bitcoin and other cryptocurrencies.