Welcome to Finance and Fury, the Furious Friday edition
Been talking about monetary system – today dive into Crypto currency
Crypto currency – means nothing - has to do with individual coins/tokens/whatever –
Preface – Don’t have as deep an understanding on the overall crypto market as I do on the fiat money system, and especially blockchain
I do know enough about BTC to know one thing – I wouldn’t buy BTC personally – You may love it – good If I get something technical incorrect – let me know – But ill be talking from fundamental POV – helps to explain where I come from –
We all know the story –
In 2008 - Bitcoin was proposed by unknown author/s - pseudonym of Satoshi Nakamoto At the heart of blockchain is the distributed ledger. In its simplest terms, a distributed network is a shared database. Rather than one central entity holding the information, it’s spread through a network of millions of sites or nodes. This decentralization offers many benefits over traditional, centralized systems: increased security and transparency, for starters. use of a trustless, fungible and tamper resistant distributed ledger called a blockchain Ironic it is called a decentralised currency, when you need power and the internet to access Since Bitcoin's inception, thousands of other cryptocurrencies have been introduced – no limit or requirement to join
cryptography allowed the currency to have:
Reading summary here - Trustless system allows you to trust in the system without needing to trust in the parties with which you’re transacting. Computers verify each transaction with sophisticated algorithms to confirm the transfer of value and create a historical ledger of all activity. The computers that form the network that are processing the transactions are located throughout the world and importantly are not owned or controlled by any single entity. The process is real-time, and much more secure than relying on a central authority to verify a transaction. In a shared ledger system, every transaction is recorded and verified in a transparent manner, and the system creates the trust by default – doesn’t show who is behind the ledger though Trustless technology — meaning you don’t have to know, like, or trust the person or entity you’re doing business with — Trust in the system versus not needing to trust – but this only refers to trust in transactions going through Fungibility fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of its parts is indistinguishable from another part – same as AUD tamper resistant – tamper how? Unregulated – does this mean tamper with prices? Or just tamper with transactions? Been hacking cases - hackers steak API keys and get into wallets Or just destruction of blocks or theft – simplification - done on mining through forcing incorrect verification codes – change a c for a d in the chain – block is lost – range of 17%-23% lost for good of BTC
Going deeper is bitcoin an option?
what do you value BTC in? Is it AUD? Or USD? Think about that – is it really a new form of money if it is still valued in current currency – not in relation to good themselves Fractal version of fiat currency – you need fiat money to start with to purchase under current economy Currencies need reserves to lower chance of going to zero – without something backing it (other currencies, gold, etc.) – no perceived floor in panic How do we value currencies? Subjective theory of value – what is the value? What we will pay –confidence Reserves and Gov decree - provide lots of subjective value in Fiat – lots of confidence – until there isn’t Seen currencies suffer massively under this – even with safety measures Subjective value – when btc goes 11k, is seen as subjective value – speculation in further prices Has a form of floor value mechanism – cost of mining versus price – if price goes to $2k, nobody mine – supply stop Confidence - When it is lost – depending on how bad - impossible to regain –requires confidence – or short memory The fact that BTC doesn’t have an Intrinsic value doesn’t matter as much as how resilient it is to confidence shocks– BTC never been through a financial collapse – created around 2009 – We know how other asset classes will perform – never seen BTC performance in panic – who knows? Unregulated leads to fraud and manipulation – or regulation being introduced Future regulations are a worry – for the most part left alone – easy to regulate – Requires internet – Aus providers easily block IPs – what if access through internet is blocked – can’t verify without internet connection May have a base value purely due to the areas it is most useful for – tax evasion, laundering, terrorism, illegal stuff – North Korea blocked in cash transfers, but could trade in crypto - utility token until use taken the supply of it also being snapped up by Governments – China, seized all of the citizens BTC, while on the surface against it, they likely have the largest control over the mining and ownership of BTC – come back to this in a sec Have been money seizures in the past 100 years – gold by FDR – made it illegal to own more than allowed Forced buyback at $20.5USD ounce, then went on buying spree and eventually pushed price to $35 by Nixon - Doesn’t escape concentrations in control/supply – cheapest power or deepest pockets – China has both June 2018, over 80% of Bitcoin mining is performed by six mining pools - five of those six pools are managed by individuals or organizations located in China. Other is in Iceland. First – why concentration in china? Cheap power – mining takes a lot of Electricity power requirements Why Iceland or China – mining Using as much as Nigeria – 90m people – soon as much as japan No way it can be allowed if environmentalists get wind – but that is what you need to increase mining incentives – higher prices – current cost of mining 1BTC = $4k USD If prices are low - Then you hit a wall in the mining incentives – chain creation dries up Second – control of mining production and supply allows price manipulations – unregulated Painting the tape - a form of market manipulation whereby players attempt to influence the price of a security - buying and selling it among themselves create the appearance of substantial trading activity. ... Painting the tape is an illegal activity that is prohibited – but only in markets that are regulated We are both BTC miners – we both trade the same coins back and forward – slowly increasing the Also Called a ramp – old trick – think boiler room – painting the tape Price action is going up – who would have most influence on this? Could go to $50k - Looks to be having a second wind bubble – Remember the first Massive bubble Sceptical of price transactions - Over time there are studies being published – may start to show Evidence of fraud - nothing new Every market has this Why markets have regulators - Believe that BTC not manipulated? Magnet due to it The trustless system is helping reduce any exposure of fraud – that would create a confidence Collapse – Confidence – how confident you are that others will still be confident? Computers trust as long as the trade transaction clears the key – watchdogs in markets see something up and investigate Also important – creates a new class of accidental criminals – have to declare it on returns, - Govs will track down using powers from AUSTRAC and ATO -
Summary -
What do you think in terms of value when you think BTC – what can you trade it for/exchange it? Terms of currency conversion – as long as there is dollars – another form of digital monetary expansion Most money in existence is in 1s and 0s – fracking banking reserve in modern economy Crypto - Allows for more money to be traded away into 1s and 0s Don’t have a good feeling about it – further into the rabbit hole - Removal of value further from a dollar – at least you can hold it in your hand if the system is crashing Think about it – how decentralised is it when you need power and the internet to access it? And when it has an infinite supply – if there is no confidence that the unit will retain value over longer term – not adopted as monetary system – How would the global economy operate if as a country you could just create a new Crypto currency and bail on your existing one No country would trade or trust you to repay your debts/not just bail on a currency once it runs out of supply If fully adopted it would be a hybrid system of what is currently known – Still by governments/central banks – Back to being centralised – but now what would back this? And money completely out of your hands – No physical money then System that is more centralised –control the cost of money and supply completely – non held outside of the system like cash of gold Don’t own any, don’t recommend it – if you want – go ahead, I like the potential blockchain has Fan of the free market and new tech – but don’t see it as anything to invest in and hold Personally – capital preservation is more important to me – if BTC came out when I was 16 – would have
Next ep – look at another type of mining - Gold - Gold and bitcoin are both a form of money – one has been around for recorded history – interesting that Symbols for crypto always resembles gold or silver coins
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